The tax-exempt market was quiet Monday as traders look ahead to the year’s largest weekly calendar of new issuance to date. While some traders are nervous about how the market can absorb the uptick in supply, yields still remain near record lows.
“Munis are kind of dead,” a New York trader said. “There are lots of new issues coming that traders are waiting for.”
“It was real sideways last week, so there was no bid side,” a trader in Chicago said, adding that this week the market will look to new issues for direction. “Munis are real quiet today.”
“Last week’s new issuance was generally well-received and the market is preparing for $7 billion more this week,” wrote Mark Cantrell, managing director at Piper Jaffray. “With the possibility of a building new-issue calendar looming, buyers have displayed a bias to be patient with respect to deploying capital at these levels.”
Though the new-issue supply increase has yet to impact current yields, he said “a sustained 30-day visible [supply] above $10 billion could start to have a negative effect on current muni yields.”
Munis were firmer Monday, according to the Municipal Market Data scale. Yields inside seven years were steady while the eight- to 12-year yields fell between one and two basis points. Yields on the 13- to 16-year were steady while yields outside 17 years fell up to two basis points.
The two-year yield ended steady at 0.26%, its record low as recorded by MMD on Feb. 16. The 10-year and the 30-year yields fell two basis points each to 1.85% and 3.23%, respectively.
Treasuries were stronger Monday on negative news from the G-20 meeting of finance officials in Mexico over the weekend and more negative news coming out of Greece. The two-year yield fell three basis points to 0.29%. The benchmark 10-year yield and the 30-year yield dropped six basis points each to 1.93% and 3.05%, respectively.
In the primary market, Bank of America Merrill Lynch priced for retail $138.8 million of Maine Turnpike Authority revenue bonds, rated Aa3 by Moody’s Investors Service and AA-minus by Standard & Poor’s and Fitch Ratings.
The bonds were priced in two series, $68.8 million of Series 2012A turnpike revenue bonds and $70 million of Series 2012B revenue refunding bonds. Pricing information was not yet available.
In the secondary market, trades reported by the Municipal Securities Rulemaking Board showed firming.
Bonds from an interdealer trade of Campbell County, Tenn., 5.8s of 2031 yielded 3.93%, 11 basis points lower than where they traded last Thursday. A dealer bought from a customer Clark County, Nev., Airport System 5s of 2023 at 2.83%, seven basis points lower than where they traded last Thursday. Bonds from an interdealer trade of Delaware Economic Development Authority 5s of 2036 yielded 3.82%, five basis points lower than where they traded Friday. Bonds from another interdealer trade of Port of Seattle 5s of 2033 yielded 3.53%, two basis points lower than where they traded Friday.
Last week, muni-to-Treasury ratios rose as munis underperformed Treasuries and became cheaper. The 10-year ratio jumped to 94.4% from 91% the week before. The 30-year muni-to-Treasury ratio increased to 104.8% from 102.2%. The five-year ratio was steady at 75.6%.
While the 10- to 30-year slope of the curve has fallen to 138 basis points on Friday from 169 basis points at the beginning of the year, the slope has steepened in the last three weeks, according to J.R. Rieger, vice president of fixed-income indexes at Standard & Poor’s Indices.
“A steepening curve means longer maturity bond prices will take the brunt of any yield increases,” he said, adding the difference in yields between the S&P AMT-Free Municipal Series 2013 and 2021 indexes moved from 202 basis points on Feb. 1 to 222 basis points as of Feb. 23.
Spreads have also tightened across the credit spectrum so far this year. The spreads on the two-year triple-A to single-A munis tightened to 44 basis points on Friday from 56 basis points at the beginning of the year as investors reached further out on the curve for yield. The spread on the 10-year triple-A to single-A munis fell to 90 basis points on Friday from 96 basis points. Similarly, the 30-year triple-A to single-A spread compressed to 83 basis points from 89 basis points at the beginning of the year.
“One interesting, although probably predictable, dynamic that we have been observing is the fairly significant credit spread-tightening that has occurred thus far in 2012 — particularly in the A-rated category — as buyers continue to reach for extra yield in an exceeding low nominal rate environment,” Cantrell added.
Rieger agrees and thinks the lower-rated bonds are the ones to watch. Investment-grade municipal bonds, measured by the S&P National AMT-Free Municipal Bond Index, returned 2.41% so far this year as of Feb. 23. And while those numbers show the demand for munis, the high-yield sector has returned much better numbers.
High-yield muni bonds, measured by the S&P Municipal High Yield Bond Index, returned 4.11% year to date, with the health care sector returning over 3.6%.
“The yield spread differential between high-yield municipal bonds and investment-grade municipal bonds has narrowed since year end,” Rieger said. “The spread narrowing indicates the market is willing to take on more risk for higher yield.”