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Market Post: Low Yield Reality Means Reluctant Muni Buyers

SEP 9, 2011 10:38am ET
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NEW YORK — Municipal bond investors are gradually and grudgingly accepting the reality of lasting low nominal yields.

Subsequently, fewer of them are willing participants in the market, particularly the farther maturities extend along the curve, said a trader in New York.

“People who are putting money to work are doing so reluctantly,” he said. “In the short term, your position is not going to be a whole lot different from where you are today.”

The secondary market has seen around 51 trades on the day, a paltry amount, the trader said. Currently there are pockets of strength in high grades inside the 7- to 10-year range. But there is little value out on the long end.

“Most want to stick to going short on high grades,” the trader said. “That’s where the money is flowing. They’re buying quality short, so they won’t have a credit problem.”

Tax-exempt yields are unchanged across the curve, according to the Municipal Market Data scale. Thursday, they firmed for maturities between 10 and 20 years, as well as those maturities at the back end of the curve.

The benchmark 10-year yield Thursday again reached a record low, as measured by MMD. It ticked down one basis point on the day to 2.08%. It has fallen 16 points since Sept. 1.

The 30-year yield also inched down a basis point to 3.67%, its lowest level since Aug. 31, 2010.

The two-year yield held fast at 0.30% for a 21st consecutive session, hovering at its lowest level in more than 40 years.

Treasury yields are somewhat weaker Friday, following a small rally Thursday. The 10-year benchmark yield has risen two basis points above its low for the week to 2.00%, lingering around levels it hasn’t seen in more than 50 years.

The 30-year yield has moved up three basis points to 3.34%. The two-year yield is unchanged at 0.20%.

“The tide carried all bond boats higher Thursday … as Treasuries again had a strong session and munis followed,” wrote Janney Capital Markets’ Alan Schankel.

Volume in the primary is slowly creeping up from the scraps with which the market had to contend the past two weeks. New issuance for next week is expected to be $4.65 billion, and that doesn’t include $5.4 billion California revenue anticipation notes. Estimates for this week’s volume were revised downward, to $1.95 billion.

And in another positive sign, following six consecutive weeks of outflows, municipal bond mutual funds finally saw inflows. The week ending Sept. 7 saw $565 million in inflows from muni bond funds that report their flows weekly, according to Lipper FMI.

The deposits bucked a recent trend six weeks in the making. In the week ended Aug. 31, muni bond funds saw net outflows of $282 million.

High-yield muni funds have also seen their first week of inflows after six straight weeks of outflows. Funds that report weekly saw inflows of $136 million, Lipper reported. The previous week, high-yield funds reported outflows of $108 million.

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