NEW YORK – Amid a rallying Treasury market and weaker-than-expected economic data, municipal yields plunged to record-low levels, picking up a streak interrupted only halted by Monday’s flatness.
Traders said tax-exempt yields were lower by five to seven basis points overall, following surging Treasuries..
“We were firmer early on today, but we’re extending the gains,” a trader in Los Angeles said. “We should definitely be setting some records again.”
The Municipal Market Data triple-A scale yielded a record-low 2.23% in 10 years and 3.34% in 20 years Tuesday, also a record-low, following 2.29% and 3.39% Monday. The scale yielded an all-time low of 3.70% in 30 years Tuesday, following 3.75% Monday.
Though yield levels were unchanged Monday, Tuesday’s levels mark the 11th all-time low in 10-year munis set in the past 13 sessions. Also, 20- and 30-year tax-exempts reached record lows for the third time in four sessions.
Tuesday’s triple-A muni scale in 10 years was at 89.6% of comparable Treasuries and 30-year munis were at 104.2%, according to MMD, while 30-year tax-exempt triple-A general obligation bonds were at 115.6% of the comparable London Interbank Offered Rate.
Also, a dozen municipal bond exchange-traded funds representing 43% of the muni ETF industry's $7.8 billion in assets hit 52-week highs today.
Municipal ETFs strive to replicate the returns on a target index, offering a theoretical real-time proxy for investors' assessment of where municipal indexes are heading. ETFs hitting annual highs today include two funds tracking Build America Bonds, funds following the Barclays Capital AMT-Free Long Municipal and the Barclays Capital Municipal Managed Money Indexes, two short-term indexes from Barclays and Standard & Poor's, and three Standard & Poor's indexes tracking bonds maturing respectively in 2014, 2015, and 2016.
The Treasury market rallied Tuesday on heightened concerns about the economy, following much weaker than expected economic data. The benchmark 10-year note was quoted recently at 2.49% after opening at 2.60%.
The 30-year bond was quoted recently at 3.55% after opening at 3.66%. The two-year note was quoted recently at 0.47% after opening at 0.48%.
The Treasury Department today auctioned $37 billion of two-year notes with a 3/8% coupon at a 0.498% yield, a price of 99.76. The bid-to-cover ratio was 3.12. The Fed banks also bought $905.9 million for their own account in exchange for maturing securities.
In the California new-issue market Tuesday, JPMorgan priced $525.6 million of revenue bonds for the Southern California Public Power Authority.
The bonds mature from 2011 through 2030, with yields ranging from 0.45% with a 3% coupon in 2012 to 3.77% with a 5% coupon in 2030. Bonds maturing in 2011 were decided via sealed bid.
The bonds, which are callable at par in 2020, are rated AA-minus by both Standard & Poor’s and Fitch.
JPMorgan also priced $289.3 million of taxable pension obligation bonds for Sonoma County, Calif.
The bonds mature in 2010, from 2013 through 2018, and in 2029. Yields range from 0.555% in 2010 to 6.00% in 2029, all priced at par. The bonds were priced to yield between 40 and 185 basis points over the comparable Treasury yields.
The bonds, which contain an unspecified make-whole call, are rated AA-minus by Standard & Poor’s and AA by Fitch.
In economic data released Tuesday, existing home sales fell by a record 27.2% in July to a seasonally adjusted annual rate of 3.83 million units, representing a 12.5 month inventory of units, another record.
The 3.83 million unit rate is the lowest sales pace since 1995 while the 12.5 month inventory of existing home sales is the largest since at least 1999 when NAR altered the way it compiled housing statistics. The last time inventories approached July’s levels was in 1982, when inventory of single-family homes reached 13.8 months.
Economists polled by Thomson Reuters expected 4.70 million existing home sales.
Diane Swonk, chief economist at Mesirow Financial wrote in a note to investors that the “bottom line is the economy is weak, and flirting with a double dip.”
“Without a more demonstrative pickup in growth in the next few weeks, the [Federal Reserve] could be back in the game of buying assets soon, regardless of dissent in its ranks,” she wrote. “The next [Federal Open Market Committee] meeting is scheduled for September 21, 2010, and it is likely to be a market moving event.”
Previous Session's Activity
The Municipal Securities Rulemaking Board reported the most actively traded security in the California municipal market Monday was California 4.6s of 2032 that traded 75 times at a high of 94.016 and a low of 92.766.
