The municipal bond market rallied for a fifth consecutive session Monday despite broader volatility initiated by Standard & Poor's revising its outlook on Treasury debt to negative from stable.
Multiple traders said the news had no effect on municipal trading in the secondary markets.
"Any weakness associated with the S&P news, or anything else, is all being hidden behind the bottom line of a lack of supply," a trader in Florida said. "We're seeing a lack of selling from the customer base."
A trader in California called the revised outlook for U.S. debt a "non-event" for municipal bonds, as munis weren't following the direction of Treasuries. Short-term tax-exempt yields fell two to three basis points, intermediate yields declined three to four basis points, and yields maturing beyond 2023 fell two basis points, according to the Municipal Market Data triple-A scale.
The benchmark 10-year muni now yields 3.11%, or 16 basis points lower than its yield last Monday. The two-year yielded 0.63% and the 30-year yield offered 4.76%.
"I wouldn't say it's a rally of huge proportions, but it says something that there's a rally at all," a trader in California said. "A lot of it has to do with the lack of paper out there."
Total new volume in this holiday-shortened week is expected to be a measly $1.43 billion, versus $2.48 billion last week. Volume in the first quarter averaged $3 billion per week, versus an average $8 billion in 2010. The new-issue market on Monday featured no significant deals.
Upcoming supply concerns remain but have been pushed back. This week's issuance is one of the slimmest of 2011, particularly with Passover beginning Tuesday evening and the markets being closed Friday.
"Half the people are out this week," the California trader said. "Why would anyone bother coming in?"
The Florida trader added: "I can't anticipate the customers will become sellers as we approach the holidays. … We think the lack of supply will become exacerbated over the next week or so."
He described the market as hungry for supply, noting that limited block trades are easily finding a home.
Munis have now been rallying for five consecutive days, reversing a four-week trend of rising yields. The 10-year yield had been pushed from 2.90% on March 16 to as high as 3.27% last Monday.
"We were bleeding slowly for two months and now we're kind of ratcheting up a bit," the California trader said.
Cash flowed out of Treasuries when the Standard & Poor's news hit the wires, but the market quickly stabilized to its lowest yields in nearly a month as investors fled from equities.
The 10-year Treasury finished four basis points down from Friday's close at 3.37%. The two-year yield fell four basis points to 0.65%, and the 30-year yield declined one basis point to 4.46%.
The bigger action was in equities. The Dow Jones industrial average shed as much as 244 points in mid-afternoon trading before finishing 140 points lower at 12,201. The S&P 500 fell 14.5 points to 1,305. Those declines mark daily losses of 1.14% and 1.10%, respectively.
The muni market received confirmation over the weekend that the $1.3 billion offering from the Liberty Development Corp. was pulled last week because of a "volatile rate environment."
"We made the decision to delay the Tower 4 Liberty bond sale due to market considerations," said a joint statement from Silverstein Properties and the Port Authority of New York and New Jersey. "We plan to move forward with the Liberty bond financing once the municipal markets have settled down and we have addressed investor issues."
James Ramage contributed to this column.
