The tax-exempt market surged higher on Monday as traders played catch-up on a flight-to-quality rally that hit Treasuries last Friday.
Municipal bond yields fell double digits to lows not seen in a month.
"Volume was strong in the morning but the bumps in the afternoon didn't do anything for volume; in fact, it was dead slow," a New York trader said. "Rates are so low that it doesn't seem the risk to reward is worth it to buy munis."
He added the rally was based on a flight to quality from equities to Treasuries.
"There are not a lot of bonds out there," another New York trader said. "In the secondary, there is some supply. But for the most part, the recent push in the last 24 hours has been reaction to the move on Friday that a lot of people weren't able to take advantage of because they were out."
Indeed, data compiled by Markit showed munis were much stronger in Monday trading compared to last Thursday. In a sample of 10 CUSIP numbers, all yields fell between seven and 17 basis points. Pennsylvania 5s of 2023 fell 11 basis points to 2.41%, California 5s of 2022 dropped 16 basis points to 2.82%, and Wisconsin 5s of 2024 fell 13 basis points to 2.53%.
Munis rallied for the second consecutive trading session on Monday, according to the Municipal Market Data scale. The two- and three-year yields fell three and four basis points while the four- and five-year yields dropped six and seven basis points. Yields between the six- and 22-year plummeted 10 to 15 basis points. Outside 23 years, yields plunged seven to nine basis points.
On Friday, the two-year yield dropped three basis points to 0.33% while the 30-year yield fell seven basis points to 3.35%. The 10-year yield plunged 15 basis points to 1.97%, falling before 2.00% for the first time since March 6.
Treasuries were buoyed by a flight to safety. The two-year yield fell three basis points to 0.32% while the benchmark 10-year yield dropped 14 basis points to 2.04%. The 30-year yield plunged 15 basis points to 3.18%.
In the primary market, Barclays Capital began its first day of retail for $800 million of New York City Transitional Finance Authority future tax-secured bonds and subordinate bonds, rated Aa1 by Moody's Investors Service and AAA by Standard & Poor's and Fitch Ratings. A second day of retail is expected Tuesday follow by institutional pricing Wednesday.
Yields ranged from 0.40% with 2.5% and 4% coupons in a split 2014 maturity to 3.90% with a 4% coupon in 2042. Credits maturing between 2023 and 2026, between 2028 and 2031, and in 2037 and 2041 were not offered for retail. The bonds are callable at par in 2022.
Barclays also held preliminary pricing on $671.9 million of Virginia Small Business Financing Authority senior-lien revenue bonds, rated BBB-minus by Standard & Poor's and Fitch.
Yields ranged from 4.45% with a 4.25% coupon in 2022 to 5.5% priced at par in 2042. The bonds are callable at par in 2022.
In the secondary market, trades reported by the Municipal Securities Rulemaking Board showed firming.
A dealer sold to a customer Minnesota Housing Finance Agency 3.45s of 2024 at 3.21%, 24 basis points lower than where they traded two week ago.
A dealer bought from a customer New York Liberty Development Corp. 5s of 2041 at 3.96%, 12 basis points lower than where they traded two weeks before.
A dealer sold to a customer California 5.25s of 2014 at 1.05%, 10 basis points lower than where they traded two weeks before.
Another dealer sold to a customer South Carolina Public Service Authority 5s of 2043 at 3.89%, seven basis points lower than where they traded last Thursday.
Over the past week, muni-to-Treasury ratios have remained mostly flat, moving only slightly higher as munis underperformed and became comparatively cheaper. The 10-year muni yield to Treasury yield rose to 97.7% from 96.8% the previous week while the 30-year ratio jumped to 103% from 101.5%. The five-year ratio was flat, closing at 96% from 96.1% the week before.
The slope of the yield curve steepened over the past week as investors moved out of the long end and into the short end. The one- to 30-year slope of the curve rose to 324 basis points from 321 basis points the pervious week. The 10-year to 30-year slope also jumped to 130 basis points from 126 basis points. Inside the 10-year, the sloped flattened to 194 basis points from 195 basis points.
Throughout the year, muni investors have moved down the credit scale to reach for yield and credit spreads on the triple-A to single-A bonds have tightened.
The two-year triple-A to single-A spread plummeted to 39 basis points from 56 at the beginning of the year. The 10-year spread dropped to 78 basis points from 96 in January. The 30-year triple-A to single-A spread fell to 78 basis points from 89 basis points.
And while rates are expected to stay relatively low for the next few years, not all analysts agree reaching down the credit scale for yield is the right move.
"Investors have increasingly moved down in credit quality in search for yield [as the] triple-A to single-A 10-year spreads have decreased to 12-month lows of 78 basis points," according to MMD's Daniel Berger. "Reaching for yield by purchasing lower-rated credits is not a trade that we would recommend for MMD subscribers. … Investors purchasing lower-rated credits might experience weak performance should spreads return to their recent three-month average level of 87.2 basis points."
For the first quarter this year, high-yield municipal bonds have outperformed the general market, according to Standard & Poor's indexes. As measured by the S&P Municipal Bond High Yield Index, high-yield muni bonds returned 6.07% for the first quarter, according to J.R. Rieger, vice president of fixed-income indexes.
The high-yield muni bond returns far beat the general market, which returned 1.77% for the quarter as measured by the S&P National AMT-Free Muni Bond Index.
"Driving this outperformance is investor demand for higher-yielding bonds which has compressed the spread between high-yield and investment-grade municipal bonds since year end 2011," Rieger wrote.
