The panicked aftermath of last week’s earthquake in Japan buttressed the municipal bond market on Tuesday as investors sought the protective sanctuary of high-quality dollar-denominated bonds.
The 10-year triple-A municipal bond yield sank seven basis points on Tuesday, according to the Municipal Market Data scale, while the 30-year yield dropped four basis points.
The flight-to-safety bid knocked down stocks and fortified Treasury bonds, which broadly speaking is good for municipals because of their long-term correlation with the Treasury market.
“Whenever the Treasury runs like this, there’s always a flight-to-quality bid and all the high-quality municipals are following suit right now,” a trader in San Francisco said. “It’s standard stuff.”
The flight-to-quality bid on Tuesday helped to firm a municipal market that has become rather jittery about just how much demand there is for tax-free debt.
Municipalities may very well close out the first quarter having issued less than $50 billion of bonds. Even amid such a sickly supply, one trader in California said the market until this week has been “pushing out at the edges of where we could get things done.”
The dip in yields helps to solidify demand a little.
“I don’t see a strong broadening out of the market, but I think we will get a little bit more demand in play here,” this trader said. “The headwinds are still too great for a real broadening out in municipals at this point.”
The flight to safety was more pronounced earlier in the day. The bid retrenched a bit later in the afternoon, after the Federal Reserve adopted a modestly more optimistic assessment of the economy.
The Fed shocked nobody in deciding to keep its target for short-term interest rates slightly north of zero. The pricing of interest rate futures contracts coming into today suggested zero probability of a rate hike at this meeting. Still, the Fed eased back on some of the cautionary language that had accompanied previous statements, suggesting the possibility of a rate hike at some point on the visible horizon.
“On balance, there appears to be slight shift in the policy statement towards the inflation risks we see as more substantial,” Guy LeBas, chief fixed income strategist at Janney Montgomery Scott, wrote in a report.
The market’s strength manifested in the pricing of the biggest deal of the day, which came from Wake County, N.C.
The county, which is rated triple-A across the board, commanded strong bids in the competitive auction for its $116.8 million general obligation bond sale on Tuesday. JPMorgan won the deal, with a bid representing a true interest cost of 3.36% for a series of bonds with an average life of 10 years. The deal’s maturities are spread out more or less evenly over the next 20 years.
The deal actually priced at lower yields than MMD’s triple-A scale at some of the shorter maturities. The five-year maturity priced at 1.68%, versus the closing triple-A yield of 1.69%. The 10-year piece priced at 2.92%, also a basis point lower than the scale.
