NEW YORK – Surprising economic data lifted equities Friday and pushed Treasuries south, especially on the short-end. Municipal bonds gave up some yield around the 10-year mark but held steady for most maturities.
“It’s the flight backwards after a flight-to-quality the previous week,” a trader in Chicago said. He said tensions have eased a bit as things get under control in Japan and Portugal, so money is leaving safe-haven markets and heading back into equities.
The Municipal Market Data scale showed muni yields backing up as much as three basis points in the belly of the curve, defined as bonds maturing between seven and thirteen years out. All other maturities were flat.
The 10-year muni yield backed up two basis points to 3.07% -- the highest borrowing cost since Feb. 23. The two-year yield remained at 0.63%, the highest since the March 11 earthquake in Japan. The 30-year bond yield stayed put at 4.73%, MMD said, after rising three basis points on Thursday.
Trading in the secondary market was described as “slower than slow” Friday.
“This whole week has been a little subpar as far as activity goes,” said a trader in New York. “There was a fair amount of selling yesterday but today it’s like a Friday in the summer.”
With no major supply on the final day of the week, munis received direction from Treasuries. The 10-year Treasury yield moved up three basis points to 3.45% and the 30-year bond yield climbed two basis points to 4.51%.
But demand for short-term munis remained strong, so yields remained flat despite a broader sell-off that pushed the two-year Treasury yield up six basis points to 0.76%
“It’s a safety thing,” the Chicago trader said. “Guys don’t know what to do with their money so they might as well stay short. So the question is, do you want to pay taxes or not?”
A trader in New York attributed the fixed-income sell-off to the morning’s surprising economic news: real GDP in the fourth-quarter was upwardly revised to 3.1%, versus forecasts that it would remain at 2.8%, as estimated a month ago.
An upswing in inventories was the main culprit for the growth, as shelf-accumulation during the quarter was revised to $16.2 billion from $7.1 billion. Corporate profits also came in higher than originally projected.
Revisions to state and local government spending dragged down growth, as did downward estimates for net exports, personal spending, and orders for non-durable goods.
One factor not playing a role in rising muni yields: next week’s supply figures.
The Bond Buyer calculated that municipal bonds expected to be sold next week total just $1.94 billion, compared with the $4.72 billion sold this week. The $1.9 billion figure, called “amazingly low” by the Chicago trader, would be the slimmest amount of munis sold since the first week of the year; excluding that, it would be the lowest since October 2008.
This week’s issuance was the most in a month and contributed to selling pressures.
“Although the past week’s new issuance was only moderately higher than past weeks, it was not easily absorbed,” wrote Alan Schankel at Janney Capital Markets in a morning note.
Money had flooded into Treasuries and munis in the wake of Middle East turmoil and the earthquake in Japan. As economists conclude that the impact on U.S. and European economies will be small, the flight-to-quality reversed, according to a Friday note from RBC Capital Markets.
Net outflows among municipal bond mutual funds continued for the 19th consecutive week with $640 million of assets departing in the period ending March 23, according to Lipper FMI on Thursday. This compares with $569 million of outflows in the prior week.
An analyst in New York said recent growth in equity markets could be enticing retail buyers to move money from muni mutual funds towards riskier assets like stocks.
In the nine weeks beginning mid-January, weekly outflows were continuously more than $1 billion. By comparison, the latest figures don’t seem so bad and liquidation fears have subsided, a Los Angeles trader said Thursday.
