NEW YORK – A drop in unemployment to 8.5% wasn’t enough to rally stocks as hopes of a recovery were short lived. Treasuries and munis were firmer Friday and throughout the week and many expect the trend to continue. With lack of supply and $20 billion of January reinvestment money flooding back to the market, demand for munis could be strong.
Throughout the week, muni yields fell up to ten basis points across the curve, according to the Municipal Market Data scale.
On Friday alone, yields inside the five-year were flat while yields on the six-year to nine-year fell one basis point. The 10-year to 11-year yield dropped two basis points and the 12-year year plummeted four basis points. The 13-year to 19-year yields plunged the most, falling six basis points. The 20-year yield dove five basis points while yields outside the 21-year maturity dropped four basis points.
For the week, the two-year yield closed flat at 0.42% for its fourth consecutive trading session. The 10-year yield closed down three basis points to 1.85% and the 30-year fell seven basis points to 3.50%.
Treasuries strengthened Friday after weakening earlier in the week. The benchmark 10-year yield fell three basis points to finish at 1.97%. The 30-year yield fell four basis points to close at 3.02% on Friday. The two-year yield finished flat at 0.27%.
And while the tax-exempt market was stronger Friday, traders said the big players weren’t participating.
“There is a lot of internal distribution going on,” said a trader in Chicago. “There are various firms and retail systems, but I’m not seeing a tremendous amount of institutional activity.”
He added a decent amount of institutional customers don’t like the market and at some of the retail shops, there is still cash to put to work. “To get the yields that retail finds attractive there is some extending going on. People continue to take call risk and next week is a more taxable slate, so supply is still going to be constrained.”
The Chicago trader added that institutional players aren’t getting into the market for a few reasons. “Would you rather buy a 10-year muni at 2% or take a shot at some technology stock? If you’re capital preservation and that’s you’re only goal, munis make sense,” he said. “But if you need capital appreciation and income, there are other asset classes that give you better potential.”
One bearish trader in New York said the muni rally this week may not be sustainable.
“It’s quieter Friday,” he said. “People are tired. Even though it is short, it felt like a long week.” He added munis have “come so far, so quick” that it is “natural to have a breather.”
In the secondary market Friday, trades reported by the Municipal Securities Rulemaking Board showing firming during the week.
Bonds from an interdealer trade of Detroit Water Supply Systems 5.25s of 2041 yielded 5.04%, 19 basis points lower than where they traded the week prior. Bonds from another interdealer trade of New York Liberty Development Corp. 5s of 2041 yielded 4.08%, nine basis points lower than where they traded the week prior. A dealer sold to a customer Allegheny County, Pa., Sanitary Authority 5s of 2021 at 2.08%, two basis points lower than where they traded the week before.
Municipal bond funds saw their fifth consecutive week of inflows, with $523 million of net inflows for the week ending Jan. 3, Lipper FMI said. This is after $362 million of net inflows for the week ending Dec. 28.
“These inflows come as no surprise,” said MMD’s Daniel Berger. “There is little doubt that January re-investment needs estimated at approximately $20 billion should, by far, outstrip issuance during the next few weeks. Another hint of muni inflows was the modest flattening of the muni yield curve. With more retail fund buyers, there could be more demand in the longer end of the muni market and during this heavy reinvestment period the muni curve is likely to see flattening in the foreseeable future.”
Looking ahead to next week, the municipal market can expect almost $4 billion to come to market, up from a revised $384.9 million this week. In the negotiated market, $2.15 billion is expected to be priced, up from a revised $204.3 million. On the competitive calendar, $1.83 billion is expected to be issued, up from this week’s revised $180.5 million.
