Munis Finish Lower on Soft Demand, Looming Headwinds

Yields on municipal bonds ended higher for the week as primary deals were priced to sell and secondary prices improved as the week progressed.

Hawaii issued more than $800 million in bonds followed by triple-A rated Massachusetts with over $600 million. Underwriters were able to lower yields on bonds maturing inside six years while raising yields on longer maturing bonds on both deals.

"By most measures I'd say it was a successful underwriting week and the market was marginally better in the secondary," said Jim Colby, portfolio manager and senior municipal strategist at Van Eck Global.

Bank of America Merrill Lynch priced $440 million of New Jersey Economic Development Authority bonds for the Goethals Bridge Replacement Project. The bonds subsequently traded higher in the secondary by 17 basis points, a sign of strength after underwriters priced the bonds to move to avoid inventory build-up on dealer balance sheets.

"It traded up in a very significant way and it's an interesting barometer of the near term attitude that participants are taking for the market - which is fairly constructive," Colby said.

A light new issue calendar is also helping performance, he added. "Overall the new issue market for the year is struggling. And as much as anything it's a reason for the improved performance for munis these past two months."

Any moderate strength during the week dropped off Friday with the release of better-than-expected employment numbers. October non-farm payrolls were up 204,000, according to the Bureau of Labor Statistics, better than the 125,000 expected by economists.

The positive jobs number adds to the headwinds facing munis in the next few months as it raises the possibility that the Federal Reserve will begin tapering its $85 billion a month bond purchasing program. Outflows from municipal bond mutual funds also increased this week to $738.5 million, marking the 24th consecutive week of redemptions.

"Outflows continue from funds and we are bound to get more headlines on tapering and it may be more imminent than we thought just a couple weeks ago," Colby said. "And that creates more uncertainty."

For the week through Nov. 7, the 20-Bond GO Index of 20-year general obligation yields rose eight basis points this week, to 4.56%, its highest in two weeks.

The 11-Bond GO Index of higher-grade 20-year GO yields increased seven basis points this week, to 4.27%, its highest in three weeks.

The Bond Buyer's Revenue Bond Index, which measures 30-year revenue bond yields, rose four basis points this week, to 5.18%, also a three-week high.

The yield on the U.S. Treasury's 10-year note rose six basis points this week to 2.60% while the Treasury's 30-year bond increased nine basis points this week to 3.72%, the highest levels in four weeks.

For the week through Thursday, the triple-A Municipal Market Data scale ended weaker. The 10-year yield rose three basis points to 2.49% and the 30-year yield increased two basis points to 4.08%. The two-year was flat at 0.34% for the week.

The Municipal Market Advisors scale also ended lower. The 10-year and 30-year yields rose two basis points for the week through Thursday to 2.64% and 4.27%, respectively. The two-year was steady at 0.48%.

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