The tax-exempt market ended on a firmer tone despite traders saying the market was very quiet following a mid-week closure in observance of Independence Day.
With no direction from a barren primary market, munis followed Treasuries higher.
“It’s very slow,” a New York trader said.
Others agreed. “There is nothing to do,” a Chicago trader said. “It’s really quiet and people are making a joke out of it, really.”
Most market participants are looking forward to next week, he added. “It doesn’t look like a whole lot of new issuance, but anything is more than this week,” he said. “There’s a lot of July redemption money just waiting to be spent that’s piled up. I have to think that it will be OK next week. I’m positive on next week.”
On Thursday, munis were steady to slightly stronger, according to the Municipal Market Data scale.
Yields inside six years were flat while yields outside seven years fell one basis point.
The 10-year yield and the 30-year yield each fell one basis point to 1.84% and 3.15%. The two-year ended steady at 0.32% for the 24th straight session.
Treasuries were stronger Thursday. The benchmark 10-year yield fell three basis points to 1.60% while the 30-year yield dropped four basis points to 2.71%. The two-year yield fell one basis point to 0.30%.
In the secondary market, trades compiled by data provider Markit showed mostly firming.
Yields on Louisiana gas and fuels tax 5s of 2020 dropped three basis points to 1.80% while Port Authority of New York and New Jersey 4.926s of 2051 fell two basis points to 4.11%.
Yields on San Diego County Regional Transportation Commission 5s of 2042 and New York Hudson Yards Infrastructure Corp. 5s of 2047 each fell one basis point to 3.45% and 3.92%.
So far in July, muni-to-Treasury ratios have risen as munis underperformed Treasuries and became comparatively cheaper.
The five-year ratio jumped to 114.7% on Thursday from 108.2% on June 29. The 10-year ratio rose to 115% from 112% at the end of June. The 30-year ratio increased to 116.2% on Thursday from 114.5% at the end of last month.
So far this year, ratios have also risen, at least for short to intermediate maturities.
The five-year ratio jumped to 114.7% from 98.9% on Jan. 3. The 10-year ratio rose to 115% from 96.4% at the start of the year.
On the long end, ratios have fallen so far this year as munis outperformed Treasuries and became relatively more expensive.
The 30-year ratio dropped to 116.2% from 119.4% at the beginning of January.
So far in July, the slope of the yield curve is slightly flatter.
The one- to 30-year slope fell to 295 basis points on Thursday from 296 basis points at the end of June. The one- to 10-year slope flattened slightly to 164 basis points from 166 basis points at the end of June.
And so far this year, the slope has flattened as demand outweighed supply.
The one- to 30-year slope flattened to 296 basis points on Thursday from 332 basis points at the beginning of the year.
Credit spreads also compressed so far this year.
The two-year triple-A to single-A spread compressed to 39 basis points on Thursday from 56 basis points at the beginning of the year. The 10-year spread flattened to 79 basis points from 96 basis points at the start of the year. The 30-year spread dropped to 80 basis points on Thursday from 89 basis points on Jan 3.
Given the availability of cash from recent bond calls and maturing securities, muni analysts at Citi say demand has been able to keep up with a recent increase in supply over the past several weeks.
“Despite stronger-than-expected new issue supply, yields have been virtually unchanged,” wrote George Friedlander. “A key reason for that is the magnitude of bond calls and maturities.”
Different types of investors treat bond calls and maturities differently, Friedlander added.
Individual investors have continued to stay on the sidelines while institutions and separately managed accounts have absorbed most of the supply.
“Direct retail investors in general have been extremely resistant to giving up high-coupon paper prior to actual calls or maturities, even in cases where the average call-adjusted maturity of a portfolio is collapsing.” Friedlander wrote, adding that when additional cash comes in, it’s not reinvested either. Individual investors are fearful of buying bonds at these near-record low yield levels.
On the other hand, institutional investors or separately managed accounts factor in expected calls and maturities when establishing the duration of a portfolio, Friedlander wrote, so cash coming into the account is not changing the investment behavior.
“For an investor who manages direction or maturity, a bond which is about to mature or be called is already being treated as a ‘zero duration’ investment, a measure which is already taken into account in determining portfolio structure,” he wrote.
Other institutional investors, like bond funds, don’t adjust the maturity of a portfolio as calls and maturities approach, but aren’t willing to sell high-coupon paper before the call or maturity date.
“In such cases, heavy calls and maturities in a portfolio will often lead to very strong demand for additional paper,” he wrote. “This is particularly the case for muni bond funds. They find it difficult to give up high-coupon paper before call or maturity, so when bonds are called or mature, the cash immediately becomes omens available for investment out along the yield curve.”