Top quality municipal bonds finished weaker on Tuesday, traders said, as they kept a wary eye on muni yields, which have risen by as much as 64 basis points since Election Day and by 115 basis points since July's all-time lows.
The yield on the 10-year benchmark muni general obligation rose three basis points to 2.33% from 2.30% on Monday, while the yield on the 30-year increased two basis points to 3.08% from 3.06%, according to the final read of Municipal Market Data's triple-A scale.
On Monday, Nov. 7, the day before the election, the 10-year muni yield stood at 1.70% while the 30-year yield was at 2.53%.
Both the 10-year and 30-year muni yields fell to record lows this year, with the 10-year hitting 1.29% and the 30-year dropping to 1.93% both on July 6. Since then, the 10-year has risen 104 basis points and the 30-year has gained 115 basis points.
U.S. Treasuries were mixed on Tuesday. The yield on the two-year rose to 1.09% from 1.08% on Monday, the 10-year Treasury dropped to 2.32% from 2.34%, while the yield on the 30-year Treasury bond was unchanged at 3.01%.
The 10-year muni to Treasury ratio was calculated on Tuesday at 100.5% compared to 98.6% on Monday, while the 30-year muni to Treasury ratio stood at 102.4% versus 101.8%, according to MMD.
Where Does the Post-Election Market Go From Here?
After the spike in municipal bond yields since the election, signs of calm are beginning to emerge, though patience is warranted before putting additional money to work, according to BlackRock's Peter Hayes, the managing director and head of the municipal bonds group.
"The U.S. election surprised on a number of fronts: Polls and prediction markets did not point to Donald Trump's victory," said Hayes. "Likewise, the Republican sweep of both chambers of Congress was not the widely anticipated outcome. Most forecasts called for a Hillary Clinton win and split government, essentially setting the stage for a continuation of the status quo in Washington, D.C."
Hayes also said that the financial markets delivered a third surprise when the "risk-off" sentiment that was expected to accompany a Trump victory lasted only hours. Markets appeared to take solace in a contrite acceptance speech and potential for a pro-growth agenda from the new administration. Sentiment quickly shifted to a risk-on trade that benefited stocks and other risk assets as traditional safe havens, including Treasuries and municipal bonds, sold off.
"The events of Nov. 8 led the municipal market to one of the most severe and abrupt moves in its history. By Nov. 18, the market had given back nearly all the gains that had been achieved in an otherwise impressive calendar year," he said.
Some of the volatility has been because of concerns of tax reform from the Trump administration but Matt Fabian, partner at Municipal Market Analytics, said the risk of tax reform is elevated but not imminent.
"MMA spent time in D.C. last week discussing, among other things, the prospects for damage to the tax exemption via tax reform efforts. We believe the risk of change is real but not imminent, and, as always, the most disruptive outcomes remain the least likely," Fabian said.
"So while yields may indeed keep climbing, there is a better potential for market action to remain orderly and at least loosely moored to the movements in taxables."
Hayes said it's possible munis have seen the worst of the correction. However, the market (not unlike all Americans) is waiting to see where the new administration sets its priorities and what it and Congress can reasonably accomplish.
"Generally speaking, big sell-offs in the municipal market historically have been good buying opportunities longer term. We believe this will hold true again, but caution is warranted around the entry point," said Hayes. "we are concerned about the potential for additional outflows, which would exert more pressure on the market. We saw $3 billion exit municipal funds in a week, and there is likely more to go. For context, amid the 2013 taper tantrum, outflows lasted 32 weeks and totaled $42 billion. This is not atypical for a retail and momentum-driven market. Under the current set of circumstances, we believe patience is a virtue."
One New York trader said that the although there was a little stabilization today, there are still a decent amount of customers selling and that market doesn't have much of a chance until that stops.
"It is very much day-to-day, no one is trying to price their position for next Tuesday or anything like that," he said. As for how the market will handle issuance next week, "We will know better on Friday, but I can see deals getting done next week, as long as both underwriters and customers know that they will be cheaper, and I think they will."
Primary Market
JPMorgan Securities priced the State of New York Mortgage Agency's $83.05 million of homeowner mortgage revenue alternative minimum tax and non-AMT bonds on Tuesday.
The $64.03 million of Series 200 non-AMT bonds were priced at par to yield 3.90% in 2036 and as 3 1/2s to yield 2.35% as a PAC bond in in 2045. The $19.02 million of Series 201 AMT bonds were priced at par to yield from 1.10% in 2017 to 3.40% in 2027 and 3.85% in 2031. The SONYMA deal is rated Aa1 by Moody's Investors Service.
There were no competitive deals larger than $100 million on this week's calendar.
