Municipal bond investors have varying reactions to the precipitous rise in yields over the past several weeks.
Since late July, tax-exempt yields have risen from record lows at the intermediate and long ends of the curve, but Treasury yields there have risen even faster.
On a relative basis, bondholders may rejoice in the fact that munis have outperformed Treasuries over the period. On an absolute basis, the same investors know their bonds lost value.
For bond buyers, the backup in yields affords an opportunity to move cash at a time when the calendar should pick up.
“Munis backed up less than Treasuries,” said Brian Rehling, chief fixed-income strategist at Wells Fargo Advisors. “And on a relative basis, that would make you feel a little bit better; you look better than Treasuries. On an absolute basis, you lost money; you just didn’t lose as much.”
Historically speaking, munis still represent significant value, with high-grade tax-exempt yields above their corresponding Treasury yields, said David Manges, managing director of municipal trading at BNY Mellon Capital Markets.
Historically, 10-year muni ratios have hovered around 85% to 90% of Treasuries, he added. They are now around 103%, Municipal Market Data numbers show. Throughout much of July, they ranged north of 115%.
The backup since late July has been pronounced, but not surprising, industry watchers say. The 10-year muni yield has risen 27 basis points over the period, climbing to 1.87% from a record low 1.60%, MMD numbers show. The 30-year has jumped 22 basis points, to 3.01% from a record low 2.79%
Again, equivalent Treasury yields over the period have skyrocketed. The benchmark 10-year hurtled 41 basis points, to 1.81% from 1.40%. The 30-year Treasury yield vaulted 47 basis points to 2.93% from 2.46%.
The two-year to 30-year yield curve slope has steepened markedly for both fixed-income securities over the period since late July. This suggests that investor preference has moved away from both munis and Treasuries at the intermediate and long ends of the curve.
For tax-exempts, the slope has risen 24 basis points, to 272 basis points from 248. The Treasury yield slope steepened by 40 basis points, to 264 basis points from 224 basis points.
“There has been a substantial rise in rates, but that’s really just offsetting the substantial plunge that we saw in the few weeks prior to that,” said Kenneth Potts, principal at Samson Capital Advisors LLC. “So, [munis have] really gone back to where we were two and a half months ago.”
The rise in rates has also presented opportunities, however. Many investors had hesitated to allocate money to tax-exempts throughout the summer reinvestment period because they saw yields at prohibitively low levels.
“Any time you have a little bit of a backup, there’s a chance maybe to take some money off the sidelines and put it to work,” Rehling said. “For those investors who’ve been waiting, then in the short term it offers a good entry point.”
To others in the industry, though, even with the expected uptick in primary volume, investors might continue to hold off. Much of the hesitancy stems from the market’s distinct lack of direction during this otherwise choppy and trendless period, said Kenneth Friedrich, head of municipal sales, trading and syndication at RBC Capital Markets.
“The market is positioned for it to absorb supply reasonably well at the current price point,” he said. “I don’t see anybody jumping up and down, saying this is a tremendous buying opportunity, though. But it’s very typical of August, when the market fights for direction.”
The lack of activity in the marketplace points to a lack of conviction, Friedrich added, and because accounts have significant cash flows, selling pressure will be limited.
What’s more, demand is holding up, Potts added, but there are fewer participants in the market due to the season.
On the whole, supply is driving the market more than rising or falling yields, Potts and Manges said. Investors will look to volume over the next few months to assess value. ƒá