NEW YORK – The California municipal market was mostly flat Monday amid fairly light secondary trading activity.
“There isn’t a whole lot of trading going on in the secondary,” a trader in San Francisco said. “There are some bits and pieces trading, but it’s a quiet session for the most part. There will be some decent activity in the primary this week, so there could be some interest there, but we’re just unchanged at this point. We had some firmness that carried through to late last week, but that’s sort of faded at this point and we’ve just been flat since late last week.”
The Treasury market showed some losses Monday. The benchmark 10-year note was quoted recently at 2.96% after opening at 2.91%. The 30-year bond was quoted recently at 4.07% after opening at 3.99%. The two-year note was quoted recently at 0.57% after opening at 0.55%.
The Municipal Market Data triple-A scale yielded 2.58% in 10 years and 3.67% in 20 years Monday, following levels of 2.57% and 3.67% Friday. The scale yielded 3.97% in 30 years Monday, matching 3.97% Friday.
Monday’s triple-A muni scale in 10 years was at 87.2% of comparable Treasuries and 30-year munis were at 97.8%, according to MMD, while 30-year tax-exempt triple-A general obligation bonds were at 99.8% of the comparable London Interbank Offered Rate.
Alan Schankel, managing director at Janney Capital Markets, wrote in a commentary that “the paradigm of moderate supply and strong demand continues to push tax free yields lower, al¬though the pace of the decline in yields is lagging that of benchmark Treasury yields.”
However, Schankel added, “not all parts of the yield curve are participating equally in the rally.”
“Short and medium term ma¬turities have benefited disproportionately, with yields for two, five and ten-year maturities reaching record lows,” he wrote. “On the other hand, yields for longer maturities, more subject to inflationary concerns, are still above record levels, but are approaching the pre-crisis levels of early 2008. So although levels over much of the yield curve are at low points, the spread, the differential between short term and long term yields is the highest in at least a decade.”
“Given the increasingly uncertain economy it seems highly unlikely that monetary policy will tighten in the near future, so duration extension, to take advantage of the sharp curve slope, may be an appropriate strategy for increasing total return,” Schanckel wrote. For laddered portfolios, our favored municipal portfolio approach, extending the ladder by a few years--for example, adjusting a twelve year ladder to fifteen years--should be considered to increase total return.”
In economic data released Monday, construction spending edged higher by 0.1% in June, while economists were expecting a decrease, as federal construction reached a record high.
May’s construction spending was revised sharply lower to a decrease of 1.0% from a 0.2% decrease reported last month. Construction spending in April increased 2.3%.
Economists expected June construction spending would fall 0.5%, according to the median estimate from Thomson Reuters.
The overall economy grew for the fifteenth straight time after seven months of contraction, while the manufacturing sector expanded for the twelfth time after eighteenth months of contraction, the Institute for Supply Management reported this morning.
According to the ISM’s monthly report on business, the ISM index dipped to 55.5 in July from 56.2 in June.
Economists polled by Thomson Reuters predicted the index would fall to 54.1.
Activity in the California new-issue market was light Monday.
Previous Session's Activity
The most actively traded security in the state yesterday was insured Elk Grove Finance Authority 5s of 2025, which traded 82 times at a high of 95.905 and a low of 93.691.
