The tax-exempt market started the week on a strong note, even after an impressive rally the week prior, as supply-starved investors push up demand for municipal bonds.
Demand has continued to outweigh supply, pushing the 30-year yield to a new record low as recorded by Municipal Market Data.
“I would agree that munis are much stronger,” a New York trader said, “especially considering where we are doing trades from Friday to today.”
Indeed, munis continued to strengthen Monday after rallying all last week, according to the MMD scale. The two- to 12-year yields fell one and two basis points while yields outside 13 years dropped three and four basis points.
On Monday, the two-year yield fell one basis point to 0.31%, breaking a 30-session streak of trading at 0.32%. The 10-year yield dropped one basis point to 1.73%, hovering only six basis points above its record low of 1.67% set Jan. 18. The 30-year yield plunged four basis points to a new record low of 2.92%, beating the previous record low of 2.96% set on last Thursday.
Since the beginning of the month, the 10-year yield has dropped 12 basis points while the 30-year yield has plunged 24 basis points.
Treasuries were stronger Monday on economic worries, although they pared a majority of the morning gains by the afternoon. The benchmark 10-year yield and the 30-year yield each fell two basis points to 1.47% and 2.56%, respectively. The two-year plunged three basis points to 0.23%.
In the negotiated market, Loop Capital Markets priced $203.2 million of Pennsylvania Turnpike Commission senior lien turnpike revenue bonds, rated Aa3 by Moody’s Investors Service and A-plus by Standard & Poor’s and Fitch Ratings. The deal was originally expected to price Tuesday.
Yields ranged from 0.60% with a 3% coupon in 2014 to 3.875% with a 3.875% coupon in 2037. Credits maturing between 2023 and 2027, between 2029 and 2031, and in 2037 and 2042 were not formally re-offered. The bonds are callable at par in 2022.
On the competitive calendar, JPMorgan won the bid for $100.9 million of King County, Wash., triple-A rated general obligation bonds. Pricing details were not yet available.
In the secondary market, trades compiled by data provider Markit showed firming. Yields on New York City Municipal Water Finance Authority 5s of 2038 plunged six basis points 2.42%.
Yields on Adams and Arapahoe Counties, Colo., Joint School District 5s of 2023 fell three basis points to 2.21% while Little Elm, Texas, Independent School District 5s of 2037 dropped two basis points to 3.05%. Yields on Alaska’s Northern Tobacco Securitization Corp. 5s of 2046 and Hawaii Housing Finance & Development Corp. 3.75s of 2031 each dropped one basis point to 6.81% and 3.72%, respectively.
July has been a strong month for municipal bonds, but the muni rally was not able to match the Treasury rally. So far this month, muni-to-Treasury ratios have risen as munis underperformed and became comparatively cheaper.
The five-year muni yield to Treasury yield ratio rose to 118.3% on Monday from 116.4% at the beginning of the month. The 10-year ratio rose slightly to 177.7% on Monday from 117.1% at the start of July.
Munis outperformed Treasuries on the long-end, pushing the muni yield to Treasury yield down and making munis relatively more expensive. The 30-year ratio dipped down to 114.1% from 117.5% at the beginning of the month.
The slope of the yield curve has flattened throughout July as investors extend maturities in search for yield. The one- to 30-year slope flattened to 272 basis points on Monday from 296 basis points at the beginning of July. The one- to 10-year slope also flattened to 153 basis points from 165 basis points at the beginning of the month.
Credit spreads have also compressed as investors move further down on the yield curve in search for yield. The five-year triple-A to single-A spread compressed to 63 basis points on Monday from 66 basis points at the beginning of July. The 30-year triple-A to single-A spread compressed to 73 basis points from 80 basis points at the start of the month.
But credit spreads in the belly of the curve widened so far this month. The 10-year triple-A to single-A spread widened to 83 basis points on Monday from 79 basis points at the beginning of July.
Despite an increase in supply in the last few weeks, demand has more than matched. Prices on deals in the primary market have been bumped to reflect that demand, wrote muni analysts at Citi. “Yields on new issues prices against the MMD high-grade curve tightened in by as much as 20 basis points in some cases, with initial pricings heavily oversubscribed, leading to some additional tightening upon repricing.”
The analysts added the rally was due in part to the strong seasonal bond call and maturity peak that happens between June 1 and August 1. There is also a tendency among investors like bond funds and separately managed accounts to put to work the cash as it is received. “Proceeds from redemptions tend to be put back to work rather quickly because cash that lies fallow at near-zero yields affects yields reported to investors,” they wrote. “This pattern has led to bond funds being participants in new issues at a multiple of the $800 million to $1 billion that has been flowing into bond funds over the past two months.”