The market for tax-exempt municipal bonds erased earlier losses Tuesday afternoon, 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 in an interview. "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 Tuesday afternoon, 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%.
Negative movement in munis and Treasuries earlier in the day have been a reaction to higher-than-expected inflation data released by the government Tuesday morning. The U.S. consumer price index rose 0.2% in March, compared with a 0.1% estimate by analysts, according to Bloomberg data.
"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.
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 a5% 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.
Washington Suburban, Maryland will also issue $150 million of consolidated public improvement bonds, which are rated AAA by Moody's.
