NEW YORK - Yields in the California municipal market rose dramatically Wednesday as the expectation that tbe Build America Bond program will expire at year's end spurred issuers to bring more of the taxable product to market.
Traders said tax-exempt yields were weaker by about 15 basis points in maturities 10 years and longer as an excess of supply worked to cause the weakness, in tandem with a Treasury rout exacerbated by a dovish statement from the Federal Open Market Committee.
"You have all that BAB supply out there, and quite a bit more to come before the year is out, but right now, we're getting hammered with bid-wanteds and the supply isn't really helping anything," a Los Angeles trader said. "None of the deals we've seen today have gotten a great reception as far as I can tell, and that's not likely to change with anything else that's expected this week."
The Municipal Market Data triple-A 10-year scale widened 15 basis points Tuesday to reach an eight-month high of 3.24%, the highest since June 26, 2009; the 20-year scale increased 18 basis points to a 21-month high of 4.51%, the highest since March 31, 2009; and the scale for 30-year debt rose 15 basis points to a 21-month high of 4.69%, the highest since March 27, 2009.
In its final meeting of 2010, the FOMC kept its federal funds rate target at a range of 0% to 0.25% and kept its QE2 Treasury purchase program unchanged at a buying pace of $75 billion per month, helping to push rising Treasury yields even higher.
"Since QE2 launched in November, the rate markets have been the anti-graffiti walls fighting back against Fed policymakers," wrote Guy LeBas, chief fixed income strategist at Janney Capital Markets. "It appears the bond buying spree hasn't done all that much to cause inflation, but rising real yields mean that the policy is proving neither reflationary nor stimulative. While we still believe a final amount of QE2 purchases in the $1 trillion area would be more appropriate to stave off deflation risks, this program may end up as little more than a teaching session for the Fed, the lesson being 'don't fight the markets.'"
In the Treasury market, the benchmark 10-year note was quoted recently at 3.44% after opening at 3.27%. The 30-year bond was quoted recently at 4.51%, after opening at 4.40%. The two-year note was quoted recently at 0.64% after opening at 0.58%.
Tuesday's triple-A muni scale in 10 years was at 93.9% of comparable Treasuries and 30-year munis were at 106.4%, according to MMD. Meanwhile, 30-year tax-exempt triple-A general obligation bonds were at 112.8% of the comparable London Interbank Offered Rate.
In economic data released Tuesday, producer prices jumped 0.8% in November, led by a 2.1% increase in energy goods prices, while core prices, which exclude food and energy, increased 0.3% on rising prices for new autos.
Economists expected producer prices would rise 0.6% and core prices would increase 0.2%, according to the median estimate from Thomson Reuters.
Retail sales increased 0.8% in November as sales excluding autos jumped 1.2%, the strongest gain since March.
Total October sales increased 1.7%, revised higher from the 1.2% gain reported last month. It was the strongest month for retail sales since March.
Retail sales excluding autos grew 0.8%, following a similar gain last month. A core reading of retail sales, excluding autos, gas and building materials, increased 0.9% in November.
Economists polled by Thomson Reuters expected retail sales and sales excluding autos to increase 0.6% for the month, according to the median estimate.
Business inventories increased 0.7% in October. Business sales increased 1.4% for the month. Retail inventories fell 0.6%.
Economists expected business inventories would rise 1.0% for the month, according to the median estimate from Thomson Reuters.
Previous Session's Activity
The most actively traded security in the state yesterday was taxable La Habra Utilities Authority 7.553s of 2040, which traded 70 times at a high of 102.875 and a low of 101.500.
