The municipal market maintained a strong tone Thursday in the face of limited paper and activity.
News from Europe provided what little impetus for movement in muni yields there was on the day. While the European Central Bank cut rates, its reluctance to become a lender of last resort has pushed U.S. Treasury yields lower. And muni yields, by turn, were seen to ride in the wake of rallying Treasuries, traders say, enough to maintain the week’s gains.
The Treasury market reacted to news that the ECB on Thursday cut interest rates by 25 basis points — back to a record low of 1% — in response to rising concerns about deflation and recession in the euro zone. It also introduced new measures to help the region’s troubled banks.
But as yet, ECB president Mario Draghi has given no indication the central bank will be a lender of last resort to sovereigns through any large-scale purchase program of euro zone government bonds.
The muni market has been cognizant of developments in Brussels, a trader in New York said. But ECB moves haven’t driven muni yields directly, of late.
“That’s more or less going to drive what Treasuries are doing,” he said. “In the last week or two, we’ve been in our own little world.”
Still others in the industry said munis would benefit from the effect ECB news had on Treasuries.
Muni yields ended Thursday mostly firmer, according to the Municipal Market Data scale. They were steady through four years. Thereafter, they fell one to three basis points. The six- to 11-year range — falling three basis points on the day — remained the strongest of the market.
The benchmark 10-year yield skipped down three basis points Thursday to 1.97%. It has fallen 61 basis points since Oct. 12, and equals the lowest point it’s reached in all of 2011 — a level it last saw on Sept. 23.
The tumble lowered its ratio to Treasuries to 100% from 106.37% three days ago. It has moved considerably closer to the 2011 calendar-year average of 97.26%.
The muni-Treasury ratio has gotten richer recently, falling 18 percentage points in 10 sessions since Nov. 23, and 28 percentage points from its calendar-year high of 128.42%, achieved on Oct. 5.
This will affect demand for munis from certain investor classes, said Howard Mackey, president of the broker-dealer unit of Rice Financial Products. In particular, he added, traditional taxable buyers may regard a richer muni-Treasury ratio less favorably.
“It makes it more difficult for crossover buyers to consider buying munis,” Mackey said. “They were very attractive at [a ratio of] 110%-plus. At par, they’re less so, especially if there’s a view that this trend is going to continue.”
The two-year muni yield held fast at 0.36% for a second straight session. The 30-year ticked down one basis point to 3.69%.
Treasury yields started the day with a sluggish gait, but rallied once they caught wind of what the ECB was willing and unwilling to do. The benchmark 10-year yield dropped six basis points to 1.97%.
The two-year yield slipped two basis points to 0.23%. The 30-year yield fell seven basis points to 3.00%.
Traders found the most reaching by investors to occur in the short-to-intermediate range, MMD analyst Randy Smolik wrote in a research post. By midday, there were gains of two to three basis points, on average, sustained in maturities ranging from six to 11 years.
“Outside of this range, gains seemed slight at the most,” Smolik wrote. “After two days of running hard, munis still showed some buying momentum. But it seemed like the buoyancy in Treasuries was a factor today as ratios to Treasuries have plummeted this week.”
Primary market volume is expected to come in around the $6 billion range this week. Industry estimates for anticipated market volume total $5.82 billion, against a revised $5.88 billion last week. Investors anxious to put reinvestment money to work snapped up much of the week’s supply, leaving little left over.
“Nothing that we’ve seen on the horizon will have a big impact on the market, so it will continue to remain firm,” Rice’s Mackey said. “But I don’t see anything that will catapult the market into new lower levels.”
Few large deals reached the primary market Thursday. In the negotiated space, JPMorgan priced $331.6 million of Massachusetts Development Finance Agency revenue bonds. The bonds are rated Aa2 by Moody’s Investors Service and AA by Standard & Poor’s and Fitch Ratings. Yields ranged from 0.95% with a 2.00% coupon in 2014 to 4.58% with a 5.00% coupon in 2041.
Bank of America Merrill Lynch priced $104.2 million of New Jersey Housing and Mortgage Finance Authority single-family home mortgage bonds in three series. The bonds are rated Aa1 by Moody’s. Yields for the first series, $73.1 million of Series 2011B bonds, ranged from 4.00% priced at par in 2026 to 3.20% with a 4.25% coupon in 2032.
Yields for the second series, $9 million of Series C bonds, ranged from 0.30% priced at par in 2012 to 2.25% priced at par in 2017. Yields for the third series, $22.1 million of Series D bonds, ranged from 1.20% priced at par in 2013 to 3.25% priced at par in 2018.
In economic news, the Labor Department reported Thursday that seasonally adjusted initial jobless claims fell to 381,000 for the week ended Dec. 3, a 23,000 decrease from the previous week’s revised level of 404,000.
