NEW YORK – Long-end munis showed significant losses again Thursday, as the overall municipal market weakened for the fourth straight session, with 30-year yields rising to a two-year high.
Traders said tax-exempt yields were weaker by three to five basis points inside 20 years and by about 10 basis points out longer.
“The long end got crushed again,” a trader in Los Angeles said. “It’s another 10 basis points or so weaker 20 years on out. There is just very poor liquidity out there right now.”
The Municipal Market Data triple-A 10-year scale increased five basis points Thursday to 3.36%, the 20-year scale rose 12 basis points to 4.80%, and the scale for 30-year bonds climbed nine basis points to 5.01%, its highest level since Jan. 2009.
In the daily MMD commentary, Randy Smolik wrote that forced selling caused distressed sales in intermediates and long bonds, noting “the Street was mostly bidding at pothunter levels.”
“Many dealers are holding back purchases until retreating levels start shutting off the selling,” he wrote. “Their caution caused the muni market to fall in the same illiquidity trap we saw in the irrational market backups for mid-November and mid-December. Some buyers are picking up their heads but obviously the selling pressure has not eased off yet.”
Amid the rising rates and market uncertainty, Bank of America Merrill Lynch priced $1.04 billion of school construction bonds for the New Jersey Economic Development Authority, downsized from an originally scheduled $1.9 billion. Yields were raised about 18 basis points from retail levels to complete the deal.
Bonds from the $777.5 million series of tax-exempt refunding debt maturing from 2014 through 2025 were offered with yields ranging from 2.40% with a 3% coupon in 2014 to 5.52% with a 5.25% coupon in 2025. The bonds are callable at par in 2021.
A $67.0 million series of SIFMA index refunding notes matures in 2018, yielding 180 basis points over the index. They are callable at par in 2017.
A $123.2 million series of taxable refunding notes, which mature from 2012 through 2015, with yields ranging from 2.14% in 2012 to 3.72% in 2015, all priced at par. The bonds were priced to yield between 125 and 180 basis points over the comparable Treasury yields.
The credit is rated Aa3 by Moody’s Investors Service and AA-minus by Standard & Poor’s and Fitch Ratings.
The evaporation of retail demand in the market is reflected in their withdrawals of cash from municipal bond mutual funds. Investors have redeemed $14.6 billion from municipal bond funds the past five weeks, according to the Investment Company Institute.
These flows have also been reflected in exchange-traded funds, a roughly $7.6 billion sector of the municipal market whose rapid growth the past few years began to slow late in 2010.
Wednesday, Vanguard announced it shelved plans to launch three municipal ETFs: a short-term fund, an intermediate-term fund, and a long-term fund.
The Valley Forge, Pa.-based money manager in June unveiled plans to be the lowest-cost ETF manager in the business, charging fees of just 12 cents out of every $100 of assets annually. Most other passively managed municipal ETFs charge 20 to 30 cents.
The fourth quarter was a rough period for municipal ETFs, with most funds’ shares underperforming their target indexes and suffering from “tracking error” – which is the phrase ETF managers use to describe failing to replicate returns on an index.
Thursday’s triple-A muni scale in 10 years was at 101.5% of comparable Treasuries and 30-year munis were at 111.6%, according to MMD. Meanwhile, 30-year tax-exempt triple-A general obligation bonds were at 119.6% of the comparable London Interbank Offered Rate.
Treasuries showed some gains Thursday. The benchmark 10-year note was recently quoted at 3.32% after opening at 3.37%. The 30-year bond was recently quoted at 4.50% after opening at 4.52%. The two-year note was recently quoted at 0.59% after opening at 0.60%.
In economic data released Thursday, producer prices rose 1.1% in December, led by a 3.7% increase in energy goods prices.
Core prices increased 0.2%, partly due to higher cigarette prices. Economists expected December producer prices to rise 0.8% and core prices, which exclude food and energy, to gain 0.3%, per Thomson Reuters.
Initial jobless claims surged 35,000 to 445,000 the week ending Jan. 8 as a backlog of holiday-delayed filings were processed.
The four-week moving average for new unemployment claims, a less volatile figure, rose 5,500 to 416,500,
Labor economists said the year’s first week often has the highest claims and does not reflect a cascade of new layoffs.
Economists expected 404,000 initial claims and 4.1 million continuing claims. Continuing claims fell 248,000 to 3.879 million for the week ending Jan. 1.
Visible Supply
The Bond Buyer's 30-day visible supply fell $518.7 million to $8.715 billion. The total is comprised of $2.100 million of competitive bonds and $6.615 billion of negotiated bonds.
Previous Session's Activity
The Municipal Securities Rulemaking Board reported 48,105 trades of 16,803 issues for volume of $12.50 billion. Most active was Missouri Health & Educational Facilities Authority 5.25s of 2032 that traded 227 times at a high of 99.550 and a low of 97.850.
