Market Close: Munis Get Lift from Ukraine; PR Price Slide Continues

Muni bonds took a bit of a roller-coaster ride Tuesday.

The market for tax-exempt bonds started the day weaker after an inflation report and then reversed midday, instead following a rally in Treasuries after reports of reignited tension between Russia and Ukraine.

Treasuries started the morning softer but began rallying around midday after Ukrainian military forces pushed back against a pro-Russian uprising near the border between the two countries. Thirty-year government bond yields fell four basis points to 3.45% and municipal bonds erased losses of as much as a basis point.

"The day started off on a slightly weaker tone but the market right now on very light volume is following more of the macro picture as the Treasury market rallies on further unrest in the Ukraine," a trader in the Midwest said. "I think that's what's really moving it."

In February, munis were led by a Treasury rally that saw yields on government bonds fall by as much as 15 basis points as Russian forces invaded and seized the Ukrainian peninsula of Crimea. Unrest overseas can lead buyers to look for safe investments such as munis.

Treasuries firmed across the curve midday Tuesday, with two-year note yields firming one basis point and 10-year bonds falling three basis points. The Dow Jones Industrial Average fell 0.20% and the S&P 500 Index dropped 0.25%. By market close, Treasuries were mostly steady with 10- and 30-year yields down one basis point.

Municipal bond yields dropped the most on the long end of the curve, with bonds maturing from 2040 and beyond firming by four basis points, according to Municipal Market Advisors.

Negative movement in munis and Treasuries earlier in the day was a reaction to higher-than-expected inflation data released by the government Tuesday morning, traders suggested.

The U.S. consumer price index rose 0.2% in March, compared with a 0.1% estimate by analysts, according to Bloomberg data.

Food prices were up 0.4% in February, as dry weather in California pushed fruit and dairy prices higher, and meat prices rose. Vegetable prices, however, fell 0.2% in the month. The index excluding food prices was still up 0.1%.

"I don't know that it was that much of a surprise, but it was enough of a number to give this elongated rally a little bit of reason to pause and slightly soften up," the trader in the Midwest said.

Municipal bond prices were strongest in the middle-to-long part of the curve, with yields on bonds maturing from 2016 to 2028 firming by as much as two basis points, according to Municipal Market Data's AAA scale.

Puerto Rico 8%-coupon bonds didn't ride the Treasury wave Tuesday, instead extending losses to a third day.

"That's going to be a tough bond to unwind," one trader in New Jersey said in an interview. "I think that thing's just going to keep going down. When those bondholders try to check liquidity it's going to be tough for them."

The bonds began weakening Friday as nontraditional bondholders like hedge funds sold the bonds ahead of the island's Supreme Court ruling that parts of the commonwealth's teachers' pension reform plan were unconstitutional.

"I think any of those hedge fund-type buyers, when they see the lack of liquidity and they put it out for a bid and it's points back from what they wanted, it's like, 'holy crap,'" the trader said. Crossover buyers that don't typically invest in the muni market may be taken aback by the difficulty in selling the high-yields bonds, he said.

The newly-issued Puerto Rico general obligations maturing in 2035 traded as low as 86.8 cents on the dollar, pushing the average yield up to 9.35% on Tuesday, according to data from Bloomberg.

"You've got to remember where these bonds are and they were non-traditional hedge fund buyers and perhaps they discovered the liquidity in this market," the trader in the Midwest said.

Puerto Rico bond trading has declined since the island's historic $3.5 billion junk deal on March 11.

Over the course of the past month, the price of Puerto Rico Electric Power Authority (PREPA) bonds with a 5% coupon maturing in 2042 fell 12.9%, more than any other Puerto Rico bond, according to Peter Degroot, fixed income strategist at JP Morgan.

Total potential volume in the holiday-shortened week is $2.6 billion, down from $4.39 billion last week, according to data provided by Ipreo and The Bond Buyer.

Barclay's Capital Markets brought $200 million of sales tax bonds for the Massachusetts Bay Transportation Authority to market, the largest deal of the week.

Yields on the Mass. bonds ranged from 0.37% with a 3% coupon maturing in 2016 to 3.71% with a 5% coupon in 2044. The bonds are callable at par in 2024. The bonds are rated Aa2 by Moody's Investor Services and AAA by Standard & Poor's.

JP Morgan won the bid for $125 million of general obligation bonds for Florence County, South Carolina Tuesday. Yields ranged from 0.17% with a 1% coupon in 2015 to 1.88% with a 4% coupon in 2021. There is no call option. The bonds are rated Aa2 by Moody's and AA-minus by S&P.

Also in the negotiated market, Maryland's Washington suburban sanitary district issued Citi-led $150 million of consolidated public improvement bonds, which were rated Aaa by Moody's and AAA by S&P and Fitch.

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