Longer-term tax-exempt yields jumped two or three basis points Friday, continuing a three-and-a-half week trend of rising rates.
Weakening Treasuries gave the muni market some direction as new-issue supply remained slim.
Traders continue to say that true prices are a bit of a mystery.
“It’s not like we have enough data on the spectrum to give us some transparency yet,” a trader in New York said. “That’s our problem. We don’t know where we are.”
Despite the lack of supply, buyers aren’t fighting for paper. The 10-year tax-exempt bond yield rose two basis points Friday to 3.27%, its highest level since Feb. 15. Its yield has climbed 37 points since a recent low on March 16, according to the Municipal Market Data triple-A scale.
The two-year scale remained at 0.68% for the sixth straight session, while the 30-year tax-exempt yield rose three basis points to 4.85%, its highest since Feb. 15.
Despite those climbs, a trader in New York said: “Rates really haven’t cheapened to the point where retail would jump in with both feet. You’re slowly approaching that, but the problem is there just aren’t a whole lot of bonds.”
Most traders believe yields will rise further once a decent batch of supply finally hits the market.
“This could be the lull before the storm as most market observers expect issuance volume to jump significantly in the months to come,” wrote analyst Tom Kozlik in a daily commentary for Janney Capital Markets.
The Bond Buyer and Ipreo calculated that $2.6 billion of new supply entered the market last week, versus a weekly average of about $3 billion in the first quarter. The estimate for this week is $4.35 billion.
The market has been in wait-and-see mode amid the light supply.
“It’s a very quiet market right now,” said a trader in Los Angeles. “Supply has been extremely light but at the same time demand is lighter.”
With little help from the primary market, Treasuries are providing the general direction. The two-year Treasury finished the week at 0.82%, two basis points higher than Thursday’s close. The 10-year yield rose three basis points to 3.59%, and the 30-year yield rose two basis points at 4.65%.
Randy Smolik, in his daily commentary for MMD, said the tax-exempt market established some depth to bidding as institutions recognized the recent back-up in yields has given munis value relative to other assets.
“But,” he added, “watching Treasuries establishing a new trend to higher yields did undermine confidence and gave muni sellers cause to offer concessions.”
Outflows for municipal bond mutual funds ballooned to $1.1 billion in the week ending April 6, according to Lipper FMI. That’s the biggest sell-off since the last week of February and marks the 21st consecutive week of outflows.
Kozlik said the market continues to underestimate the meaning of Standard & Poor’s slashing the financial strength of DeKalb County, Ga., to BBB from AA-minus, and then withdrawing the rating for inadequate disclosure.
“This S&P action leaves open worries about which issuer or issuers could be the next to suffer a similar action because of the common lack of updated municipal financial disclosure among certain, especially higher-risk, credit profiles,” Kozlik wrote.
