NEW YORK – The California municipal market was slightly weaker Wednesday, following but lagging rising Treasury yields after a much stronger than expected ADP National Employment Report, in light to moderate secondary trading.
“It feels a bit weaker today, coming off that ADP report,” a trader in Los Angeles said. “Now there’s a thought that payrolls on Friday will be stronger than anticipated. Treasuries had a much bigger reaction to it than we did, though we’re probably down two or three basis points as a result.”
In the daily MMD commentary, Randy Smolik wrote that the muni market was poised to improve Wednesday “given the lack of secondary blocks and little building in the forward primary calendar” before the ADP data helped reverse it.
“The surprising jump in December ADP payrolls of 297,000 versus 100,000 consensus raised concerns that December payrolls on Friday will be very strong,” he wrote. “Treasuries reversed their course, trading down significantly, but muni sellers seemed reluctant to react to this one day event. Customers that have been lingering in the five- to 10-year range especially bought bonds at nearby market levels, discouraging dealers from chasing street bids.”
Private-sector employment rose by 297,000 jobs in December due to a surge of services sector hiring, according to the ADP National Employment Report.
The seasonally adjusted data released Wednesday indicates non-farm payrolls rose to 107.5 million thanks largely to a gain of 270,000 services jobs. The ADP index is considered a key precursor to the December employment situation report, which is scheduled for release Friday by the U.S. Labor Department.
The ADP data has led to increased projections for December nonfarm payrolls by numerous economists. For instance, Janney Capital Markets sent out a note to investors increasing its projection to 225,000 jobs created last month, up 96,000 from their previous estimate.
The Municipal Market Data triple-A 10-year scale rose one basis point Wednesday to 3.19%, the 20-year scale was up three basis points to 4.50%, and the scale for 30-year debt climbed three basis points to 4.71%.
Tuesday’s triple-A muni scale in 10 years was at 94.9% of comparable Treasuries and 30-year munis were at 105.4%, according to MMD. Meanwhile, 30-year tax-exempt triple-A general obligation bonds were at 112.2% of the comparable London Interbank Offered Rate.
The Treasury market showed losses Wednesday. The benchmark 10-year note was quoted recently at 3.48% after opening at 3.33%. The 30-year bond was quoted recently at 4.54% after opening at 4.41%. The two-year note was recently quoted at 0.72% after opening at 0.62%.
Municipalities continue their hiatus from borrowing money this week as they are once again slated to sell a meager amount of new debt.
State and local governments are scheduled to sell just $723.6 million of bonds this week, according to The Bond Buyer and Ipreo data, an uncommonly small amount of debt.
This is the supply lull municipal market participants were looking forward to during the spasm of bond sales in the fourth quarter. A $131.2 billion flurry of debt issuance in the fourth quarter helped propel the municipal bond market to a record $431 billion of issuance in 2010.
Craig Brandon, a portfolio manager at Eaton Vance, said outflows from mutual funds are probably a factor preventing the municipal market from rallying more than it has during a time of light supply.
Municipal bond mutual funds have reported $16.6 billion in outflows during the past seven weeks, according to Lipper FMI.
"Our market is very retail-driven," said Brandon. "When retail sells bonds or sells funds that creates a demand for people to sell bonds and raise cash."
In other economic data, the U.S. services sector expanded more rapidly than economists expected in December as new orders picked up, the Institute for Supply Management reported Wednesday.
ISM’s non-manufacturing business activity composite index rose to 57.1 on a seasonally adjusted basis, from 55.0 in November. Economists polled by Thomson Reuters had expected a 55.5 level.
Readings below 50 signal a slowing economy. Higher ones signal expansion.
The prices paid component index, closely watched for signs of inflation, jumped to 70.0 from 63.2; employment fell to 50.5 from 52.7; production rose to 63.5 from 57.0; and new orders climbed to 63.0 from 57.7.
Previous Session's Activity
The most actively traded security in the state yesterday was California 3s of 2011, which traded 37 times at a high of 100.983 and a low of 100.499.
