Tax-exempt yields remained steady Monday despite a knee-jerk sell-off in Treasuries following Sunday night’s news that Osama bin Laden was killed by U.S. forces.
“There was firm new-issue pricing so we certainly haven’t fallen back, but we didn’t move ahead either,” said a trader in New York. “Prices were unchanged and activity was light. People were just taking a look to see what’s happening.”
The Municipal Market Data triple-A scale showed tax-exempt yields were steady throughout the yield curve, leaving tax-exempt prices at calendar year highs.
The benchmark 10-year yield is currently at 2.85%, or 42 basis points lower than a recent peak of 3.27% on April 11. The two-year yield remained at 0.56% — it lowest since early November — and the 30-year offered 4.58%, its lowest since early December.
A rival scale from Municipal Market Advisors also held steady. Its 10-year scale remained at 3.10%, its lowest since Dec. 10, 2010, and 24 basis points down from 3.34% on April 11.
Some traders on the East Coast said yields were down another one or two basis points.
“There’s a lack of bonds out there so we’re trading in a vacuum,” a trader in New Jersey said. “There’s no pressure on the market so people continue to lift offerings they wouldn’t normally lift because they need some product for retail buyers. It’s trading unto itself. The market just keeps going higher.”
In the new-issue market today, Bank of America Merrill Lynch offered a retail pricing for $171.6 million of Oregon general obligation bonds. The debt is rated Aa1 by Moody’s Investors Service and AA-plus by Standard & Poor’s and Fitch Ratings.
The bonds were priced in three series, two of which were available in the retail period. The first batch, for $49.7 million, offered yields from 0.66% in 2012 to 4.80% in 2041. Yields in the second series, for $52.2 million of bonds, range from 2.03% in 2017 to 4.33% in 2031. The 10-year spot, at 3.05%, offered 18 basis points more than the triple-A MMD curve.
Tuesday is anticipated to bring the retail pricing for the biggest deal of the week — a $600 million sale from the New Jersey Transportation Trust Fund Authority.
The recent rally in the secondary market has been driven by the scarcity of new tax-exempt paper. The Bond Buyer anticipates less than $3.5 billion of new issuance this week, versus the $3.53 billion from last week. In 2010, the weekly average of new supply was $8 billion.
“People aren’t in love with yields down here, but they need to have product for retail so they keep buying,” the New Jersey trader said.
Domenic Vonella, writing in in MMD’s daily commentary, said munis are also benefiting from favorable technicals driven by institutional traders.
“Meanwhile, outflows from muni bond funds continue during 'risk on’ trading as muni returns do not satisfy individual and retail investor risk-return profiles,” Vonella said, adding that individual investors have moved their cash into equities to avoid headline risk surrounding munis and relatively low yields.
Indeed, the move to equities has allowed the Dow Jones Industrial Average to climb 10.62% year-to-date, leaving the index at its highest level in nearly three years.
Muni traders said a pause in the rally wasn’t significant. “It really says nothing other than this is a market unto itself,” the New York trader said. “No directions are being sent. We have to wait and see what happens tomorrow.”
Treasuries opened modestly weaker as cash flowed into global equities on the news that bin Laden had been killed. But appetite for safe-haven debt promptly returned when a European Central Bank official was quoted saying a restructuring of Greek debt wasn’t on the table.
The two-year Treasury yield finished Monday at 0.61%, equivalent to Friday but three points down from the opening level. Similar movement left the 10-year yield one basis point lower at 3.28%, while the 30-year yield fell one basis point to 4.39%.
A trader in New York said morning trading was “a tad slower and lighter than a typical Monday, but my gut tells me the market is still strong.”
The news of bin Laden’s death had no discernible impact on munis, he added.
“The only way the news has extended to munis is that everyone is celebrating, not trading,” said the New York trader.
Until issuance picks up, there’s little reason to believe bond prices will reverse course.
“I would still count on light supply as the dominant theme — people are idly rich right now,” the New York trader said. “You sit on your hands and your bonds are gaining value, so unless you’re a big player that can easily rotate into the cheaper new deals coming and then sell your supply for good levels, you’re just sitting and making money.”
Positive economic news contributed to the morning’s sell-off in Treasuries. The Institute for Supply Management’s manufacturing index, a key barometer of the sector’s health nationwide, beat expectations by posting a score of 60.4 in April and marking the fourth straight month above the 60-mark.
The index has now boasted a score above the 50-threshold marking growth for 21 consecutive months. According to analysts at Nomura Global Economics, the four-month trend is the best performance for the index since early 1984.
“This is another solidly encouraging report from the manufacturing sector suggesting that sector’s growth will help keep the economic expansion on a moderate GDP growth trajectory,” they wrote. Those concerned with rising inflation wouldn’t be happy with the prices paid component though: it rose 0.5 points to 85.5, its highest level in nearly three years.
