The supply and demand imbalance in the tax-exempt market continues to weigh on investors.
With limited supply, demand appears high and yields fell up to 14 basis points last week. But some participants aren’t willing to play until yields look more attractive.
“The market turned around last week with the Federal Open Market Committee announcement to hold rates low to 2014,” said a Los Angeles trader. “Yields had been back-tracking until then and then came back.”
The trader added that spreads have compressed this year. A double-A school district general obligation bond is trading at 35 basis points above the Municipal Market Data scale, down from 70 basis points in December. “There is not a lot of supply and people are convinced rates are staying low, so they want to buy,” the trader said. “And as long as supply stays where it is, spreads will stay low.”
And indeed, the difference in yield between the Standard & Poor’s AMT-Free Municipal Series 2013 index and the 2021 index moved to 213 basis points on Thursday from 225 basis points at the start of the year, said J.R. Rieger, S&P’s vice president of fixed-income indexes.
The spread between high-yield and investment-grade munis has tightened by 50 basis points since the beginning of the year, Rieger added.
Some traders noted that after the rally last week, investors head into this week a little more wary about buying as yields remain at unattractive levels.
“There is definitely money to use, but when there are really less attractive levels, people are more hesitant,” said an Atlanta trader. “Coming into last week, we had more basis points to play with but I am not as excited about the potential for this week.”
Except for losses on Monday, munis were firmer for the week, according to the MMD scale. The 10-year muni yield fell 10 basis points while the 30-year yield fell 14 basis points throughout the week.
On Friday, the 10-year yield fell two basis points to 1.77% while the 30-year yield dropped four basis points to 3.23%. The two-year muni yield closed steady at 0.35% for its 11th consecutive trading session. Treasuries rallied Friday on less-than-positive GDP numbers. The benchmark 10-year yield fell four basis points to 1.90% while the 30-year yield fell three basis points to 3.07%. The two-year was steady at 0.22%.
Secondary trades reported by the Municipal Securities Rulemaking Board showed gains.
Bonds from an interdealer trade of Denver School District 4s of 2027 yielded 2.76%, 11 basis points lower than Thursday. Bonds from another interdealer trade of University of Puerto Rico 5s of 2024 yielded 4.00%, three basis points lower than where they traded Thursday.
