Municipal bond yields slid Thursday as new issue sales weren't enough to slow a weeks-long firming in bond prices. Treasuries rallied as the U.S. economic picture remained dubious following jobless claims and home sales reports.
"There has been some weak data recently and munis are feeling good with a treasury market that's rallying," one trader in New York said in an interview. "The muni yield curve has continually steepened at the same time that the treasury yield curve flattened. There was a lot of cheapness in the market, and people are realized that. All you needed was a catalyst."
Initial jobless claims for state unemployment benefits was less than expected in the Jan. 18 survey week, the Labor Department reported Thursday. Claims rose by 1,000 to 326,000, compared with economists' expectation of a jump to 330,000. Existing home sales and leading economic indicators also came in below target.
The numbers weren't enough to convince market participants of a robust economy, traders and analysts said.
"We're taking the viewpoint that until we get into non-weather related months, we're looking the unemployment rate with a suspicious eye in terms of accuracy," Dan Heckman, senior fixed-income strategist at U.S. Bank Wealth Management, said in an interview. "We won't be surprised if we see some revisions."
Falling treasuries are likely to continue supporting the municipal market until weekly supply volume rises, Heckman said.
"Economic data is on the weak side so you're seeing treasuries come down and that's giving a good tone to munis," Heckman said.
Bond sales this week are expected to increase again, with anticipated new issue volume forecast to weigh in at $5.00 billion, compared with $3.81 billion last week.
A lack of big deals the past two months has skewed the supply-demand relationship in the municipal market in favor of issuers, even as some sizeable deals trickled into the market Thursday, Heckman said.
"There's been good demand, supply had been very light, and it's starting to pick up," Heckman said.
In the competitive arena, Citigroup Global Markets Inc. won the bid for $316.89 billion of Fairfax County, Va., public improvement and refunding bonds, and Bank of America Merrill Lynch took $100 million of Berkeley County School District, S.C., general obligation bonds.
"There is a very strong appetite for higher credit quality issuers, so reception to these deals will be contingent on who the issuers are," said Heckman, whose wealth management strategy targets higher yields than those currently on the market. "We're trying to be patient, waiting for a better buying opportunity. The supply-demand scenario is more favorable to the issuer right now."
A dearth in supply the past month has pushed yields down, making some bonds a little bit on the expensive side, Heckman said.
Several weeks of new issuance between $6 billion to $8 billion would help balance supply and demand in the market. "That's when some deals would have to be priced at some more attractive levels, and we would come buy from that market more aggressively," Heckman said. "But that could be 60 days from now."
Yields on the Fairfax refunding bonds ranged from 0.12% with a 3% coupon maturing in 2014 to 3.72% with a 4% coupon maturing in 2033. The bonds, rated AAA, are callable at par in 2023.
Yields on the Berkeley County school GOs ranged from 0.50% with a 5% coupon in 2017 to 3.80% with a 4% coupon maturing in 2032. The bonds, rated Aa2 by Moody's and AA-minus by Standard & Poor's, are callable at par in 2024.
In the negotiated market, Goldman, Sachs & Co. priced $160 million of California-based ABAG Finance Authority revenue bonds for non-profit Sharp HealthCare. The bonds are rated A1 by Moody's and AA-minus by Standard & Poor's.
Yields on the ABAG bonds ranged from 0.50% with a 3% coupon maturing in 2016 to 4.71% with a 5% coupon in 2043. The bonds are callable at par in 2023.
Muni bond yields on the Municipal Market Data triple-A scale further strengthened across the curve in the afternoon, with yields falling as much as five basis points on bonds maturing beyond 2041.
Municipal Market Advisors reported bond yields falling as much as five basis points on paper maturing between 2035 and 2040. Bonds closer in on the curve were steady to two basis points lower.
Treasury yields slid across the curve, with 10-year and 30-year yields each sliding seven basis points to 2.79% and 3.69%, respectively. The two-year fell three basis points to 0.38%.
"As anticipated, the 10-year municipal bond-to-Treasury yield ratio decreased last week amid below-average supply and fund inflows," US Bank Wealth Management sad in its weekly outlook report. "Muni-Treasury ratios may continue to decrease somewhat over the coming trading sessions as supply is expected to be approximately 75 percent of the 2013 weekly average."
The ratio for the 10-year hit 90% Wednesday, Janney Capital Markets said in a Thursday report. That level was last reached a year ago, according to Janney.
"The municipal market has rallied in January due to support from reinvestment demand and below average weekly supply," Dorian Jamison, a municipal analyst at Wells Fargo Advisors, said in a report Wednesday.
The MMD 10-year triple-A benchmark yield has fallen 25 basis points to 2.54% since Jan. 1, while the 30-year benchmark on MMD has fallen 39 basis points to 3.90%.
"The move today was kind of a non-event," the New York-based trader said. "All eyes are going to turn to Puerto rico over the next couple weeks and that's partly creeping into the bid here. I think people are realizing that they were pretty optimistic on how things would eventualy shake out."
