The rally in the municipal bond market continued for a fourth day Friday with yields firming two to four basis points across the curve.
“The market got better today — we’re underperforming Treasuries but it was pretty darn solid,” a trader in New York said.
A strengthening Treasury market played a key role in directing rates lower, as the benchmark 10-year Treasury yield fell eight basis points to 3.41% — its lowest since March 24. The slim slate of new volume anticipated this week provided further support.
The New York trader said trading activity was moderate to active, unusual for a Friday.
“You had a wide spectrum of buyers, some crossover accounts nibbling, and some institutional buying,” he said.
The 30-year muni, at 4.78%, offered 106.9% of comparable Treasuries, compared to its 12-month average of 100.5%
“Relative-value guys are coming in to buy,” added another trader in New York, who said bids were strong.
Municipal Market Data showed “aggressive trading in the intermediate range” with yields falling three to four basis points. The 10-year tax-exempt finished three basis points lower at 3.15%, while the two-year yield fell two basis points to 0.63%.
“Guys are marking stuff up, definitively,” a trader in New Jersey said. “Anything that came in this week was well-received and I’m watching a lot of these issues getting traded up in the secondary market.”
Demand remains limited to high-grade paper, however.
The 10-year spread between triple-A and single-A bonds was 109 basis points on Friday, whereas in December it was 77 basis points.
One New York trader said “it’s unbelievable” how focused the market is on double-A or higher-rated bonds.
“People are getting into single-A, but the market’s clear focus is on high-grade,” he said.
Traders said some of the firming is related to the dearth of new issuance expected this week.
The Bond Buyer calculated that volume should total $1.43 billion, versus a revised $2.48 billion last week. Scheduled for sale are $616.2 million of competitive offerings, compared with a revised $629.9 million this week, plus $814.4 million of negotiated deals versus a revised $1.85 billion this week.
“It’s light every week as far as I’m concerned,” the New Jersey trader said. “We’re used to $8 billion per week and now we get excited when it’s $4 billion, so the light calendar is still the major problem here.”
Randy Smolik, in his daily commentary for MMD, said the expectation of little issuance kept buyers reaching for tax-exempt paper Friday.
Treasuries were the primary driver, though. The two-year yield fell seven basis points to 0.69% and the 30-year yield dropped seven basis points at 4.47%.
“You can’t have a complete disconnect when Treasuries have such a good rally like that,” the New Jersey trader said. “It pulled some of the better muni credits higher, but the less-than-stellar credits are still suffering. There’s no bid for that kind of stuff.”
A trader in New York said if Treasuries maintain this kind of range, there will be decent support for munis and the four-day rally could become more than just a blip.
“This rally could have legs,” he said.
Analysts at Janney Capital Markets noted that supply concerns remain high, particularly with the Illinois governor negotiating with legislators over a proposed $8.75 billion bond issue.
A research note from Janney said that amount approximates “the backlog of unpaid bills in the state treasurer’s inbox.” An issuance of that size would approach the muni world’s record — Illinois’ $10 billion taxable issue for pension funding in 2003.
“If this deal makes it to market, it will be the second-largest in municipal history,” the Janney note said, noting that Illinois and California have issued nine out of the 10 largest deals.