The municipal market didn’t need to do a lot to have a decent week.
Amid modest pre-holiday activity, muni yields have outperformed those of Treasuries on the week by firming very little. Munis have also seen a narrowing in their ratios to Treasuries and in their credit spreads, especially in the belly of the curve.
“There’s a slight downward bias to yields on the week,” said Michael Pietronico, chief executive officer at Miller Tabak Asset Management. “In particular, credit spreads are narrowing, specifically in the intermediate part of the yield curve.”
Muni bond indexes were mostly unchanged. After a slack week, Treasury indexes rose accordingly.
The Bond Buyer’s 20-bond GO index of 20-year general obligation yields was unchanged this week, at 3.92%. It’s still at its lowest level since Sept. 22, when it was 3.85%. The 11-bond GO index of higher-grade 20-year GO yields rose one basis point, to 3.66%, but stayed below its 3.67% level from two weeks ago.
The yield on the Treasury’s 10-year note increased four basis points this week, to 1.96%, but was below its 1.98% level from two weeks ago. The yield on the 30-year Treasury gained seven basis points this week, to 2.99%, but still hangs below its 3.00% level from two weeks ago.
Thanks to a sell-off starting on Tuesday, Treasury yields have increased on the week, particularly as one ventures farther out along the curve. The two-year Treasury rose five basis points on the week, according to Municipal Market Data numbers, compared with its muni equivalent, which was flat.
The 10-year Treasury yield rose 11 points, while the 10-year muni was two basis points firmer, landing at a record low 1.91%. The 30-year Treasury yield rose 14 basis points, against a muni equivalent that ended up flat. Ratios also continue to tighten, according to MMD. The 10-year muni-Treasury ratio ended Thursday’s session at 97.45%, close to its average for the year, which is 97.39%.
Ratios at the two-year and 30-year ranges, though narrowing, still sit above their averages for 2011. The 30-year muni-Treasury ratio, at 121.07%, has a ways to fall before it approximates its calendar-year average of 109.10%.
The two-year ratio, at 128.57%, is closer. For 2011, it has averaged 122.42%.
Munis have seen little volatility since late last week, MMD analyst Randy Smolik wrote. By midday Thursday, secondary market quotes were scarce, as the Street was more comfortable holding its positions than trying to lighten up ahead of the Christmas holiday.
The market is likely preparing for January reinvestment money and an uptick in retail interest next month. The secondary market even strengthened Thursday afternoon as some buyers found sellers reluctant, Smolik added.
With extremely strong technicals, dealers are positioning for light issuance and narrowing ratios in early January. And they may not be eager to let go of inventory, said Steven Schrager, director of research at SMC Fixed Income Management, a firm that builds portfolios for high-net-worth individuals.
“People are going to hang on to what they have right now,” he said. “If you put them out there for bid, you’re not going to see much action. So, if people have bonds that have had price appreciation, they’re going to hang on to them over the next couple of weeks.”
The revenue bond index, which measures 30-year revenue bond yields, was unchanged this week, at 5.01%. It remains at its lowest level since Nov. 10, when it was 5.00%.
The one-year note index also was unchanged this week, holding at its all-time low of 0.27%. The index began on July 12, 1989. The weekly average yield to maturity of The Bond Buyer muni index, which is based on 40 long-term bond prices, declined six basis points this week, to 4.89%. This is the lowest weekly average for the yield to maturity since the week ended Oct. 21, 2010, when it was also 4.89%.