The tax-exempt market ended flat on Thursday as traders noted secondary trading activity slowing as the weekend approached and most primary deals had been priced earlier in the week.
“Supply has dropped off,” a Chicago trader said. “If there wasn’t Illinois debt next week, it would be next to no supply. And there are rumors that coupon payments could be considerably higher in the next months.”
Flows were great Wednesday, but have slowed on Thursday, the trader said. “Today is firm and we’re seeing some more spread products come in. But the high-grade names are asleep today,” he said. “There is a little more spread product, but otherwise it is very quiet.”
The muni market was more active Thursday morning. “Munis are kind of flat, but a lot busier,” a New York trader said. “There are lots of bonds around.”
“Deals that are being done are coming back to the street,” he added. “They couldn’t put them away to customers so dealers are trying to sell them. We should see some good cuts coming.”
Munis ended steady Thursday, according to the Municipal Market Data scale. The two-year yield closed flat at 0.31% for the seventh consecutive trading session, while the 30-year ended flat at 3.25% for the fourth consecutive trading session. The 10-year yield finished at 1.87%.
Treasuries were stronger Thursday after weakening all week. The benchmark 10-year yield fell four basis points to 1.95%, while the 30-year yield dropped three basis points to 3.12%. The two-year yield fell one basis point to 0.27%.
In the primary market, Loop Capital Markets priced $274.9 million of Dallas-Fort Worth International Airport joint revenue refunding and improvement bonds, rated A1 by Moody’s Investors Service and A-plus by Standard & Poor’s and Fitch Ratings.
Yields ranged from 0.78% with a 4% coupon in 2014 to 4.25% with a 4.125% coupon and 4.05% with a 5% coupon in a split 2045 maturity. Credits maturing in 2013 were not reoffered. The bonds are callable at par in 2021.
In the competitive market, Bank of America Merrill Lynch won the bid for $70.1 million of Virginia Public School Authority revenue bonds, rated Aa1 by Moody’s and AA-plus by S&P and Fitch.
Yields ranged from 0.25% with a 2.5% coupon in 2013 to 2.80% with a 5% coupon in 2028. Credits maturing between 2015 and 2017, in 2026 and 2027, and between 2029 and 2032 were sold but not available. The bonds are callable at par in 2022.
In a sample of CUSIPs compiled by data provider Markit, munis were stronger.
Yields on Ohio’s Buckeye Tobacco Settlement Financing Authority 5.125s of 2024 and Illinois Finance Authority 5s of 2042 each fell one basis point to 7.59% and 3.97%, respectively.
Yields on California State Public Works Board 5s of 2027 dropped two basis points to 3.87%.
Elsewhere in the secondary market, trades reported by the Municipal Securities Rulemaking Board showed firming Thursday.
A dealer sold to a customer Illinois 3.321s of 2013 at 0.80%, five basis points lower than where they traded Wednesday.
A dealer bought from a customer Washington 5s of 2024 at 2.52%, three basis points lower than where they traded Wednesday.
A dealer bought from a customer North Carolina Medical Care Commission 5s of 2036 at 4.16%, three basis points lower than where they traded Wednesday.
A dealer bought from a customer Ohio hospital revenue 5s of 2038 at 3.86%, one basis point lower than were they traded Wednesday.
Over the course of April, muni-to-Treasury ratios have risen on the short end and long end as munis underperformed and became relatively cheaper.
The five-year muni yield to Treasury yield rose to 97.6% from 96.1% on the first day of trading in April. The 30-year ratio jumped to 103.8% from 101.5% at the beginning of April.
The 10-year muni-to-Treasury ratio fell slightly to 95.9% from 96.8% in early April as munis outperformed Treasuries and became comparatively more expensive.
Despite the slight changes, ratios are near their three-month averages. “In the backdrop, the U.S. Treasury market ended [Thursday’s] session one to three basis points lower in yield, leading muni-Treasury ratios back to their three-month averages,” according to MMD’s Domenic Vonella. The 10-year three-month average ratio is 95.8% while the 30-year three-month average ratio is 103.6%.
The slope of the yield curve fell during April to 305 basis points from 321 as investors moved further out on the curve in search of yield. The 10- to 30-year slope of the curve increased to 138 basis points from 126 as buyers showed more interest in the belly of the curve than on the long end.
Triple-A to single-A credit spreads show investors are more willing to slip down the credit scale on the short end and the long end but prefer high-grade bonds in the belly of the curve.
The two-year triple-A to single-A spread remained at 39 basis points during April, while the five-year spread fell to 62 basis points from 67 basis points at the beginning of the month.
Further out on the curve, investors were also willing to move down the credit scale. The 30-year triple-A to single-A spread fell to 76 basis points from 78 basis points at the beginning of the month.
But in the belly of the curve, investors moved out of the higher-yielding bonds into high-grade.
The 10-year triple-A to single-A spread jumped to 81 basis points from 78 basis points at the start of April.