Market Midday Post: Lack of Activity in Shadow of Treasury Weakness

Weakness in Treasuries spilled over into municipals midday Thursday, extending the morning's overall quiet atmosphere, and slightly curtailing the relative value of municipals to Treasuries compared to earlier in the week, traders reported.

"Obviously, Treasuries are at the lows of the week, and as long as Treasuries feel weak I think customers are being a little patient," said one New York trader. "I think the market would have been more interesting if Treasuries would have hung in there," he said.

At midday Thursday, 30-year triple-A GOs on MMD's benchmark scale remained at 2.87%, after inching up one basis point on Wednesday, while the 10-year was at 1.99% after rising three basis points the prior day, according to Municipal Market Data.

Meanwhile, the benchmark 30-year Treasury was steady at a 2.82%, while the 10-year was reported up one basis point from earlier in the morning at 2.22%. The two-year bond was steady at 0.64% at midday.

However, the weakness slightly decreased the relative value of municipals to Treasuries compared to Monday, the trader noted.

"The relative value of municipals has gotten worse with the Treasury pullback making our bonds look a little worse," the trader said.

The 30-year and 10-year muni to Treasury ratios were at 104.8% and 93.2%, respectively, as of Thursday, down from 105.3% and 94.1%, respectively, on Monday, according to Municipal Market Data.

With the market still digesting the prior two week's $25 billion glut of supply, the New York trader said, dealers opted to largely stand pat at week's end and decide if they will sell older bonds to pay for their new purchases in the next few days.

"They've got a lot of the last two to three weeks' new issuance to pay for," he said. "Now that you are coming upon settlement dates this week and next, that puts a little pressure on dealers to become sellers."

"You are drifting into a liquidity-challenged holiday week," the trader said. "I think the market would have been more interesting if Treasuries would have hung in there."

All of those cross currents, he said, was contributing to the existing holiday malaise.

"Most people are just watching Treasuries and people are focusing on a lot of office party talk rather than the market," the New York trader said. "If Treasuries weren't off, there would be a little more focus on the market," he added.

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