Municipal bonds gave up some yield around the 10-year mark Friday but held steady for most maturities, as surprising economic data lifted equities Friday and pushed Treasuries south, especially on the short end.
“It’s the flight backwards after a flight to quality the previous week,” a trader in Chicago said.
He said tensions have eased a bit as the fallout from Japan’s earthquake and nuclear woes get under control, so money is leaving safe-haven markets and heading back into equities.
The Municipal Market Data scale showed muni yields backing up as much as three basis points in the belly of the curve, defined as bonds maturing between seven and thirteen years out. All other maturities were flat. The 10-year muni yield rose two basis points to 3.07% — the highest borrowing cost since Feb. 23. The two-year yield remained at 0.63%, the highest since the March 11 earthquake. The 30-year bond stayed put at 4.73%, MMD said, after rising three basis points on Thursday.
Trading in the secondary market was described as “slower than slow” on Friday.
“This whole week has been a little subpar as far as activity goes,” said a trader in New York. “There was a fair amount of selling yesterday, but today it’s like a Friday in the summer.”
With no major supply on the final day of the week, munis took their orders from Treasuries. The 10-year Treasury yield moved up three basis points to 3.45% and the 30-year bond yield climbed two basis points to 4.51%.
Demand for short-term munis remained strong, so yields were flat despite a broader sell-off that caused the two-year Treasury yield to climb six basis points to 0.76%
“It’s a safety thing,” the Chicago trader said. “Guys don’t know what to do with their money so they might as well stay short. So the question is, do you want to pay taxes or not?”
A trader in New York attributed the fixed-income sell-off to the morning’s surprising economic news: real gross domestic product in the fourth quarter was upwardly revised to 3.1%, versus forecasts that it would remain at 2.8%, as estimated a month ago. An upswing in inventories was the main culprit for the growth, as shelf-accumulation during the quarter was revised to $16.2 billion from $7.1 billion. Corporate profits also came in higher than originally projected.
Revisions to state and local government spending dragged down growth, as did downward estimates for net exports, personal spending, and orders for non-durable goods.
One factor not playing a role in rising muni yields: this week’s supply figures.
The Bond Buyer calculated that municipal bonds expected to be sold this week total just $1.94 billion, compared with the $4.72 billion sold last week. The $1.9 billion figure, called “amazingly low” by the Chicago trader, would be the slimmest amount of munis sold since the first week of the year — excluding that, it would be the lowest since October 2008.
Last week’s issuance was the most in a month and contributed to selling pressures.
“Although the past week’s new issuance was only moderately higher than past weeks, it was not easily absorbed,” wrote Alan Schankel at Janney Capital Markets.
