NEW YORK – Tax-exempt yields followed Treasury yields lower Friday as investors fled to safe haven assets after a slew of bad economic data.
But while munis generally follow Treasuries, some traders noted muni yields could rise as traders hit a wall with near record low rates and on an expected increase in supply in the next few weeks.
“This is bad,” a New York trader said. “Some trades are going off, but coupled with this calendar, say goodnight to munis.”
He added that muni yields can’t follow Treasury yields any lower. “People don’t care anymore. June rollover supply is coming, the 30-day visible supply jumped to $12 billion, and secondary supply is at an all-time high.”
On Friday, the trader said, participants couldn’t get a cash bid. “There is some buying, but people with the pulse of the market are giving good counters to bids.”
Munis were firmer Friday and for the week, according to the Municipal Market Data scale. Over the course of the week, the 10-year yield dropped eight basis points while the 30-year dropped 10 basis points.
On Friday, the 10-year yield dropped four basis points to 1.75%, remaining eight basis points above its record low of 1.67% set Jan 18. The 30-year yield dropped four basis points to 3.04%, setting a new record low as recorded by MMD. The 3.04% yield beat the previous record of 3.05% set May 14. The two-year yield fell one basis point to 0.32%.
Fueled by the risk off trade, Treasuries rallied sharply, pushing yields to record lows. The benchmark 10-year yield dropped 11 basis points to 1.46%, closing only one basis point above the record low of 1.45% set in the morning. The 30-year yield plunged 13 basis points to 2.52%, also setting a new record low. The two-year yield fell one basis point to 0.26%.
Bad economic data started with non-farm payrolls, which rose 69,000 in May, coming in well below the 150,000 gain expected by economists. The unemployment rate subsequently moved up to 8.2%.
Personal income rose $31.7 billion or 0.2% in April, coming in short of the 0.3% increase economists had expected.
ISM manufacturing index fell to 53.5 in May from 54.8 in April. The drop was worse than the slip to 54.0 economists had expected.
In the secondary market Friday, a sample of trades compiled by data provider Markit showed firming.
Yields on Pennsylvania 5s of 2022 dropped four basis points to 1.96% while Illinois Finance Authority 5s of 2021 dropped three basis points to 2.50%.
Yields on California 5s of 2018 and University of Central Arkansas 4s of 2041 each fell two basis points to 1.62% and 4.07%, respectively.
Looking ahead to next week’s market, $9.61 billion is expected to be issued, up from this week’s revised $3.73 billion. In the negotiated market, $7.53 billion is expected to be priced, up from this week’s revised $1.96 billion. On the competitive calendar, $2.08 billion is expected to be auctioned, up from this week’s revised $1.77 billion.
