Market Close: Muni Rally Pushes 30-Year Yield to New 2011 Low

JUN 1, 2011 4:40pm ET
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The muni market finally awoke from an eight-day slumber.

Municipal bond yields declined as many as four basis points Wednesday as the Treasury market rallied to fresh 2011 highs on weak U.S. jobs and manufacturing data. In the prior eight sessions, benchmark muni yields had moved no more than a single basis point.

“We were responding to tremendous movement in Treasuries,” a trader in New York said. “If we hadn’t moved, it would have suggested we weren’t in good shape. But we did.”

Intermediate muni bond yields fell two to three basis points and tax-exempts maturing beyond 2036 fell four basis points, according to Municipal Market Data. Short-term munis held steady.

The two-year muni yield finished one basis point lower at 0.43% — its lowest yield since Sept. 9, 2010. The 10-year yield fell three basis points to 2.62%, merely the lowest since May 18, and the 30-year yield dropped four basis points to 4.26% — its lowest since Nov. 12, 2010.

The iShares S&P National AMT-free municipal bond fund, a $2.1 billion exchange-traded fund used as a proxy for the market, moved 0.28% over the last two days to $103.60.

Fixed income assets strengthened after the worst private-sector jobs report in six months and a sharp drop in a key nationwide manufacturing survey impelled investors to flood the Treasury market. The 10-year yield broke through the 3% barrier for the first time since December early in the session and even fell as low as 2.94% in the early afternoon. It finished at 2.95% — 22 basis points lower than its yield on May 19.

Prior to Wednesday, the 10-year muni yield had fallen just one basis point from May 19. The underperformance lifted the 10-year muni-Treasury ratio from 81.6% on May 18 to 88.5% on Wednesday.

The two-year Treasury yield fell two basis points to 0.44% and the 30-year yield dropped seven basis points to 4.15%.

Muni market borrowers in the primary market took advantage of the falling rates environment and more attractive valuations.

Morgan Stanley slashed yields up to six basis points as it priced for institutions a $521 million deal for the New York State Environmental Facilities Corp, which has $9.8 billion in first-resolution debt and $16.8 billion in second-resolution debt outstanding.

According to a source at the agency, $217 million was sold in Tuesday’s retail period. That kind of demand allowed the underwriter to upsize the deal by $10 million.

The bonds carry high double-A ratings from Moody’s Investors Service, Standard & Poor’s, and Fitch Ratings. Proceeds will finance many New York City water projects, most notably the Croton Reservoir and the Newtown Creek Water Pollution Control Plant.

Yields on the short end were unchanged from Tuesday’s retail pricing, with the 2012 notes still offering 0.57%, but 20-year yields were slashed six basis points over two repricings. The 10-year offered a 2.98% yield, two basis points lower than on Tuesday and a 36 basis points spread over the comparable triple-A MMD scale.

Bonds maturing in 2036 and 2041, which weren’t offered in Tuesday’s retail period, had their yields reduced five basis points apiece in a repricing to 4.51% and 4.56%, respectively.

“With Treasuries pushing in the belly as much as 10 basis points, tax-exempt bidders are encouraged to do more reaching,” said MMD’s Randy Smolik in a mid-day update.

Weak data included the Automatic Data Processing employment report, which showed a net gain of 38,000 private jobs in May — just a fraction of the Street’s 178,000 estimate and the smallest gain since September. The manufacturing and construction sectors reported net losses of 9,000 and 8,000, respectively, while increases were concentrated among small- and medium-sized businesses.

The report’s value in forecasting Friday’s non-farm payrolls report is debated among economists, but it clearly puts the risk to the downside.

“In light of May’s highly disappointing ADP employment change result, we are downgrading our forecasts for May nonfarm payrolls by a significant margin to 136,000 from 209,000,” wrote fixed income strategist Guy LeBas at Janney Capital Markets.

“This morning’s weakness in ADP payrolls appears broad-based and consistent across goods and services industries as well as firms of all sizes, lending credence to likely disappointing official jobless data for the month of May,” he added. “It’s too soon at this point to establish whether the weakness will stretch into future months.”

Fixed-income markets received further support after the Institute for Supply Management’s manufacturing report declined 6.9 points in May to 53.5 — the lowest reading in 12 months and the first reading below 60 in 2011. The report suggests manufacturing continues to expand, but at a much slower pace than expected.

“Manufacturers continue to experience significant cost pressures from commodities and other inputs,” said Bradley Holcomb, who chairs the survey.

Elsewhere among new issues, JPMorgan priced for retail $85.1 million of general improvement and refunding bonds for Memphis, Tenn. Rated Aa2 by Moody’s and double-A by Standard & Poor’s, the bonds’ yields range from 1.09% in 2014 to 4.60% in 2036.

Goldman, Sachs & Co. priced a $39.7 million issue for the Arizona Board of Regents. The University of Arizona revenue bonds were given low double-A ratings from Moody’s and Standard & Poor’s. Yields ranged from 1.78% in 2016 to 4.41% in 2029.

Citi also sold $181 million of tax and revenue anticipation notes for San Diego County School Districts, and Barclays Capital sold $161 million of tax allocation bonds for the Inland Valley Development Agency.

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