Two days of modest selling had little impact on trader sentiment last week, and analysts continue to believe muni prices will hold steady or resume the rally as the summer reinvestment period approaches.
Tax-exempt yields were flat or a basis point higher Friday following a broader profit-taking session Thursday that sent Municipal Market Data yields higher by up to five basis points.
“Essentially, we stabilized,” a trader in New York said of Friday’s session. “There was very little activity. Treasuries came back, so there was nothing to move it.”
Benchmark yields remained flat Friday with the two-year note at 0.44%, the 10-year note at 2.64%, and the 30-year bond at 4.31%, according to MMD’s triple-A scale. The scale only moved for bonds maturing in 2017 and 2018, which rose one and two basis points, respectively.
“With the exception of a few accounts selling, the market was never really tested,” Domenic Vonella wrote in MMD’s daily commentary.
Issuance was too light to offer much price discovery, so traders were mostly in wait-and-see mode, according to a Chicago trader.
“We’re waiting to see if the other guy blinks,” he said.
Early Friday trading was like “walking through a six-inch deep muddy field — you’re not quite sure what you’re next step is,” he added.
The benchmark 10-year Treasury yield finished the day at 3.15%, two basis points firmer than Thursday’s close. The two-year yield was slightly firmer at 0.52%, while the 30-year yield was flat at 4.30%.
The iShares S&P National AMT-free municipal bond fund, a $2 billion fund used as a proxy for the market, finished the week 0.24% lower at $103.04, its first slide in over a month.
But analysts remain confident that munis can outperform Treasuries or at least maintain current valuations.
“We do not think that the rally in municipal bonds has ended,” Loop Capital Markets’ strategist Chris Mier wrote on Friday.
However, he said the majority of the two-legged rally — which first began Jan. 14 — “is probably behind us.”
“Continuation depends on maintenance of reduced supply, more easing of anxiety over municipal credit quality, and stabilization of core [inflation],” Mier wrote.
Reduced supply seems a certainty in the near term: the muni market is expected to digest $2.95 billion of new product this week, versus a revised $3.90 billion last week, according to The Bond Buyer. That’s the lowest in four weeks.
Scheduled for sale are $749.1 million in competitive offerings and $2.20 billion in negotiated deals.
The Bond Buyer’s 30-day visible supply ended the week at just $5.99 billion.
Phil Villaluz, managing director at Sterne Agee, also viewed the modest sell-off ending the week as merely a pause in the rally, not a reversal.
“I’m not ruling out another day or two of profit-taking occurring,” he said Thursday. “But as long as you have an environment where demand outpaces supply, there’s going to be enough behind this market to take us through the July-July reinvestment period.”
Municipal Market Advisors estimates that $50 billion and $27 billion of munis will mature in June and July, respectively, not including coupon reinvestment.
Villaluz said there continues to be appetite for municipals with single-A or higher ratings, and credit perceptions should continue to improve as government balance sheets improve, as indicated by recent state revenues.