Municipal bonds continued their descent to lower yields Thursday, declining at least five basis points across the curve while the short end continued its rally.
The one- to three-year yields are reaching near-record lows, calling into question how far they can drop before investors start backing off. A decent crossover trade from taxable bond sectors into the municipal market has already begun.
Meanwhile, funds and retail don’t seem to be backing off as of now. Refinitiv Lipper reported a $1.84 billion inflow to municipal bond funds in the week ended May 20 after a $582 million inflow the previous week.
“The front end of the municipal bond curve continues to plunge into uncharted waters,” ICE Data Services said. “The one-year yield on the ICE muni curve is four basis points lower today to 0.18% … the muni percent of Treasury yields is moving closer to 100% in the one-year, down from over 600% one month ago.
Taxable equivalent yields on exempts are close to converging into taxables, said FHN Financial’s Senior Vice President Kim Olsan.
“Two-year AAA munis yielding 0.25% work out to a 0.31% TEY for a 21% corporate buyer,” just 15 basis points above the current two-year U.S. Treasury yield.
Secondary trading showed Virginia one-year general obligation bonds trading in blocks at 0.17%. Washington GOs, 2026, 5s of 2021 were at 0.23%-0.20% in early trading. Georgia GOs, 5s of 2022, were at 0.24%-0.21%. Baltimore City and County 5s of 2022 were at 0.24%. Utah GOs, 5s of 2024, at 0.35%-0.33%.