Municipal bond yields in the short and intermediate parts of the curve rose sharply this week.
In a week that has seen a marked uptick in muni issuance, demand for tax-exempt paper hasn’t kept pace, traders say. Despite the backup, new deals were reasonably well-received on Tuesday.
Investors needed concessions, though, to clear volume on Wednesday.
And the secondary market struggled on both days, traders noted.
Muni bond indexes reflected higher bond yields.
All but those representing the front end of the yield curve saw increases on the week.
The Bond Buyer’s 20-bond GO index of 20-year general obligation yields increased 15 basis points this week to 3.92%. It is the highest level for the index since April 12, when it was 3.97%.
The 11-bond GO index of higher-grade 20-year GO yields rose 15 basis points this week, as well, to 3.71%. It also sits at its highest level since April 12, when it was 3.77%.
The yield on the U.S. Treasury’s 10-year note increased eight basis points this week to 1.66%.
The 10-year remained below its 1.78% level from two weeks ago.
The yield on the Treasury’s 30-year bond also rose eight basis points this week to 2.75%, but remained below its 2.86% level from two weeks ago.
With triple-A yields lingering near historic lows, the market was due for some kind of correction.
Municipal bond yields were going to feel pressure from increased supply this week, regardless of what Treasuries did, said Michael Pietronico, chief executive officer of Miller Tabak Asset Management.
“As a market, we were primed to give back some of last week’s gains, even if Treasuries were stable this week, as we’re going to experience too large a calendar relative to the yield levels in the market,” he said.
Since last Friday, the triple-A 10-year and 30-year yields have risen 15 basis points each, according to Municipal Market Data numbers.
Over the same period, the 10-year and 30-year Treasuries have risen 19 and 21 points, respectively.
As a result, muni ratios to Treasuries have gotten richer on the week. But they still remain at incredibly cheap levels, each settling above 110%.
The two-year ratio stood at 114% Thursday. The 10-year and 30-year ratios sit at 115% and 116%, respectively.
The backup in Treasuries expedites price discovery, according to Pietronico.
“We were heading in that direction anyway,” he said. “But certainly the fact that Treasuries turned and got weaker just helped the momentum in munis.”
The revenue bond index, which measures 30-year revenue bond yields, gained seven basis points this week to 4.80%. That is its highest level since April 19, when it was 4.81%.
The Bond Buyer’s one-year note index, which is based on one-year GO note yields, was unchanged again this week at 0.24%.
That is still its lowest level since April 18, when it was 0.23%.
The weekly average yield to maturity of the Bond Buyer municipal bond index, which is based on 40 long-term bond prices, declined one basis point this week, to an all-time low of 4.38%.
Still, the technicals are a positive for overall performance, Pietronico said.
It’s just likely going to take a little more of a sell-off to get muni yields to levels that the market can digest, he added.