Municipal bond yields rose for the first time in nearly six weeks on Thursday as traders snatched up profits following 27 days of steady or rising prices.
“You can’t keep it going forever,” a California trader said. “You’d like it to, but it had to stop at some point. We needed to take a breather so the market could consolidate some of the gains it has had. Now we can take a look at the market and see where it is heading.”
Yields jumped as much as five basis points in the eight- to 11-year range, according to Municipal Market Data’s triple-A scale.
Yields maturing beyond 2034 held flat at calendar-year lows, while others rose one to three basis points.
The California trader said a little bit of weakness is pretty meaningless given how substantial the gains have been since April 11.
The yield on the 10-year tax-exempt, for instance, fell 68 basis points prior to Thursday’s five-basis-point reversal.
“It’s just a small step back and it doesn’t have the look of a major move,” a New York trader said. “If you like ice cream and you’ve had ice cream for the past 35 days, maybe you want a day or two off. But ice cream is still good.”
The benchmark 10-year muni finished the session at 2.64% after reaching its lowest since Nov. 9, 2010, earlier in the week.
The 30-year muni yield held at 4.31%, its lowest since Dec. 1, 2010, while the two-year stayed at 0.44%.
A weakening Treasury market set the tone for profit-taking in the morning. Treasuries later reversed course and finished nearly unchanged from Wednesday, but the often-lagging municipal market failed to react.
“The damage was done and muni trading did not improve into the afternoon,” Domenic Vonella wrote in MMD’s daily commentary, noting that some muni bonds continued to soften.
The benchmark 10-year Treasury yield finished at 3.18%, a single basis point higher after it climbed six basis points Wednesday. The 30-year Treasury yield rose one basis point to 4.30%.
Despite those losses, the 10-year and 30-year Treasury yields each fell five basis points over the week.
The California trader said tax-exempt prices should remain elevated in the weeks going forward. He noted the 10-year muni-Treasury ratio, which closed at 83.3% Thursday, is spot-on its two-decade average. The only reason muni yields would rise is if Treasuries see a sharp sell-off in the coming weeks, he said.
“I don’t think there’s anybody out there who is concerned going forward over the next six to eight weeks as we enter the reinvestment period,” the trader added, referring to the June and July period when coupon payments are deposited back into the market.
Janney Capital Markets’ Alan Schankel estimated that $50 billion would be available for reinvestment, which gives plenty of optimism for muni prices to stay near recent highs, as new issuance averaged $15 billion in the first four months of the year.
Thursday’s weakness hardly put a dent in the week’s gains, as numerous yield indexes fell to fresh calendar-year lows.
The Bond Buyer’s 20-bond general obligation index of 20-year yields declined six basis points this week to 4.55%, a 27-week low. The 11-bond GO index of higher-grade 20-year GO yields dropped six basis points this week, to 4.29%, also a 27-week low.
The revenue bond index, which measures 30-year revenue bond yields, declined one basis point this week to 5.40%, a 20-week low. The Bond Buyer’s one-year note index remained flat at 0.43%, a 33-week low.
The average weekly yield to maturity of The Bond Buyer municipal bond index, which is based on 40 long-term bond prices, declined eight basis points to 5.38%.
Another reason to believe Thursday’s reversal was temporary was newfound support from muni mutual funds.
The Investment Company Institute reported $38 million of muni mutual fund inflows in the week ending May 11 on Wednesday, reversing a six-month trend of losses totaling $45.3 billion. In the previous four weeks, outflows had averaged $803 million.
Prior to the release, chief muni strategist John Dillon of Morgan Stanley Smith Barney said the expected inflows could add pressure for the rally to keep going.
“A positive read on fund flows in the near-term could easily convert this headwind into a tailwind and provide a significant lift to an already improved buyer sentiment,” he wrote last Friday.
While Dillon believes current muni-Treasury ratios are low enough to give investors pause, he also suggested that a new era of light issuance does give reason for tax-exempt valuations to fall below long-term averages.
“The acute supply shortages that the market only now seems to be embracing argue for much lower ratios than the long-term average,” Dillon wrote.
A further sign of muni market health: recent comments and a Wall Street Journal Op-Ed piece by muni bear Meredith Whitney have been thoroughly ignored.
While Whitney maintains her prediction that a variety of state and local government defaults will occur in the coming year, she has conceded her definition of default is not restricted to monetary defaults, but instead includes services cutbacks and renegotiated pension plans.
“Whitney has moved the goalposts in the middle of the game,” Daniel Berger wrote in an MMD commentary Thursday. “She should be considered as the Donald Trump of municipal finance — a great self-promoter who should not be taken seriously.”
According to Richard Lehmann, president of Income Securities Advisor, 14 muni market issues totaling $605 million had defaulted year-to-date, as of May 16. Two of the issues are community development districts in Florida, accounting for 43% of the total.
Through May of last year, there were $1.75 billion of defaults. Allowing for some late reporting, the January-May total may be closer to $1 billion, Lehmann said, but one thing appears certain: “They’re definitely not going up. If there was a huge default, we’d know about it. Those things tend to make headlines.”
Thursday’s new-issue pricing was described by traders as firm, but not strong.
Morgan Stanley priced $184 million of GO bonds for the Foothill-De Anza Community College District in Santa Clara County, Calif. The bonds carry Aaa ratings from Moody’s Investors Service and AA ratings from Standard & Poor’s.
The bulk of the deal matures in 2040 and yields 4.78%. A smaller portion matures in 2036 with a yield of 4.73%.
Morgan Keegan & Co. sold $64 million of taxable and tax-exempt education revenue bonds for Houston’s Higher Education Finance Corp. The deal was rated BBB by Standard & Poor’s.
The tax-exempt portion was offered in 10-year, 20-year, and 30-year maturities, with corresponding yields of 5.875%, 6.60%, and 6.6875%.
The taxable portion of direct-pay qualified school construction bonds mature in 2026 with an 8.75% coupon priced at par.