The tax-exempt market ended weaker on Friday, following Treasuries, on positive news out of Europe and better than expected GDP numbers.
Traders said munis initially hesitated to follow Treasuries but increasing resistance to record-low yields combined with a surging stock market helped push tax-exempts lower.
The risk-off trade started with reports that gross domestic product increased at an annual rate of 1.5% in the second quarter, outperforming economists’ expectations of 1.4%. “Real GDP growth was weak in the second quarter but no weaker than expected, while growth over the four quarters ended in the first quarter of this year was revised a little higher to 2.4% from 2.0%,” wrote analysts at RDQ Economics.
Treasuries led fixed-income assets lower as the benchmark 10-year yield soared 12 basis points to 1.55% and the 30-year yield spiked 14 basis points to 2.63%. The two-year rose two basis points to 0.26%.
Munis followed suit as tax-exempt yields rose, breaking a 24-session streak of steady to firmer munis. Yields inside four years were steady while yields outside five years climbed between two and five basis points.
On Friday, the two-year yield held steady at 0.29%. The 10-year jumped four basis points to 1.64%, finishing above its record low as recorded by Municipal Market Data of 1.60% set Thursday. The 30-year yield climbed five basis points to 2.84%, finishing above its record low of 2.79% set Wednesday.
Weaker munis on Friday snapped a 24-session streak of steady or stronger trades. Since that most recent rally started on June 22, the 10-year yield fell 26 basis points while the 30-year yield plunged 37 basis points. By afternoon trading, the market was showing signs of slowing. “Nothing is going on,” a New York trader said. “It’s a Friday in munis.”
“There was firmer trading this morning and then it quieted down,” a second New York trader said. “I think the week is over. Munis might be following Treasuries a little but there is not a lot going around. It may be off one or two basis points depending on what it is.”
He added that this week’s supply of an estimated $5.62 billion should not scare off investors. “The big deal this week is a New York deal and then away from that there is not a lot of supply,” he said. “And there is still August reinvestment money that will hit, and it’s not as big as June or July but it should still be OK as long as Treasuries don’t fall totally out of it.”
In the secondary Friday, trades compiled by data provider Markit showed mostly weakening. Yields on Little Elm, Texas, Independent School District 5s of 2042 jumped six basis points to 3.00%. Yields on Dormitory Authority of the State of New York 5s of 2040 and Georgia Road and Tollway Authority 5s of 2017 rose four basis points each to 2.93% and 0.85%.
Other trades were firmer. Yields on Pennsylvania Turnpike Commission 5.125s of 2040 fell five basis points to 3.67% while Ohio’s Buckeye Tobacco Settlement Financing Authority 6.5s of 2047 dropped two basis points to 7.47%.