Activity in the tax-exempt market started to slow Friday as munis looked to take a rest after a strong week.
While yields ended lower for the week, munis did show some soft spots Thursday and Friday.
“I would say they are selling a bit,” a New York trader said Friday afternoon. “I am getting counters on bids. It’s a smidge lower.”
He added the news coming from JPMorgan’s $2 billion trading loss is actually aiding munis a little. “I think the news might have helped a little, but munis have also been weaker the latter part of the week.”
Still, during the course of last week, the 10-year yield fell seven basis points to close Friday at 1.75% — just seven basis points above its record low of 1.68% set Jan. 31. The 30-year yield also dropped seven basis points throughout the week to finish at 3.08%, touching its record low as recorded by Municipal Market Data initially set on Wednesday.
The two-year yield remained steady at 0.31% for the 18th consecutive trading session.
Treasuries gained Friday and were also stronger for the week. The benchmark 10-year yield and the 30-year yield each dropped four basis points to 1.85% and 3.02% on Friday. The two-year yield fell one basis point to 0.26%.
As yields have fallen to near record lows this week, market participants continue to move down the credit scale in search of yield.
High-yield municipal bonds have outperformed the overall muni market, returning over 8.5% year to date as measured by the Standard & Poor’s high yield index. That compares to the 3.75% returns for investment-grade bonds, as measured by the S&P AMT-free municipal bond index.
Over the past 12 months, high-yield muni bonds have returned 17.99% compared to 12.62% for investment-grade bonds, according to JR Rieger, vice president of fixed-income indexes at S&P.
“The yield spread differential between high-yield municipal bonds and investment-grade municipal bonds has narrowed by over 60 basis points since year-end ending at 341 basis points,” he wrote. “The last time the spread differential was nearly this low was December 2010. The spread narrowing indicates the market is willing to take on more risk for higher yield.”
The yield curve also continues to flatten as investors extend duration in search for yield. After reaching a high on March 20, the spread between the S&P AMT-free municipal Series 2013 index and the 2021 index compressed to 206 basis points on Thursday from 253 basis points.
Municipal bond funds also saw strong inflows last week, due primarily to coupon and principal reinvestment, according to Chris Mauro, head of municipal strategy at RBC Capital Markets. “Over the last six months, the first or second reporting week of the month has seen spikes in inflows as the first-of-the-month coupon payments and principal redemptions are reinvested.”
“The big difference now, however, is that this money is being reinvested into long and high-yield funds, rather than short and intermediate funds, as investors try to maintain a reasonable rate of return in a low interest-rate environment,” he said. “Flows into long bond funds have been over 50% of aggregate muni flows over the last few weeks.”