The tax-exempt market had a tough week as muni prices were cut across the curve and leftover supply from the past few weeks far outweighed demand.
“Things are trading all over the place but I’m seeing deep discounts,” a trader in the Southwest region said, referring to a few deals that are being offered in the market. “People are licking their wounds for a little.”
“Only people that don’t own bonds are happy about the rise in yields, and there are not many people out there,” he said. “And as long as Treasuries are falling, we are treading water. Muni-to-Treasury ratios have to get better to ultimately get people back in the market.”
The iShares Standard & Poor’s national municipal mutual fund is off its high of about 114. “It has gotten back in line,” the trader said. “There was a premium that got built in and is now washed out. We are about seven basis points off from the top.” On Friday, the fund was trading around 107.89.
Munis were much weaker Friday, according to Municipal Market Data, extending a four-day stretch of losses. Yields on the two- and three-year rose two basis points while the four-year yield jumped six basis points. The five-year yield increased two basis points while yields outside six years spiked up between four and six basis points.
On Friday, the two-year yield closed two basis points higher at 0.36% while the 10-year yield jumped five basis points to finish at 2.26%. The 30-year yield increased four basis points to 3.44%.
Since munis started weakening last Tuesday, yields have risen dramatically. The two-year yield jumped nine basis points while the 30-year yield increased 15 basis points. The 10-year yield got hit the hardest, rising 24 basis points in four days. Before the big losses last week, the two-year yield had not been this high since Jan. 11. The 30-year yield hasn’t risen to this level since Jan. 9. The 10-year muni hadn’t seen such levels since Nov. 18, 2011.
Rising yields seemed to be a self-fulfilling prophecy. Earlier last week, a Chicago trader commented that rising yields seemed inevitable. “I don’t think participants believe that we’re going to reverse course,” he said. “The trend is higher rates — just in what time frame?”
And given the amount of supply in the market, rising yields are likely to continue. “There is a lot of supply out there from the past few weeks and new supply in the pipeline and money is going into equities,” a New York trader said.
Treasuries didn’t escape last week without a few bruises, either. The two-year Treasury yield rose five basis points over the course of the week. The benchmark 10-year yield jumped up 25 basis points while the 30-year increased 21 basis points.
Over the past week, muni-to-Treasury ratios fell as munis outperformed Treasuries and became relatively more expensive. Since munis started weakening last Tuesday, the five-year ratio fell to 84.4% from 86.8% at the start of the week. The 10-year ratio fell to 96.9% from 99.5%, while the 30-year ratio fell to 99.7% from 103.8% last Monday.
The 10- to 30-year slope of the curve fell last week as investors went further out on the yield curve. The slope fell to 119 basis points on Thursday from 127 basis points at the beginning of the week. Credit spreads also tightened throughout the week as investors move down the credit scale in search for yield, despite weaker munis.
The two-year triple-A to single-A spread tightened to 39 basis points from 43 basis points at the beginning of the week. The spread on the 10-year triple-A to single-A muni fell to 80 basis points from 86 basis points at the start of the week. The 30-year triple-A to single-A spread held steady at 80 basis points.
Looking to this week, the municipal market can expect $7.95 billion in new bonds, up from a revised $5.52 billion last week. On the negotiated calendar, $6.51 billion is expected, up from last week’s revised $4.47 billion. In competitive deals, $1.44 billion is expected, up slightly from last week’s revised $1.04 billion.