Activity in the tax-exempt market slowed this week as new issuance fell and traders looked to the secondary market for direction.
“It was quiet in both the primary and secondary markets and the factor that is driving a big part of the market is that new supply continues to ratchet down,” said Eric Friedland, head of municipal research at Schroders Investment Management. “At the same time, we are starting to see mutual fund flows begin to reverse.”
Mutual funds that report weekly had $306 million in inflows for the week through May 15 following $22 million in inflows the week before that.
“The technicals are supportive of pricing. It’s difficult if you’re a buyer but good if you’re a seller,” Friedland said.
There were more sellers this week and fewer buyers in odd-lot trades, according to BondDesk Group. Data from the Municipal Securities Rulemaking Board showed the average customer buy and sell trades increased, though interdealer trading fell.
The average par value of daily trades in the week ending May 16 was $10.6 billion, up from the previous week’s $10 billion, according to the MSRB. Average customer buy trades for the week rose to 15,120, from last week’s 14,695. Average customer sell trades increased to 9.259 from 9,135. Average daily interdealer trades fell to 13,930 from 13,943.
Other traders said sellers were looking to take even small gains in the secondary. “The discount structured bonds on most issues trade a basis point or two stronger while the premium 5% coupons have little action,” wrote Dan Toboja, vice president at Ziegler Capital Markets. “The result is a large number of players that buy the discounts waiting for the small up move. It is a crowded trade of late. It also means the new issues typically hang around on the secondary for a few weeks after pricing.”
Tax-exempts also took direction from Treasuries throughout the week, though they underperformed, as muni to Treasury ratios increased. Sellers emerging in the tax-exempt market pushed muni prices lower than Treasuries.
“Munis were outperforming but it’s changing slightly,” Friedland said. “Munis look slightly cheaper to Treasuries as Treasuries perform stronger.”
The five-year muni-to-Treasury ratio increased to 101.3% on Thursday from 96.3% the previous Friday. The 10-year ratio rose to 96.8% from 95.3%. The 30-year ratio rose to 95.5% from 94.5%.
The drop in issuance is expected to continue next week with new volume falling to just $5.1 billion. “The slowdown in new issues is surprising,” Friedland said. “We expected it to be a bit stronger. We hear from issuers in many sectors that there are pent up capital needs, so we expect issuance to pick up at some point. We may see some big weeks in the summer or the end of the year.
“So much of the market is still refunding, which reduces net supply, which is a technical positive for the market,” he said.
Overall for the week, the Municipal Market Data scale ended steady to slightly weaker through Thursday. The 30-year yield rose two basis points to 2.95%. The two-year and 10-year yields were flat at 0.28% and 1.81%, respectively.
The Municipal Market Advisors scale also ended slightly weaker for the week through Thursday. The 10-year and 30-year yields rose one basis points each to 1.86% and 3.07%, respectively. The two-year was steady at 0.33%.
Treasuries were weaker on the long end through Friday morning. The 30-year yield increased three basis points to 3.13%. The two-year and benchmark 10-year were steady at 0.25% and 1.90%, respectively.