Whipsawing financial markets have been confusing investors for the better part of the past two weeks. That’s left municipal securities in a tough spot, and helps to explain why Friday’s trading session was mostly a subdued one.
For starters, an unsettled U.S. and global economic picture has shaken up the equities markets. A roiling stock market, in turn, has led to some large rallies in Treasuries, leaving them expensive.
Now munis are catching up, rallying enough so that the benchmark 10-year yield reached a record low Thursday. And their ratios to Treasuries, while off from calendar highs achieved earlier this month, are still very attractive. But all of that rallying has left munis’ nominal yields almost prohibitively low.
Add to this the fact that there is little new issuance to provide any direction for prices, and lots of cash ready to be put to use, and munis become a more difficult choice for investors to make: attractive, yet expensive, and at the moment without a discernable direction.
Tax-exempt yields, after impressive gains Thursday, were mixed to close out the week, according to the Municipal Market Data scale.
Bonds maturing through 2017, as well as between 2020 and 2027, were unchanged. Yields maturing in 2018 and 2019 fell two basis points lower. Maturities beyond 2027 inched up one basis point in yield.
Muni yields were mostly flat across the curve Friday. The 10-year muni yield held at 2.15%, its lowest level ever recorded by MMD. For the week, the 10-year yield dropped 11 basis points.
The two-year muni yield remained at 0.30%, its lowest yield in more than 40 years. In fact, it hovered there all week.
The 30-year muni yield also ticked up one basis point to 3.79%, its lowest level since late October. By week’s end, it had fallen nine basis points.
Treasury yields made modest moves along the curve, which flattened at the long end. The benchmark 10-year Treasury yield fell two basis points to 2.07%, and plunged 18 basis points for the week. On Thursday, it fell a few basis points below 2.00% briefly — a record — before softening.
The two-year yield remained unchanged at 0.20%, two basis points above its all-time low. It rose two basis points for the week.
The 30-year yield decreased five basis points to 3.39%, and flattened the curve by plummeting 33 basis points for the week.
New issuance remains in the doldrums. Industry estimates have pegged municipal bonds expected to be sold this week at $3.65 billion versus a revised $4.72 billion this past week.
With lots of cash still on the sidelines awaiting allocation, the industry has been looking for a boost in volume for price discovery. It hasn’t happened all year, and it likely isn’t happening this week.
Investors continue to pull money from muni bond mutual funds. They saw $323 million in outflows, which are down from those of the previous week, when there were net outflows of $682 million, according to Lipper FMI.
John Dillon, chief municipal bond strategist for Morgan Stanley Smith Barney said that much of the outflows could be interpreted as a hangover from the debt-ceiling crisis and the subsequent Standard & Poor’s downgrade, which unsettled individual investors.
The muni market is in a catch-up mode to Treasuries, he added.
“It is possible you could see movement out of funds and into individual securities,” Dillon said. “But, we’re also sitting, as of [Thursday], at record low yields for munis, so you have expect a certain amount of sticker shock from individuals.”
The major equities indexes ended Friday’s session down at least 1.50%. The Dow Jones Industrial Average lost almost 173 points on the day.