Munis Stay Put Despite Treasury Rally, Stock Drop

The muni market failed to post any gains Friday despite a broad rally in Treasuries and a sixth week of plummeting equity prices.

Tax-exempt yields were unchanged throughout Municipal Market Data’s triple-A scale, leaving the two-year and 30-year yields at calendar-year lows of 0.44% and 4.25%, respectively, while the benchmark 10-year yield stayed at 2.61%, just two basis points higher than its 2011 low.

The flat tone marked a contrast to Treasuries, where the 10-year yield declined as much as six basis points in intraday trading before finishing at 2.97%, or two basis points lower. The two-year yield fell two basis points at 0.40% and the 30-year yield dropped two basis points to 4.18%.

Muni traders attributed the lack of movement to rising supply expectations as the market prepares to digest another week of issuance above the $5 billion threshold — a first for 2011.

“People are waiting to see what happens,” said a trader in New York. “They need more direction.”

This week’s calendar adds up to $5.2 billion, following $5.8 billion of new issues last week.

Monday revisions might show last week’s issuance to be the most for 2011; the current high, from mid-February, is $6.17 billion.

“The supply should be manageable,” said MMD analyst Randy Smolik. He noted that demand outweighs supply given the reinvestment dynamics of June and July.

About $77 billion of munis should mature in the two months, not including coupon reinvestment, Municipal Market Advisors estimated in May.

Recent coupon payments and principal redemptions were already a major factor in the latest Lipper FMI numbers, according to Chris Mauro, director of muni bond research at RBC Capital Markets.

Lipper reported Thursday that 29 weeks of net outflows among muni mutual funds had finally ended.

Coupled with a perceived decrease in headline risk and an increasingly volatile equity market, the municipal asset class is looking increasingly attractive for mutual fund investors, Mauro said.

Michael Pietronico, chief executive at Miller Tabak Asset Management, said the inflows shouldn’t be too widely heralded.

In an environment where it is widely believed the U.S. economy is slowing, “it should not be unexpected that investors allocate more of their investment monies to fixed-income securities,” he said.

Pietronico expects muni rates to be contained in a fairly narrow range and “frustrate those investors who are either underweight their duration targets or that have large amounts of uninvested cash.”

A weekly survey from MMD reached the same conclusion: not a single trader was bearish on next week’s outlook, while 89% were neutral and 11% were bulls.

Over the next one to two months, however, the survey showed 11% were bears and the rest were neutral.

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