The tax-exempt market ended the day mostly flat as participants took summer vacations and absolute low yields kept buyers from jumping into the market.
With no primary issuance to set the tone, market participants waited for the majority of the week’s calendar to start pricing on Tuesday.
“Mondays seem to start out this way and in the last few weeks people are taking summer vacations,” a Chicago trader said.
The trader said Aug. 15 should see some redemption money hit the market, especially from Texas issuers that pay principal and interest on that date. “Right now, the market has a finite set of opportunities,” he said. “It is order-driven or a situation like this that occurs with the Texas redemption money coming due.”
This week, supply is still manageable, he added, but the market is fighting poor attendance and these absolute yield levels.
“We are off record lows for sure but I think you still have the issue of the stock market versus munis for an income perspective with dividend paying stocks,” he said. “You have an expectation coming for higher rates in the future, but right now, what do you do?”
Other traders agreed that in terms of income, stocks may be better than municipals right now.
An Atlanta trader said he is not actively trading munis. “I’m not involved right now. I am trading preferred stocks,” he said, and added that the market seems overbought. “There is a lot of action in preferred stocks and they are doing great year-to-date.”
Generally speaking, the Chicago trader said, there is demand for certain yield structures, but dealers aren’t building inventory around flows. “And I don’t think dealers are especially heavy,” he said.
Monday afternoon, trades were getting done in the range where the market could be considered firm, he said. “I wouldn’t say there are any runaway trades right now, but our market is being pushed up,” he said. “But if you have bonds in the street and you are forcing someone to put up capital, they are going to force you to lower prices.”
Others said the market appeared to be overbought. “It’s a crazy time to have to buy bonds,” a North Carolina trader said.
He also was not sure if there is any value to be found in the market, but will see how munis react to a shift in market technicals that happens in the fall. “I’m not going crazy, but buying selectively in the 15-year area with a 5% coupon,” he said.
And while trades in the afternoon appeared stronger, morning activity was slow. “It’s dead and slow,” a New York trader said. “It’s a Monday and there are summer vacations.” Muni yields were flat from Friday’s levels, he added.
On Monday, the 10-year Municipal Market Data yield closed steady at 1.76% while the 30-year yield finished flat at 2.92%. The two-year finished steady at 0.29% for the 13th consecutive session.
Treasuries ended the day mostly flat, paring gains made in the morning. The two-year and the benchmark 10-year finished steady at 0.27% and 1.66%, respectively. The 30-year yield fell one basis point to 2.74%.
In the secondary market, trades compiled by data provider Markit showed mixed results. Yields on Ohio’s Buckeye Tobacco Settlement Financing Authority 6.5s of 2047 dropped five basis points to 7.39%, while New York City Municipal Water Finance Authority 4.75s of 2035 fell three basis points to 2.53%.
Other trades were weaker. Yields on Port Authority of New York and New Jersey 4s of 2031 jumped three basis points to 3.09%, while Santa Clara Valley, Calif., Transportation Authority 5.876s of 2032 increased two basis points to 4.10%. Yields on Maricopa County, Ariz., Union High School District 2s of 2018 and Jacksonville, Fla., Electric Authority 3.25s of 2028 rose one basis point each to 1.30% and 3.36%, respectively.
So far this year, muni exchange-traded funds have showed positive results. The iShares S&P National AMT-Free Municipal Bond ETF — ticker MUB — rose 2.79% so far this year. The SPDR Nuveen Barclays Capital Short Term Municipal Bond ETF — ticker SHM — increased 0.41%. The PowerShares Insured National Muni Bond ETF — ticker PZA — rose 4.95% since the start of 2012.
Other popular ETFs, including the Market Vectors High Yield Municipal Index ETF — ticker HYD — soared 9.69% while the Market Vectors Long Municipal Index ETF — ticker MLN — rose 5.54%.
But many muni ETFs failed to keep up with the ProShares Ultra Seven to 10 Year Treasury ETF — ticker UST — which rose 6.83% this year.
Most muni ETFs outperformed corporate bond ETFs. The iShares iBoxx High Yield Corporate Bond ETF — ticker HYG — rose only 2.20% so far this year, but the iShares iBoxx Investment Grade Corporate Bond Fund ETF — ticker LQD — jumped 5.30%.
So far this year, muni-to-Treasury ratios have fallen on the short and long end as munis outperformed their taxable counterparts and became comparatively more expensive. The five-year muni yield to Treasury yield ratio fell to 95.8% on Monday from 98.9% at the beginning of the year. The 30-year ratio dropped to 106.6% from 119.4% at the start of 2012.
Ratios in the intermediate part of the curve rose as munis underperformed their Treasury counterparts and became relatively cheaper. The 10-year ratio jumped to 106% from 96.4% on Jan. 3.
Analysts at Citi said that while muni-to-Treasury ratios have gone through wild swings over the past year, there are plenty of opportunities to use ratios as a basis to make trades. On the short end of the market, ratios provide attractive entry and exit points.
“While the two-year and three-year Treasury yields have closed higher, corresponding tax-exempts have yet to sell-off in sympathy,” wrote muni strategist George Friedlander. “We believe that the three-year ratios have the most room to rise and the two-year ratio, at current levels, present attractive entry points for going long ratios.”
On Monday, the two-year ratio finished at 107.4% while the three-year ratio closed at 102.7%.
On the long end, the muni market remains starved for supply and should remain supported, the analysts noted. “We expect ultra-long triple-A MMD to stand up to any lower re-pricing of 30-year Treasury yields and the 30-year triple-A MMD Treasury yield ratios are likely to remain close to current levels,” they said.