Market Post: Secondary Supply Increases with More Sellers Than Buyers

After a busy week in the primary, the tax-exempt market took a breather Friday as trading activity slowed.

"It's pretty flat," a New York trader said. "It's Friday and California bonds won't free up until the afternoon."

Still, he added there is inventory building in the secondary market. "There are more sellers than buyers. So there are still a lot of bonds in the secondary and a building supply."

Municipal bond scales ended as much as two basis points weaker Thursday after softer sessions Tuesday and Wednesday.

Yields on the Municipal Market Data triple-A GO scale were as much as two basis points higher. The 10-year and 30-year yields were flat at 1.74% and 2.97%, respectively. The two-year closed steady at 0.29% for the fifth session.

Yields on the Municipal Market Advisors 5% coupon triple-A benchmark scale also ended as much as two basis points higher. The 10-year yield increased one basis point to 1.81%. The 30-year yield was steady at 3.06% for the second session and the two-year was steady at 0.32% for the fifth session.

Treasuries were much stronger Friday morning. The benchmark 10-year and 30-year yields dropped six basis points each to 1.74% and 2.94%, respectively. The two-year was steady at 0.23%.

In economic news, the producer price index fell 0.6% in March while the core rate, which excludes food and energy, rose 0.2%. Economists had expected a 0.1% drop in the headline number and a 0.2% core increase.

"The larger than expected decline in wholesale gasoline prices in March resulted in a 0.6% drop in finished goods prices," wrote economists at RDQ Economics. "However, trends in core finished goods prices have been very stable over the last three months, while pressures from food prices have been picking up slightly. We read the data as showing fairly benign year-over-year inflation rates and no signs of immediate inflation pressures."

They continued, "Fed policy right now is all about the labor market and is not focused on inflation. We expect next week's CPI report to be of a similar character and to show flat headline prices."
In other economic news, retail sales dropped 0.4% to $418.3 billion in March. March sales fell short of economists' expectations of unchanged figures from February.

"After a strong February, retail sales were below our expectations in March on weakness in general merchandise sales," RDQ economists said. "It is impossible to know at this point how much of this reflects the seasonally cool weather in March or whether the March estimates will be revised higher over the next two months."

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