After returning about 7.3% in 2019, the municipal bond asset class continues to see strong returns so far in 2020.
Pat Luby, senior municipal strategist at CreditSights, said that the ICE Bank of America Merrill Lynch municipal bond index returned 33 basis points last week and has now earned 1.02% year to date.
"Over the past 10 weeks, the index has been down only once and that was the week ended Dec. 20," he said. "The outperformance of the muni bond market pushed muni/taxable bond yield ratios to even richer levels."
He also noted that muni bond Exchange Traded Funds trading was 12% heavier than the week before and 76% higher than last year's daily average.
"Trading in muni closed end funds was also up from the week before but only by 9% as the average market discount widened but by a negligible amount to 3.822% on Friday from 3.820% on Jan. 10."
Peter Block, managing director of credit and market strategy at Ramirez, noted that the S&P Main Muni Index gained 0.31% last week and is now up 0.93% on the year, while the taxable muni index returned 0.11% last week and is up 0.95% year to date.
"Tax-exempts are ridiculously expensive based on several measures — ratios, spreads, absolute yields — all driven by chronic imbalance of supply/demand," Block said. "We are cautious at this time and it’s difficult to say that a secular valuation shift has occurred, although we will know for certain if/when sustained slacker demand (fund outflows) and/or positive net supply materializes."
Taxable munis continue to outperform
The ICE BofAML taxable municipal bond index continued to outperform the U.S. Treasury and Corporate bond indices last week, according to Luby.
"Compared to tax-exempt municipal bonds and corporate bonds, current market conditions generally favor taxable municipal bonds for corporate investors who are subject to the 21% federal income tax rate," he said. "For individual investors, tax-exempt municipals due around 10-years and longer may be more attractive."
He added that strong investor demand for municipal bonds (both exempts and taxable) helped the major muni bond indicies outperform the U.S. Treasury and corporate bond indices last week but the option adjusted spread for the ICE BofAML tax-exempt municipal bond index widened by two basis points last week while the taxable index tightened by three basis points.
The OAS compares the effective yield of the index versus U.S. Treasury rates.
"Not many folks in muniland pay attention to it, but for taxable investors it provides an easy way to recognize when yields more differently than the UST rates," Luby said. "Taxable issuance last week totaled $1.9 billion and is set to rise slightly to $2.1 billion this week."
Primary market
Moorhead Independent School District No. 152, Minnesota sold $110 million of general obligation school building bonds on Tuesday. The bonds were won by Citi with a true interest cost of 2.6688%.
With the municipal market being closed on Monday in observance of Martin Luther King Jr. Day, most of the issuance will be packed into Wednesday and Thursday.
JP Morgan is scheduled to price the Partners Healthcare System Inc.’s (Aa3/AA-/NR/NR) $1.004 billion of taxable corporate CUSIP for Mass General Brigham on Wednesday.
Morgan Stanley is expected to price Cottage Health Credit Group, Calif.’s ( / /AA-/ ) $500 million of taxable corporate CUSIP also on Wednesday.
In the competitive arena, Delaware (Aaa/AAA/AAA) is selling $300 million of general obligation bonds on Wednesday.
The University of Houston System Board of Regents (Aa2/AA/ ) is selling a total of $478.025 million of consolidated revenue refunding and taxable bonds in two separate sales on Wednesday.
Secondary market
Munis were mixed on the MBIS benchmark scale, with yields rising by three basis points in the 10-year maturity and falling by three basis points in the 30-year maturity. High-grades were weaker with yields on MBIS AAA scale increasing one basis point in the 10-year maturity and by two basis points in the 30-year maturity.
On the MMD benchmark scale, the yield on both the 10-year and 30-year were one basis point lower to 1.28% and 1.93%, respectively.
The 10-year muni-to-Treasury ratio was calculated at 72.3% while the 30-year muni-to-Treasury ratio stood at 86.5%, according to MMD.
“The ICE muni yield curve is one basis point lower from Friday’s levels as the market takes direction from Treasuries,” ICE Data Services said in a Tuesday market comment. “High-yield and tobaccos are quiet and unchanged. Taxable yields are down [by] up to three basis points.”
Stocks were mixed most of the day, until around 2 p.m. eastern time when it was reported that the Coronavirus had its first reported case here in the United States (in Washington State), causing stocks to sink. The Coronavirus has six confirmed deaths in China and it is similar to the SARS virus. Treasury yields moved higher.
The Dow Jones Industrial Average was down about 0.62%, the S&P 500 Index lost around 0.26% and the Nasdaq fell about 0.32%.
The Treasury three-month was yielding 1.551%, the two-year was yielding 1.522%, the five-year was yielding 1.570%, the 10-year was yielding 1.768% and the 30-year was yielding 2.230%.
Last week’s actively traded issues
According to
Some of the most actively traded munis by type in the week were from New York, New Hampshire and Texas issuers.
In the GO bond sector, the City of New York zeros of 2036 traded 27 times. In the revenue bond sector, the New Hampshire Health and Education Facilities Authority 5s of 2059 traded 67 times. In the taxable bond sector, the Texas Private Activity Bond Surface Transportation Corp. 3.922s of 2049 traded 41 times.
Previous session's activity
The MSRB reported 30,646 trades Friday on volume of $14.12 billion. The 30-day average trade summary showed on a par amount basis of $11.20 million that customers bought $5.81 million, customers sold $3.49 million and interdealer trades totaled $1.89 million.
Texas, California and New York were most traded, with the Lone Star State taking 13.618% of the market, the Golden State taking 13.467% and the Empire State taking 11.462%.
The most actively traded security was the Pennsylvania State Turnpike Commission revenue taxable refunding 3.416s of 2041, which traded nine times on volume of $40.220 million.
Treasury auctions discount rate bills
Tender rates for the Treasury Department's latest 91-day and 182-day discount bills were mixed, as the $42 billion of three-months incurred a 1.530% high rate, unchanged from 1.530% the prior week, and the $36 billion of six-months incurred a 1.520% high rate, down from 1.530% the week before.
Coupon equivalents were 1.562% and 1.557%, respectively. The price for the 91s was 99.613250 and that for the 182s was 99.231556.
The median bid on the 91s was 1.500%. The low bid was 1.480%.
Tenders at the high rate were allotted 16.51%. The bid-to-cover ratio was 3.00.
The median bid for the 182s was 1.505%. The low bid was 1.480%.
Tenders at the high rate were allotted 64.19%. The bid-to-cover ratio was 3.20.
Treasury to sell $40B 4-week bills
The Treasury Department said it will sell $40 billion of four-week discount bills Thursday. There are currently $37.307 billion of four-week bills outstanding.
Treasury also said it will sell $40 billion of eight-week bills Thursday.
Gary E. Siegel contributed to this report.
Data appearing in this article from Municipal Bond Information Services, including the MBIS municipal bond index, is available on The Bond Buyer Data Workstation.
