Munis defied Treasuries as the tax-exempt market strengthened throughout Thursday despite weaker Treasuries on positive U.S. economic news.
Positive news coming from housing data, unemployment claims, and manufacturing data pushed stocks higher and Treasuries lower.
The two-year Treasury yield rose two basis points to 0.30% while the 30-year yield jumped five basis points to 3.14%. The benchmark 10-year yield increased six basis points to 1.99%.
But that didn’t stop munis from continuing their rally, which has now lasted for five consecutive trading sessions.
“We are seeing supply start to pick up but it is still extremely well received across the board,” a New York trader said. “The market definitely feels stronger today regardless of an equity rally and weak Treasury markets.”
“There has definitely been a continued flight to slightly riskier assets throughout all markets to pick up the extra yield,” he said.
Munis regained their footing after a slow morning. “Munis are kind of quiet again,” a second New York trader said, after positive economic news had been released. “It looks like a little pause.”
Munis ended mostly firmer across the board Thursday, according to the Municipal Market Data scale. The one-year yield was steady but yields on the two- to four-year fell three basis points. Yields between the five-year and 11-year dropped between one and two basis points. The 12-year to 24-year yields closed steady while yields outside 25 years rose one basis point.
On Thursday, the two-year yield fell three basis points to 0.26%, setting a new record low as recorded by MMD. The previous record of 0.29% was set Feb. 7. The 10-year yield fell one basis point to 1.82%. The 30-year yield rose one basis point to 3.22%.
In the primary market, JPMorgan priced $440.8 million of Dallas-Fort Worth International Airport Board revenue refunding bonds, rated A1 by Moody’s Investors Service and A-plus by Standard & Poor’s and Fitch Ratings. Maturities ranged from 2012 to 2035. Prices were not available by press time.
BOSC Inc. priced $143.1 million of Lake Travis, Texas, Independent School District unlimited tax school building bonds that are insured by Texas’ Permanent School Fund. The bonds are rated AAA by Standard & Poor’s and Fitch, with an underlying rating of AA-plus.
Yields ranged from 0.33% with a 3% coupon in 2014 to 3.41% and 3.76% with 5% and 3.625% coupon in a split 2042 maturity. The bonds are callable at par in 2021.
In the competitive market, JPMorgan won the bid for $95.5 million of triple-A Virginia general obligation bonds. Yields ranged from 0.15% with a 3% coupon in 2013 to 2.15% with a 2% coupon in 2025.
In the secondary market, trades reported by the Municipal Securities Rulemaking Board showed firming.
Bonds from an interdealer trade of New York City Transitional Finance Authority 5s of 2038 yielded 3.46%, 10 basis points lower than where they traded Tuesday.
A dealer sold to a customer Dormitory Authority of the State of New York 5s of 2023 at 2.48%, seven basis points lower than where they traded Wednesday.
Another dealer sold to a customer District of Columbia 5s of 2028 at 3.26%, four basis points lower than where they traded Wednesday.
Bonds from an interdealer trade of Washington 5s of 2025 yielded 2.42%, three basis points lower than where they traded Wednesday.
Since the most recent rally began last Friday, muni-to-Treasury ratios have increased as munis underperformed Treasuries and became cheaper. The five-year ratio rose to 83.5% on Wednesday from 79.1% last Thursday. The 10-year muni-to-Treasury ratio rose to 94.8% from 91.7% last Thursday. The 30-year ratio increased slightly to 103.5% on Wednesday from 103.1%.
Muni bonds have rallied so far this year, with the two-year yield falling 16 basis points from 0.42% on Jan. 3 and the 30-year yield dropping 53 basis points from 3.57%. The 10-year yield has fallen 6 basis points since the beginning on the year when it started at 1.88%.
Some muni participants think the good news is over. “The recent rally has eaten through any ‘cushion’ that existed prior to the holiday season,” wrote John Dillon, chief municipal bond strategist at Morgan Stanley Smith Barney. “The 30-day visible supply of primary issuance has risen and the muni market has already had one near miss in terms of a selloff.”
Meanwhile, he said, enough supply to challenge the municipal market has not yet come and muni bond inflows have been positive.
“Which begs the question, just go with the flow? We don’t think so,” he said. “These supporting pillars could quickly crumble.”
“It appears that the recently enjoyed municipal price rally may be living on borrowed time,” Dillon said, adding he recommends a tactical approach of selective selling in the 25- to 30-year with sub-5% coupons and selling paper in the low triple-B category.
The rally so far this year has been good. The Bank of America Merrill Lynch muni master index has returned 2.331% for the year ending Feb. 8.
John Hallacy, municipal research strategist, said the only other fixed-income market index that has performed better is the corporate high-yield index, which returned 3.731%.