The tax-exempt market continued to see losses for its third consecutive trading session as supply far outweighed demand. A cut of 13 basis points Wednesday didn’t stop munis from experiencing further losses.
“Munis are still weaker and it’s going to continue,” a New York trader said, adding that yields are rising due to supply-and-demand factors. “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.”
“Several muni [mutual] funds were at all-time highs, so the sell-off is not surprising and very typical,” a trader tweeted. “Many still are quite high.”
Munis were weaker Thursday, according to the Municipal Market Data scale. The two-year yield jumped four basis points while the three- to 16-year yields rose some three basis points. The 17- to 22-year yields increased one and two basis points. Outside 23 years, yields were steady.
On Thursday, the two-year yield closed four basis points higher at 0.34% while the 10-year yield jumped four basis points to finish at 2.21%. The 30-year yield ended flat at 3.40%.
Before the big losses this week, the two-year yield had not been this high since Jan. 27. The 30-year yield hasn’t risen to this height since Jan. 10. The 10-year muni hadn’t seen these levels since Dec. 5, 2011.
Treasuries were stronger Thursday morning but ended the day mostly flat. The two-year yield fell throughout the day to close four basis points lower at 0.37%. The benchmark 10-year yield and the 30-year yield fell throughout the day, but ended flat at 2.29% and 3.42%.
In the primary market, Morgan Stanley repriced $277.9 million of Louisville-Jefferson County Metro Government revenue bonds for Catholic Health Initiatives. They were rated Aa2 by Moody’s Investors Service and AA by Standard & Poor’s and Fitch Ratings.
Yields ranged from 0.50% with a 3% coupon in 2013 to 4.35% with a 4.25% coupon and 4.13% with a 5% coupon in a split 2035 maturity. The bonds are callable at par in 2022.
Prices were bumped between two and four basis points inside eight years from preliminary pricing.
Wells Fargo priced $175.7 million of Charlotte, N.C., general obligation refunding bonds, rated triple-A by the big three rating agencies.
Yields ranged from 0.42% with 5% and 1.25% coupons in a split 2014 maturity to 3.07% with a 5% coupon in 2032. Credits maturing in 2013 were not formally reoffered. The bonds are callable at par in 2022.
“Charlotte was well received but bumps only occurred around the maximum yield bonds where yields were shaved one to four basis points,” according to MMD’s Randy Smolik.
Muni-to-Treasury ratios have fallen as munis outperformed Treasuries and became relatively more expensive. Since munis started weakening on Tuesday, the five-year ratio fell to 80.2% from 86.8% at the start of the week. The 10-year ratio fell to 95.6% from 99.5%. The 30-year ratio fell to 99.7% from 103.8% on Monday.
A New York municipal analyst added that the fall in ratios came from a bigger drop in Treasuries. “Don’t forget about that 20-basis-point-plus move in Treasuries the past couple of days,” he said. “Munis have outperformed on a relative basis.”
The 10- to 30-year slope of the curve fell this week as investors went further out on the yield curve. The slope fell to 123 basis points on Wednesday from 127 basis points at the beginning of the week.
“The tax-free long end is still less dangerous, but the cushion is slowly eroding,” a trader tweeted, referring to the decline in the 30-year ratio and the slippage of the slope.
Over the past few weeks, the 10-year portion of the curve has been hit the hardest and underperformed the 30-year muni and the 10-year Treasury, according to a research note from Peter DeGroot, a municipal analyst at JPMorgan.
Some of the underperformance by the 10-year is due to the high amount of bonds in that spot on the curve that have come to market recently.
“Fixed-rate issuance in the five- to 10-year portion of the curve has been approximately 25% of the market while 25-year-plus portions of the curve has issued just 15% of the supply,” he wrote. In a typical year, supply in the 25-year range is usually double that in the five- to 10-year spot.
DeGroot added that mutual fund flows have also supported longer-term bonds, further contributing to the underperformance in the 10-year.
“On a year-to-date basis, long-term municipal bond funds have had net inflows of $6.7 billion while intermediate funds have had inflows of $3.8 billion,” he said.
The underperformance of the 10-year could continue. “Through April, we could see further underperformance in the 10-year market,” DeGroot wrote. “That said, particularly from current levels, we expect that over time, the 10-year area of the curve will outperform 30-year rates.”
In particular, DeGroot expects the 10-year muni-to-Treasury ratio to fall, saying the spread between the 10-year ratio and the 30-year ratio is usually much wider.
“In a typical environment the 10-year ratio is far lower in relation to the 30-year ratio,” he said. “The spread between the 10-year ratio and the 30-year ratio is currently about 2%. Over trailing one-, three- and 10-year periods, the 10-year ratio has averaged 11, 12 and 10 ratios below the 30-year ratio.”