Munis just wouldn’t budge on Friday despite a rallying Treasury market. Traders say another week of heavy supply is keeping a lid on buying new paper, but broader uncertainty is capping any big sell moves.
The only spots on the curve to express some movement were from 2017 to 2020, where yields dropped a single basis point, according to Municipal Market Data.
“Some things are cheaper but the market is inconsistent,” a trader in New Jersey said. “I can’t tell you everything is up; it’s mixed out there.”
Intermediate and long Treasuries rallied all morning and maintained their gains for the afternoon. The 10- and 30-year yields slid seven basis points each to 2.32% and 3.37%. Volatility was limited compared to the equity market, where the Dow Jones Industrial Average crossed Thursday’s closing level 27 times before closing just 0.18% higher at 12,231.
“Today’s Treasury bounce managed to shut off aggressive muni selling,” said MMD analyst Randy Smolik in his daily note. “Yet with the exception of trading in the intermediate range, inside 10 years, activity seemed mixed.”
A trader in New York said muni yields climbed in the week but there wasn’t exactly a sell-off; it was just that prices had to adjust to reflect the movements in the Treasury and equity markets. “Opportunities shifted,” he said. “It’s not Napoleon’s retreat.”
The 10-year yield finished the week at 2.46%, up three basis points from last Monday and 22 basis points higher than at the start of the month.
The 30-year yield moved up eight basis points in the week to 3.80%, versus 3.55% at the start of the month. The two-year yield inched forward one basis point in the week to 0.46%, adding to a 12 basis point climb in the month.
General outperformance among tax-exempts the past month allowed muni-Treasury ratios to retire from multi-year highs, but Friday’s Treasury rally reversed the trend a bit. The 10-year ratio climbed 3.5 points Friday to 106.5% and the 30-year ratio hiked 2.6 points to 113.1%.
Each were above 128% just three weeks ago — the cheapest munis have been since January 2009.
The New Jersey trader said two concerns have been shaping the market: questions concerning how Europe will implement its plan to save Greece and the continent’s banks, and the prospect of more tax-exempt paper hitting the market. Both events have the same impact: sit tight and wait for clarity.
“Why take undue risks when you don’t know how the primary gets priced?” he said.
The Bond Buyer estimates that new supply this week will total $8.241 billion, up from $7.043 billion last week. Plus, the 30-day visible supply jumped to $13.5 billion — a high for 2011 and the most since the $15.07 billion on Dec. 15, 2010.
MMD’s latest survey of trader sentiment revealed that just 9% of respondents were bullish for the upcoming week; 18% were bullish on a month to two month outlook.
Nearly half of traders were bearish on the week’s outlook, and 45% were neutral.
Looking one or two months ahead appears difficult from the survey, as 64% hold neutral views. The rest are evenly split between bullish and bearish.