The tax-exempt market weakened for its seventh consecutive trading session as munis collapsed under the year’s largest week of new issuance.
On Thursday, traders said they looked to the secondary market for direction and many said they expect this period of weakness to continue.
“The market is definitely weaker again today,” a New York trader said. “It’s seems like demand is starting to pull off just a tiny bit from new issues, although there is still plenty of money out there.”
“The secondary action is still slow but should pick up alongside higher new-issue volume,” he added.
Other traders told the same story. “Munis seem weaker,” another New York trader said. “It’s relatively quiet but it’s definitely weaker.”
The market is “muted in anticipation of the jobs report Friday,” he added.
There were no big deals being priced in the primary that will steal focus, so the trader said he went to the secondary for direction. “Puerto Rico and New York City water bonds will free up today and it will be interesting to see how they bounce in the secondary,” he said.
Munis were weaker, according to the Municipal Market Data scale. Yields on the two- to six-year rose one basis point while the seven- to 10-year yields jumped two basis points. Yields on the 11- to 20-year spiked up three basis points. Outside 21 years, yields rose one and two basis points.
On Thursday, the two-year yield closed up one basis point to 0.27%, above the record low of 0.26% first registered by MMD on Feb. 16. The 10-year yield jumped two basis points to 2.05%, closing above 2.00% for the second time since Dec. 7. The 30-year yield rose one basis point to 3.31%.
Since munis started weakening last Wednesday, the 10-year muni yield has jumped 21 basis points while the 30-year has increased nine basis points.
Some traders saw this coming. “Milk goes bad. You can tell by the smell or sometimes when you pour it. The muni market currently smells and is about to have chunks,” a Texas trader tweeted.
Treasuries were weaker on positive news from Greece and economic data. The two-year yield rose one basis point to 0.32%. The benchmark 10-year yield rose five basis points to 2.03% while the 30-year yield jumped six basis points to 3.18%.
In the primary market, Citi priced $320 million of Broward County, Fla., water and sewer bonds, rated Aa2 by Moody’s Investors Service, AA by Standard & Poor’s, and AA-plus by Fitch Ratings. Details were not available.
Wells Fargo repriced $235.5 million of New York State Thruway Authority local highway and bridge contract bonds, rated AA-minus by Fitch.
The bonds yielded 0.46% with a 4% coupon in 2014, 0.70% with 3% and 4% coupons in 2015, and 0.90% with a 5% coupon in 2016. Bonds maturing in 2013 were not reoffered.
Citi priced $217 million of Kansas City, Mo., general obligation improvement and refunding bonds, rated Aa2 by Moody’s and AA by Standard & Poor’s. Prices were not available.
In the secondary market, trades reported by the Municipal Securities Rulemaking Board showed weakening.
A dealer sold to a customer Washington 5s of 2024 at 2.82%, 42 basis points higher than where they traded a week before.
Bonds from an interdealer trade of Clark County, Nev., airport revenue 5s of 2023 yielded 3.00%, 20 basis points higher than where they traded last week.
A dealer bought from a customer Maine Turnpike Authority 5s of 2028 at 3.11%, 13 basis points higher than where they traded last week.
Another dealer bought from a customer Texas 5.517s of 2039 at 3.91%, three basis points higher than where they traded last week.
Muni-to-Treasury ratios have risen as munis underperformed Treasuries and became cheaper. The five-year ratio jumped to 90.9% on Wednesday from 77.8% on March 1 when munis began weakening. The 10-year muni-to-Treasury ratio spiked to 102.4% on Wednesday from 93.6% at the beginning of the month. The 30-year ratio rose to 105.6% from 103.8%.
“On Tuesday, the 10-year ratio crossed 100% for the first time in more than 10 weeks, or since Dec. 20, 2011,” said MMD’s Daniel Berger. “By Wednesday, ratios to Treasuries in the 10-year range have turned tempting. Adjustments were now at significant technical retracements of the rally from October 2011.”
He added that in early October 2011, the triple-A 10-year peaked at 2.58% and subsequently fell to 1.67% in mid-February. “A 38% retrace of this range is at 2.01%.”
The 10- to 30-year slope of the curve has also collapsed. On Wednesday, the slope closed at 127 basis points, down from 169 basis points at the beginning of the year. “This move has come almost completely from the 30-year range which has seen a bump of 27 basis points while the 10-year range has been cut 15 basis points,” Berger said.
Despite the rise in yields recently, credit spreads have continued to fall as muni investors go down the credit scale in search for yield. The triple-A to single-A two-year muni credit spread fell to 43 basis points on Thursday from 56 basis points at the beginning of the year. Since munis started weakening last week, the spread has fallen from 44 basis points.
Similarly, the 10-year triple-A to single-A spread has collapsed, falling to 88 basis points from 96 basis points at the beginning of the year. Since munis started weakening last week, the spread fell from 90 basis points.
The 30-year triple-A to single-A spread has fallen throughout the year to 81 basis points on Thursday from 89 basis points at the beginning of the year. The spread has fallen from 82 basis points since munis started weakening last week.