A tentative and apathetic municipal market paused Thursday, awaiting the message Federal Reserve chairman Ben Bernanke is scheduled to deliver Friday in Jackson Hole, Wyo.
The market is looking to Bernanke's statement for direction for the economy, and indications as to whether another round of quantitative easing is forthcoming.
The primary market gave investors little more than scraps to fight over, while the secondary market passed the day's trading session in an increasingly subdued state, a trader in New York said.
There is still a bid for high-grade munis, he added. But liquidity has largely dried up for spread products.
"The secondary got pretty quiet," the trader said. "It's gotten fairly illiquid. The Street's a better seller; customers want to sell but there's just not a whole lot of bid side. Given the volatility, a lot of guys have taken risk off the table. There's still money out there, but it doesn't seem people are in any real hurry to spend it."
But some aren't convinced that Bernanke's message will have the impact the market appears to be craving. For one, analysts at Morgan Stanley don't expect Bernanke's statement to produce rates-moving policy, according to a recent municipal strategy report authored by analysts Michael Zezas and Julie Powers.
This means muni rates will cleave to the firm's "lower-for-longer" Treasury rates forecast.
"Bernanke is unlikely to signal QE3 at Jackson Hole," they wrote. "The most we are likely to receive is some discussion of options, including a move to negative interest on reserves and seeking to flatten the yield curve through lengthening balance-sheet duration. … Accordingly, we expect market demand should improve over time as investors come to terms with the new muni rates environment."
Tax-exempt yields were steady across the curve Thursday, according to the Municipal Market Data scale.
The 10-year muni yield held at 2.25%, after rising 10 basis points in two days from its all-time low.
The 30-year muni yield was unchanged 3.88%. The two-year yield also remained at 0.30% for a 12th straight session, hovering at its lowest yield in more than 40 years.
Traders have noticed for some time now how investors find today's nominal yields too low for participation.
Muni triple-A general obligation yields have fallen considerably throughout the calendar year, according to MMD numbers.
They are currently 25 basis points under their 2011 average for the two-year yield, 63 basis points under for the 10-year, and also 63 basis points under for the 30-year.
Muni yields have also fallen significantly from their calendar-year highs. They are currently 40 basis points under their 2011 high for the two-year yield, 121 basis points lower than the 10-year high, and 120 basis points below the 30-year high.
Treasury yields were firmer on the day. The 10-year benchmark yield, after climbing 15 basis points Wednesday, slid seven basis points to 2.23%.
The 30-year yield, after rising 17 basis points Wednesday, slipped five basis points to 3.60%.
The two-year yield has dropped two basis points to 0.22%.
But even though Treasury yields fell in the day's trading session when their muni cousins hovered — leaving municipal ratios to Treasuries a tad less attractive than they were heading into the day — munis remain attractive compared to Treasuries both on a calendar-year and monthly basis.
For 2011, the two-year muni ratio to Treasuries sits almost 26 percentage points above its calendar-year average. For the 10-year and 30-year, the ratios are eight and three percentage points, respectively, higher than their calendar-year averages.
New issuance, though sparse for the week, met a healthy appetite Wednesday, even through concession in yield. The industry predicts municipal bond sales of $3.65 billion against a revised $4.72 billion last week.
In negotiated sales, Piper Jaffray priced $121.2 million of Harris County, Texas, unlimited-tax road refunding bonds. The bonds are rated AAA by Standard & Poor's and Fitch Ratings.
Yields range from 0.43% with a 3.00% coupon in 2013 to 3.94% with a 5.00% coupon in 2031. Credits maturing in 2012 were offered in a sealed bid.
Economic news continues to underwhelm, but not necessarily surprise. The Labor Department reported Thursday that initial jobless claims increased 5,000 to 417,000 for the week ending Aug. 20. The numbers rose in part as a result of workers at Verizon Communications filing claims during a two-week labor dispute.
Continuing claims fell to 3.641 million for the week ending Aug. 13.
Economists polled by Thomson Reuters predicted 405,000 initial claims and 3.700 million continuing claims.
The numbers weren't that bad, once the Verizon labor issues were resolved and the numbers discounted, analysts said. What's more, the Nomura economics research team in the Americas, led by Jeffrey Greenberg, unearthed a deeper analysis from the data.
"We see recent initial jobless claims reports as indicative that firms have not started laying off in response to recent market volatility," Greenberg wrote. "However, we suspect that they have put hiring plans on hold."
The equities markets, though, evidently didn't like what they saw in the Labor Department's jobless claims report. And Warren Buffett's $5 billion investment, through Berkshire Hathaway, in Bank of America didn't do much to change their minds.
The major indexes were down at least 1.51% on the day. The Dow Jones Industrial Average lost almost 171 points.
