Munis Widen as 30-Years Reach Two-Year High

Muni yields widened by another eight to 10 basis points Friday, weakening for the fifth consecutive session as 30-year yields reached a two-year high.

“It’s selling based on fear and emotion, and those are hard things to refute with facts,” said Duane McAllister, who manages a $450 million intermediate tax-exempt fund for M&I’s Marshall Funds. “Only when you see yields rise to levels that are deemed too cheap will people say, 'Enough is enough.’ Unfortunately, it doesn’t feel like we’re there.”

The Municipal Market Data triple-A 10-year scale increased 10 basis points Friday to 3.46%, the 20-year scale rose nine basis points to 4.89%, and the scale for 30-year bonds climbed seven basis points to 5.08%, its highest level since January 2009.

“We’re lacking liquidity right now,” a trader in Los Angeles said. “People who can afford to sit on the sidelines are sitting there, but those that have ­inventory to move are getting beaten up.”

Randy Smolik wrote in the daily MMD commentary that the muni market continues to search for support.

“The selling pressure was evident out of the chute with broker wires showing cuts to offerings,” Smolik wrote. “The weakness was solidified later in the session as another round of customer lists cleared at forced selling levels.”

Rick Taormina, a portfolio manager with JPMorgan Funds, said crossover buyers such as insurance companies and cash-rich corporations are beginning to notice the attractive rates on municipal bonds. He expects these buyers to begin taking advantage, and stabilizing yields.

Once that happens, he is hopeful the retail community will feel comfortable wading back into the market.

Yields may already be high enough to satisfy retail investors, who hesitate to put their money to work under such volatile conditions, according to Taormina.

“We’re still looking for a bottom here, but things feel a little bit better because you’re starting to see other buyers enter the market,” he said. “If you start to see [net asset values] in mutual funds stabilize, that’s exactly what will prompt retail to come back in.”

Friday’s triple-A muni scale in 10 years was at 104.2% of comparable Treasuries and 30-year munis were at 112.1%, according to MMD. Meanwhile, 30-year tax-exempt triple-A general obligation bonds were at 120.4% of the comparable London Interbank Offered Rate.

Treasuries showed some losses Friday. The benchmark 10-year note was quoted near the end of the session at 3.33% after opening at 3.30%. The 30-year bond finished at 4.53% after opening at 4.50%. The two-year note was quoted near the end of the session at 0.59% after opening at 0.58%.

In economic data released Friday, consumer prices rose 0.5% in December, led by a sharp rise in gasoline prices.

Core prices, which exclude volatile food and energy costs, edged up only 0.1%. Economists expected consumer prices to rise 0.4% and core prices to rise 0.1%.

Retail sales rose 0.6% in December, but fell short of economic estimates.

December sales excluding autos increased 0.5%. Sales excluding autos and gasoline stations rose 0.4%.

 Economists expected retail sales to increase 0.8% and sales excluding autos to gain 0.7%.

Industrial production posted its largest gain in five months in December, increasing 0.8% as unusually cold weather led to a surge in utility output.

Capacity utilization rose to 76.0% from 75.4% in November. Economists expected industrial production to rise 0.4% and capacity utilization to reach 75.2%.

Business inventories rose less than economists expected in November, expanding 0.2%. Economists forecast an increase of 0.7% for the month.

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