A drop in unemployment figures to 8.5% wasn't enough to rally stocks as hopes of a recovery were short-lived. Treasuries and munis were firmer Friday and throughout the week, and many market participants expect the trend to continue.
With lack of supply and $20 billion of January reinvestment money flooding back to the market, demand for munis could be strong.
Throughout last week, yields fell up to 10 basis points across the curve, according to the Municipal Market Data scale.
On Friday alone, yields inside the five-year were flat while yields in the belly of the curve fell between one and four basis points. On the longer end, yields fell between four and six basis points.
For the week, the two-year yield closed flat at 0.42% for its fourth consecutive trading session. The 10-year yield closed down three basis points to 1.85% and the 30-year fell seven basis points to 3.50%.
Treasuries strengthened Friday after weakening earlier last week. The benchmark 10-year yield fell three basis points to finish at 1.97%. The 30-year yield fell four basis points to close at 3.02% on Friday. The two-year yield finished flat at 0.27%.
But while the tax-exempt market was stronger Friday, traders said the big players weren't participating.
"There is a lot of internal distribution going on," a trader in Chicago said. "There are various firms and retail systems, but I'm not seeing a tremendous amount of institutional activity."
A decent amount of institutional customers don't like the market, and at some of the retail shops there is still cash to put to work, the trader said. "To get the yields that retail finds attractive there is some extending going on. People continue to take call risk and [this] week is a more taxable slate, so supply is still going to be constrained," he said.
Institutional players aren't getting into the market for a few reasons, the trader said. "Would you rather buy a 10-year muni at 2% or take a shot at some technology stock? If you're in capital preservation and that's your only goal, munis make sense," he said. "But if you need capital appreciation and income, there are other asset classes that give you better potential."
One bearish trader in New York said the muni rally last week may not be sustainable.
"It's quieter Friday," he said. "People are tired. Even though it is short, it felt like a long week." Munis have "come so far, so quick" that it is "natural to have a breather," he added.
In the secondary market Friday, trades reported by the Municipal Securities Rulemaking Board showed firming during the week.
Bonds from an interdealer trade of Detroit Water Supply Systems 5.25s of 2041 yielded 5.04%, 19 basis points lower than where they traded the week before. Bonds from another interdealer trade of New York Liberty Development Corp. 5s of 2041 yielded 4.08%, nine basis points lower than where they traded the week before. A dealer sold to a customer Allegheny County, Pa., Sanitary Authority 5s of 2021 at 2.08%, two basis points lower than where they traded the week before.
Looking ahead, the municipal market can expect almost $4 billion this week, up from a revised $384.9 million last week. In the negotiated market, $2.15 billion is expected, up from a revised $204.3 million. On the competitive calendar, $1.83 billion is expected, up from last week's revised $180.5 million.
