As the long end of the municipal yield curve tightened Thursday, investors pointed to the Treasuries' "flight to safety" rally expected to continue into the foreseeable future.
The short end of the curve held steady as bonds maturing between 2018 and 2025 fell up to two basis points in morning trading on Thursday, while bond maturing between 2026 and 2044 fell between one and three basis points, according to Municipal Market Data's triple-A 5% scale.
"It's not surprising, given what's going on in the Treasury market," said a Midwest based trader, explaining Treasuries have enjoyed a significant rally since international tensions became tangible in mid-July. "But the U.S. market is really lagging what's going on in Europe."
Since market close on Wednesday, Treasuries strengthen across the yield curve, but most notably on the long end. The two-year note and the 10-year each fell three basis points each to 0.424% and 2.409% respectively, while the 30-year dropped four basis points to 3.209%.
While those spreads have consistently tightened over the past four weeks, traders agreed there's still a long way for U.S. Treasuries to drop.
"There's money flowing out of Europe so there's no reason German or even French sovereign debt should trader tighter than ours," the Midwest trader said.
Currently, the 10-year German Bund trades 140 basis points tighter at 1.02% than its U.S. comparative, according to data provided by Bloomberg. The 10-year French Oat traded 100 basis points lower than the U.S. 10-year at 1.40%, according to Bloomberg.
Traders expect European and U.S. sovereign debt yields to flip as threats of war in Eastern Europe escalate. With those Treasury yield drops, municipals are expected to follow, picking up spill over from investors engaging in a "flight to safety" strategy, said a New Jersey based trader.
"Add in QE unwinding, we'll be seeing a lot of money flowing in from Europe come fall," said the Midwest based trader.
