The tax-exempt bond rally continued Tuesday with certain spots on the yield curve falling two basis points to fresh calendar-year lows.
“We hung in there,” a trader in New York said, noting that municipals strengthened despite a weakening Treasury market. “Our market didn’t react at all. We looked at them anxiously in the morning but as the day went on, we improved.”
Buying was most acute among intermediate-term bonds, where yields fell two basis points, according to Municipal Market Data.
Muni prices have now been stable or climbing for 21 consecutive sessions. The benchmark 10-year yield fell two basis points to 2.72%, its lowest since Nov. 12, according to MMD. The two-year held at 0.54% and the 30-year yield stayed at 4.45%.
“Munis saw selective reaching for paper,” Randy Smolik wrote in his daily commentary for MMD, noting that rising Treasury rates took some of the steam out of longer serials.
The modest firming among tax-exempts indicates municipals are continuing to outperform Treasuries, which were on the defensive Tuesday as the taxable market absorbed $60 billion of new bonds in two auctions. The 10-year Treasury yield jumped seven basis points on the day to 3.21%, while the 30-year bond yield climbed three points to 4.34%.
That jump helped the 10-year muni-to-Treasury ratio fall to 85.63%, its lowest since early March. The 30-year ratio fell to 102.53%, its lowest since Feb. 18.
The rise in taxable yields could be a threat to the muni rally, particularly as volume may finally be picking up. The Bond Buyer’s 30-day visible supply ticked up to $8.49 billion Tuesday — the highest since March 22.
A trader in San Francisco described activity as “on hold” in part due to rising Treasury rates.
“I don’t think anyone is looking to cut their offerings, but there is a little more supply this week so guys are holding back and waiting to see direction on Wednesday and Thursday,” he added.
“We have yet to see any significant concession,” wrote Smolik, who noted that trading activity “was far from robust” but a little more active than on Monday.
A rival tax-exempt scale from Municipal Market Advisors showed the 10-year yield fall two basis to 2.98%, reversing a one basis point rise Monday.
Alan Schankel, managing director at Janney Capital Markets, called the slight adjustment Monday “perhaps the first market tremor in a month.”
Firming in the final hours may have assuaged fears that the rally was pausing, but the new-issue market did see some cheapening as JPMorgan offered for institutions $206.3 million of transportation district improvement bonds for the Fairfax County, Va., Economic Development Authority.
The bonds were cheapened up to five basis points from the retail period Monday. Yields ranged from 1% in 2014 to 4.68% in 2036.
“I don’t know if that’s truly indicative,” the San Francisco trader said of the cheapened deal. “It could have just been an aggressive pricing.”
A New Jersey trader said buyers are still getting accustomed to the new levels.
He said there has been “little activity” in the secondary market recently and there are signs that the rally has stopped, but new issues in the primary market are being gobbled up right now and he sees that continuing. “Just when you think retail is not going to care about current rates, they come in with more money they need to invest,” he said.
The muni rally beginning April 11 hasn’t just been confined to tax-exempts. In fact, Build America Bonds have strengthened even more, and for a longer period.
A passive index of BABs managed by Barclays Capital has climbed 5.53% in the past month and 8.2% in the past three months.
“The BAB market has performed well year-to-date,” said Austin Applegate, a strategist at Barclays. “There’s a good amount of demand out there, but it’s difficult to source bonds. A lot of investors have simply held onto the inventory they have and they’re not trading it. Consequently, credit spreads for BABs have tightened consistently over the course of the year.”
An index of BABs from Wells Fargo shows yields have fallen, on average, to 5.74% Tuesday from 6.21% on April 11. The 47 basis point drop compares with a 40-point drop in yield among 30-year tax-exempts.
Applegate said the two markets aren’t too correlated because the buyer bases are different, so factors that affect tax-exempts aren’t necessarily the factors that impact taxables. But current trends are similar in that tax-exempts are rallying on slim issuance, while the expiration of the BAB program means buyers are fighting for paper issued before this year.
“Both markets have had very low supply in 2011, and we’ve had a significant Treasury rally in the past month,” Applegate said. “But unlike in taxables, we will see an increase in tax-exempt issuance in the months and quarters ahead — though likely not as robust as in the past.”
Applegate said he expects the BAB rally to calm down as time goes on and trading volumes decline.
Meanwhile, Wednesday is expected to bring further price discovery to the tax-exempt market as a $600 million Virginia Department of Transportation deal gets priced alongside a $500 million offering from Puerto Rico. Also, $322 million will be issued by the Dormitory Authority of the State of New York and $286 million is being priced for Wisconsin.
A New York trader said the Wisconsin deal would be watched closely because it’s a sizable, highly rated, general obligation issue.