Munis Firmer But Quiet in Summer Lull

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The municipal market was firmer by about three basis points yesterday, in light to moderate trading.

“The market is a touch firmer, but it’s very quiet,” a trader in New York said. “You have unemployment data coming out, so people are sitting on the sidelines.”

“There’s not a whole lot going on, other than everybody looking forward to the weekend,” a trader in Los Angeles added. “The market is probably feeling a touch better, on lack of supply, good reinvestment demand, and Treasuries.”

Trades reported by the Municipal Securities Rulemaking Board yesterday showed mostly gains. Bonds from an interdealer trade of insured Miami-Dade County 4.75s of 2029 yielded 4.92%, down three basis points from where they were sold Tuesday. Bonds from an interdealer trade of Illinois Development Finance Authority 5.95s of 2026 yielded 6.2%, unchanged from where they were sold Tuesday. Bonds from an interdealer trade of Connecticut 5s of 2027 yielded 4.48%, down four basis points from where they were sold Tuesday.

“Yields are lowering again,” a trader in New York said. “Once you got to those percentages compared to Treasuries, the market got compelling. Picking the bottom has been a little tricky, but the feeling is we’re not going to see those extremes of 115%, so settle now.”

Municipal bonds have firmed in recent days after cheapening significantly compared to Treasuries last week. The ratio between triple-A rated, 30-year general obligation bonds and 30-year Treasury bonds reached 105.41% last week, its highest point since April, according to Municipal Market Data. The ratio reached as high as 117.4% in March, according to MMD.

The Treasury market, however, was mixed yesterday. The yield on the benchmark 10-year Treasury note, which opened at 3.96%, finished at 3.97%. The yield on the two-year note was quoted near the end of the session at 2.59% after opening at 2.60%.

In economic data released yesterday, new factory orders for manufactured goods jumped 0.6% in May. The factory order increase, to $448.7 billion, matched the 0.6% increase projected by IFR Markets and came after a revised 1.3% increase to $445.9 billion in April.

Excluding transportation, the level of all new manufacturing orders rose 0.4% to $391.4 billion in May, following a 2.8% rise in April to $390.1 billion. The increase compared to a 1.0% increase projected by IFR.

The week finishes today with the June employment report.

May unemployment jumped to 5.5% from 5.0%, its largest spike in 20 years. But economists said part of the rise appeared to be catch-up from low reports in previous months, and seasonal adjustment due to the large number of college and high school students entering the market.

For June, Economists polled by IFR Markets expect the unemployment rate to remain unchanged at 5.5%. Non-farm payrolls are expected to fall another 60,000, though, after dropping 49,000 in May.

“I think the overall picture here when you look at employment is that things are worsening,” said Joshua Shapiro, chief U.S. economist for MFR Inc. “It’s not a pretty picture.”

Markets have likely already adjusted to the expected report, Shapiro said. But with an early close today and some traders on vacation, low volume could amplify any deviations, he said.

“I think the markets are expecting a bad report, so I think that’s already priced in there,” Shapiro said. “But markets are trading sort of thin, so anything could kind of exaggerate it.”

“You’re going to have a lot of people who have already headed for the exits” yesterday afternoon, a trader in Los Angeles said. “It would have to be a massive shift to get people calling in on their cell phones saying 'I want to trade.’ ”

Also tomorrow, initial jobless claims for the week ended June 28 will be released, along with continuing jobless claims for the week ended June 21, and the June Institute for Supply Management non-manufacturing business activity composite index. Economists polled by IFR are predicting 385,000 initial jobless claims, 3.150 million continuing jobless claims, and a 51.0 reading for the ISM non-manufacturing index.

In the new-issue market yesterday, the Virginia Public School Authority competitively sold $45 million in special obligation school financing bonds to Davenport & Co. at a true interest cost of 4.1169%. The Henrico County Series bonds mature from 2009 through 2028, with yields ranging from 2.59% with a 4% coupon in 2010 to 4.56% with a 4.25% coupon in 2028. Bonds maturing 2009, 2022 and 2026 were not reoffered. The bonds, which are callable at par in 2018, have underlying credit ratings of Aaa from Moody’s Investors Service, AAA from Standard & Poor’s and AAA from Fitch Ratings.

Finally, New York’s Hempstead Union Free School District competitively sold $24.8 million of tax anticipation notes to various bidders. Janney Montgomery Scott LLC took the largest chunk, worth $12.8 million, with a net interest cost of 3.86%.

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