The tax-exempt market ended last week on a strong note after five consecutive days of losses. On Friday, munis followed Treasuries higher after European finance leaders rejected Greece’s spending cuts and once again pushed investors into safe-haven assets.
“We are seeing a rally,” a New York trader said. “Treasuries are up because of Greece, which carries over to us.”
Another New York trader said throughout the week most dealers were biding their time until increased supply came to the market. “Everyone has been waiting for new issues to come and loosen things up a bit,” he said.
“The secondary market is quiet but anything that is high quality is pricey,” he said, adding that triple-A rated Tennessee deals are “always a riot — and if this week’s $385 million deal is anything but a riot, run for the hills.”
Munis were mostly stronger across the curve on Friday, according to the Municipal Market Data scale. Yields inside four years were steady while yields outside five years fell between two and four basis points.
On Friday, the 10-year yield dropped four basis points to 1.83%, while the 30-year yield fell three basis points to 3.26%. The two-year held steady at 0.29%, the record low it reached Tuesday.
Before the gains on Friday, munis were on a five-day losing streak. In that time period, the 10-year yield jumped 18 basis points while the 30-year yield spiked 15 basis points.
Treasuries gained Friday. The benchmark 10-year and 30-year yields fell eight basis points each to 1.96% and 3.11%, respectively. The two-year was steady at 0.28%.
In the secondary market, trades reported by the Municipal Securities Rulemaking Board showed gains on Friday.
Bonds from an interdealer trade of Oregon 5.762s of 2023 yielded 3.28%, nine basis points lower than where they traded Thursday.
A dealer bought from a customer Guam 5.125s of 2027 at 5.31%, five basis points lower than where they traded Thursday.
A dealer sold to a customer Golden State Tobacco Securitization Corp. 4.5s of 2027 at 6.35%, four basis points lower than where they traded Thursday.
A dealer bought from a customer Los Angeles Unified School District 5s of 2030 at 2.81%, three basis points lower than where they traded Thursday.
So far this year, the 10- to 30-year slope of the muni curve has flattened to 142 basis points last Thursday from 169 basis points at the start of the year. That’s in stark contrast to the steepening Treasury slope, said MMD’s Daniel Berger.
“In general, although the muni and Treasury markets still have a high correlation, they have become more decoupled since the beginning of this year,” he said, adding that the Treasury 10- to 30-year yield curve has steepened to 115 basis points on Thursday from 101 basis points at the end of 2011.
“We believe this muni outperformance is seasonal in nature and attributable to high January reinvestment demand and low supply. We should see munis revert back to a more correlated performance to Treasuries as the calendar of muni deals builds up and reinvestment needs are filled.”
Looking at this week, the municipal market can expect $5.2 billion in new supply, up from last week’s revised $4.1 billion.
On the negotiated calendar, $4.5 billion is expected to come to market, up from last week’s $3 billion. In competitive deals, $661.1 million is expected to be priced, down from last week’s $1.2 billion.