The municipal market punched below its weight Thursday. Whether it was the dearth of new issuance, the sclerotic secondary market, or the fact that too many retail investors stood on the sidelines, there was a pronounced lack of interest in munis.
"We're feeling a little bit easier today," a trader in New Jersey said. "But I'm not seeing anyone with a gun to his head looking to just dump bonds. There's none of that panic in the market where you see motivated sellers."
For now, the market is surviving without retail participation, he added.
"I know that there's retail demand out there, just not at these levels," he said. "There's going to come a time when they're going to need retail. These new issues will come into the market at some point and they're going to need retail's help."
Muni yields remained steady at the front of the curve, according to the Municipal Market Data scale. Yields for maturities in 2015 inched up a basis point. Those between 2016 and 2020 ended two basis points higher. Those from 2021 to 2024 rose a basis point. Yields for maturities in 2025 to 2027 were flat. And bonds maturing after 2027 were one to two basis points higher.
The benchmark 10-year muni yield increased one basis point to 2.77%. The 30-year yield rose two basis points to 4.39%.
The two-year yield ended Thursday unchanged at 0.42% for the 18th straight session. Previously, it had hovered at 0.44% for 17 consecutive sessions.
Treasury yields closed the day higher. The 10-year yield jumped five basis points to 3.15%.
The two-year yield also climbed five basis points to 0.48%. The 30-year yield edged up two basis points to 4.38%.
One of the bottlenecks to increased activity and price discovery in the secondary has been that dealers have for some time been trying to unload their older inventory, traders have said, particularly higher-grade debt. Prices in the secondary market won't become clearer until they do.
"As we grind through these balances in the secondary, we'll start to free up some more space and find out what these clearing prices are," a trader in Florida said. "But right now it seems the market is a touch heavy, and that buyers are extremely selective and a majority of the cash is sidelined."
The gigantic competitive Georgia deal from last month has been the prime culprit. Many dealers and traders in high-grade names continue to follow it closely.
"That Georgia deal is still kind of stuck in a quagmire," a trader in California said. "It's really affecting the market. There are whole maturities … 10 million here and 10 million there … that are really held up."
On a historic basis, on a spread to MMD, Georgia's yields are attractive, the California trader added. But the yields aren't very attractive to some institutional customers.
Simultaneously, retail investors are looking for more yield in the front end of the curve, he said, and so aren't looking at Georgia. One issue with the deal is that it was bid competitively, the trader said, with 5.00% coupons in the front ends.
"So, you're talking about 115, 116 premiums on Georgia," he added. "And retail won't buy that. You've really got to wait until an institution's ready to clean it up. Obviously, when an institutional customer sees that someone's long 100 million of them, they want to try to buy them cheaper."
From a historical perspective, two- and 10-year ratios to Treasuries are at very attractive levels, fixed-income analysts at Janney Capital Markets wrote in a recent report. The two-year muni-Treasury ratio, at 93% as of July 1, stands far above its historical average of 75% since 1990. At the same time, the 30-year ratio, at 99%, looks cheap relative to its historical average of 90%.
"However, all muni-Treasury ratios have fallen below recent, six-month and five-year averages," the report noted.
The holiday-shortened week brought an anticipated drop in issuance. Issuers expect to sell an estimated $1.3 billion of munis this week against a revised $8.2 billion that was sold last week.
In negotiated sales Thursday, Wells Fargo priced $102.93 million of Utah Board of Education of Granite School District general obligation school building bonds. They were rated triple-A by Moody's Investors Service and Fitch Ratings.
Yields range from 0.47% with a 4.00% coupon in 2013 to 4.10% with a coupon of 5.00% in 2031. Credits maturing in 2012 were not reoffered.
Treasuries reacted in part to two reports on employment, which painted a somewhat rosier picture for the economy. The Department of Labor struck the first high note by reporting that in the week ending July 2, the advance figure for seasonally adjusted initial claims was 418,000, a drop of 14,000 from the previous week's revised figure of 432,000. The four-week moving average was 424,750, a decrease of 3,000 from the previous week's revised average of 427,750.
At the same time, employment in the non-farm private business sector rose by 157,000 from May to June on a seasonally adjusted basis, according to the latest ADP national employment report. The estimated advance in employment from April to May was revised down slightly to 36,000 from the initially reported 38,000.
The numbers beat the consensus forecast for the report. June's figures imply that the economic recovery might have gained some momentum in early summer, according to ADP.
The Labor Department's Bureau of Labor Statistics division today will issue its employment situation summary for June, which may add to the somewhat positive news on the job front.
Also, Treasuries have been reacting to recent developments between Democrats and Republicans on Capitol Hill, who appear in meetings to be moving toward a solution to the debt ceiling with President Obama.
The more stable tone for the economy boosted the major equities indexes. They closed roughly 1% higher on the day.
