Propelled by a rally in the Treasury market, the municipal market put in a strong performance that saw the benchmark 10-year tax-exempt yield set a record low.
The secondary market saw light to moderate activity Tuesday. But muni yields essentially followed Treasuries, and to a lesser degree the stock market, a trader in New York said.
“Our tone is decent, though not as strong as Treasuries,” he said. “We’re following them tighter than usual.”
For their part, Treasuries started the day’s session by falling sharply on worries emerging from Europe concerning the bailout of Greece. For munis, particularly those with maturities of 17 years on out, pricing was strong throughout the day, a trader in Chicago said.
“The Treasury market is excited about what’s going on,” he said. “Munis are going with them right now. It’s like they were a little shy. Now they’re starting to pick up. Everything in the secondary is trading. If it didn’t trade on Friday, it’s trading today.”
Tax-exempt yields crashed across all but the front end of the curve, according to the Municipal Market Data scale. For maturities in 2017 through 2021, yields were four to seven basis points lower. Yields with maturities between 2022 and 2031 ended down seven to eight basis points. Those beyond 2031 dropped eight basis points.
The benchmark 10-year yield Tuesday fell seven basis points to 2.10%, a record low on MMD. It has fallen 14 points since Sept. 1.
The 30-year yield plunged eight basis points on the day to 3.70%, its lowest level since Sept. 29.
The two-year yield remained unchanged at 0.30% for a 19th consecutive session, holding at its lowest level in more than 40 years.
Treasury yields started the week with a rally at their back. Yields beyond the front end of the curve remained lower throughout the day, flattening out the curve.
The 10-year benchmark yield dropped three basis points to 1.98%. At one point in the overnight session it touched 1.908%, levels it hasn’t seen in more than 50 years.
The 30-year yield decreased six basis points on the day to 3.26%. The two-year yield, though, remained unchanged at 0.21%.
Even though the week is shortened by the holiday, new-issuance volume is expected to be higher that last week’s. Industry estimates place the total for the week at almost $3 billion, versus a trifling $1.72 billion last week. Most of the biggest deals are expected to reach the market later in the week.
Throughout the day, Treasury yields retraced their steps from a particularly strong morning, according to MMD analyst Randy Smolik.
Tax-exempt dealers either didn’t want to show their hands during the day’s session or just didn’t have the inventory after lightening before summer vacations, and so ended up paying customers aggressively for high-grade names.
This was particularly true for maturities approaching the 10-year range, Smolik wrote.
“As ratios to taxables soared, the muni secondary seemed thin of blocks,” Smolik wrote in a research posting. “August vacation schedules and lighter August issuance — at $21 billion versus $29 billion last year — left the Street scrambling for trading blocks.
Ultimately, some dealers would step to the aggressive offering levels of customers with block trading.”
Many dealers had an opportunity to lower their inventory last week, the trader in New York said, and most of them took it.
But the market is still moving to the tune of institutional investors and crossover buyers, the trader said. And, with small exceptions here and there, Tuesday’s session was no different.
“Although indirectly, retail plays a tremendous role in our business,” he said, “in the day to day, it always seems to be below the surface.”
Muni ratios to Treasuries, already high in August compared with the rest of 2011, moved even higher at the end of last week. This was particularly true for maturities beyond the front end of the yield curve.
The 10-year ratio ended the week at 108.5%, the second-highest level this year, and 18% higher than its 2011 average of 91.88%.
The 30-year ratios leveled off at 114.2% of Treasuries, the highest level it’s seen this year, and 10% higher than its 2011 average of 104.29%.
The two-year ratio stood at 142.9%, well above its average for 2011, at 106.6%.
But ratios don’t need to keep these levels to maintain the current supply and demand balance, wrote Michael Zezas and Julie Powers, with Morgan Stanley municipal strategy research.
“We believe broad market risk measures, such as yield ratios, will not move sustainably higher from current levels, which are more consistent with greater fundamental and technical uncertainty,” they wrote. “We expect temporary moves higher, perhaps in response to a supply pickup, but do not believe they are not fundamentally sustainable.”
Furthermore, the muted outlook for growth and inflation will stanch any threat to muni performance should rates rise, Powers and Zezas added. Morgan Stanley’s economists have recently downgraded their near- and medium-term growth expectations for the United States. They anticipate Treasury rates to be mostly flat through the end of next year.
The equities markets, after coming out of the gate into a downswing, were able to claw their way back. Nevertheless, the major indexes ended the day all down by at least 0.26%.
At one point, the markets were all down by more than 2.00%. The Dow Jones Industrial Average ended the day 100 points lower than Friday’s close.