With momentum coming from a worse-than-expected GDP number Friday morning, the municipal bond market ended the week on a strong note.
Following Treasuries higher, munis posted the most gains than any other trading session this week on an overall risk-off trade following reports that real gross domestic product increased at an annual rate of 2.5% in the first quarter of 2013. That fell short of the 3% increase expected by economists. Still, it was much stronger than the 0.4% increase in the fourth quarter of 2012.
“In the last two quarters, measured real GDP growth has been held back by double-digit annualized quarterly declines in defense spending, which have portrayed a weaker picture of the economy than the monthly data on private sector activity have painted,” wrote economists at RDQ Economics. “Although real GDP growth in the first quarter was below expectations, at 2.5%, real consumer spending growth and residential investment ran ahead of forecasts.”
“For the year as a whole, we are projecting 2.5% real GDP growth and, with the share of real government spending in real GDP at a recorded low, we believe much of the measured fiscal ‘drag’ is behind us and we expect the stronger private-sector growth rate to show through in the overall GDP data over the balance of the year.”
Munis rallied, but not as much as Treasuries. “It looks like munis are underperforming on light activity on a quiet Friday,” a Virginia trader said, adding that munis could play catch up Monday and Tuesday. “Supply next week looks like things should stack up favorably for munis. If you take out the big Iowa Finance Authority fertilizer deal, it’s very manageable supply and is constructive for the market.”
Next week’s market can expect $5.77 billion in new issues, up from this week’s revised $5.61 billion. On the negotiated calendar, $4.67 billion should be priced, up from this week’s revised $3.61 billion. On the competitive side, the market can expect $1.10 billion to be auctioned, down from last week’s revised $2 billion.
Indeed other traders said the market was looking to next week. “There is a muted Treasury reaction to GDP and it’s similar on the muni side,” a Chicago trader said. “It is roughly in line with Thursday. It seems like the primary is such the driver of action that Fridays are spent preparing for next week’s calendar. That’s how today feels.”
In the secondary market, trades compiled by data provider Markit showed mostly stronger trades. Yields on Virginia’s Tobacco Settlement Financing Corp. 5s of 2047 dropped three basis points to 6.12% and Memphis, Tenn., 5s of 2021 dropped two basis points to 1.45%. Yields on California 4s of 2021 and New Jersey Transportation Trust Fund Authority 5s of 2042 slid one basis point each to 1.92% and 3.61%, respectively.
Municipal bond scales ended as much as three basis points lower Friday, posting more gains than the market did all week.
Yields on the Municipal Market Data 5% triple-A GO scale ended as much as three basis points lower. The 10-year yield fell one basis point to 1.69% and the 30-year yield slid three basis points to 2.87%. The two-year closed steady at 0.29% for the 16th session.
Yields on the Municipal Market Advisors 5% scale also ended as much as three basis points lower. The 10-year and 30-year yields fell two basis points each to 1.75% and 3.00%, respectively. The two-year was flat at 0.32% for the 16th session.
Treasuries posted gains Friday. The benchmark 10-year yield dropped five basis points to 1.67% and the 30-year yield fell four basis points to 2.87%. The two-year yield slid one basis point to 0.23%.
