Market Close: Munis Get Whacked on Historic Treasury Weakness

Intermediate municipal bonds suffered the brunt of Treasury-related weakness as benchmark yields were raised across the board at the close of trading on Thursday, traders said.

"Locking in gains for the year and reacting to another strong rally in stocks, bonds continued to backpedal," Thomson Reuters' analyst Randy Smolik wrote in a daily market commentary.

"Munis played catch-up to Treasuries as taxable yields were pinned near price lows most of the session," he wrote.

Municipal Market Data raised yields on bonds due in 2023 and 2024 by nine basis points, and those in 2022 and 2025 by eight basis points.

The 2021 benchmark yield and bonds due in 2026 to 2044 ended up seven basis points higher. The 30-year triple-A GO closed at a 2.94% yield -- up from 2.87% early Thursday.

The yield on the short end, in 2015, was one basis point higher, while the bonds due between 2016 to 2020 increased six basis points.

Treasuries sank the most in 17 months on speculation borrowing costs will rise next year and oil resumed its selloff, according to Bloomberg.

Global stocks surged, with the Standard & Poor's 500 Index posting its biggest two-day rally in more than three years.

The S&P 500 jumped 2.4% by 4 p.m. in New York, capping a two-day gain of 4.5 percent, the most since November 2011, according to Bloomberg.

The 30-year benchmark Treasury yield ended up nine basis points on the day at 2.82%, while the 10-year rose seven basis points on the day to 2.21%. The two-year was up two basis points and ended at 0.63%.

"People are putting their head in the sand and thinking maybe things will go away," said a New York trader who said the oil crisis, currency problems in Russia, and concern over Puerto Rico's restructuring plans contributed to the muni weakness.

"They cut the scale big time," he said. "Munis are a lot weaker" compared to Thursday's open.

He said traders left for the day hoping for higher yields and added trading activity as sellers rush to market tomorrow - just before the market goes into full holiday mode next week.

"People saw the bad news, and they see year end with Christmas coming, and they just shut down," the trader said.

"As volatility settled down in both oil and the Ruble, the Treasury market put its focus on the Fed's message from Wednesday," Smolik wrote. "In all, the Fed saw the U.S. on a strengthening economic path and their agenda to normalize rates starting in 2015 seemed etched in stone."

"Munis played catch-up to the sudden pullback in Treasury prices," Smolik added. "Bidders have pulled way back and their caution seemed justified as some dealers jettisoned recent syndicate positions."

Money Market Funds

Tax-exempt money market funds' assets increased by $2.14 billion, as total net assets rose to $256.85 billion, according to The Money Fund Report, a service of iMoneyNet.com.

The flow were up from $2.06 billion in the prior week.

The average seven day yield for the 400 weekly reporting tax-exempty money funds held steady at 0.01%.

The total net assets of the 994 weekly reporting taxable funds declined by $1.76 billion to $2.459 trillion in the week ended Dec. 16, compared to the inflows of $19.83 billion they generated last week.

The average seven day yield for the taxable funds was unchanged at 0.01%.

Overall the combined total net assets of the 1,394 weekly reporting money funds grew by just $372.8 million in the week ended Dec. 16 to $2.716 trillion - marking the ninth consecutive week of reported inflows.

The inflows were down from the arrival of $21.89 billion in the prior week.

 

Secondary Market

High-grade municipal bond prices decreased on Thursday. The yield on the benchmark 10-year general obligation increased nine basis points to 2.08%, from 1.99% on Wednesday. While the yield on 30-year GOs climbed seven basis points to 2.94% from 2.87% on Wednesday, according to the final read of Municipal Market Data's triple-A scale.

Treasury prices were lower Thursday, as the two-year note yield rose to 0.63% from 0.59% on Wednesday. The 10-year yield bumped up to 2.21% from 2.12%, while the 30-year also rose to 2.82%, from 2.74% on Wednesday.

On Thursday, the 10-year muni-to-Treasury ratio was calculated at 93.7% versus 93.2% on Wednesday; the 30-year muni to Treasury ratio was at 104.1%, compared with 104.8% on Wednesday.

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