NEW YORK — Fears about the state of the U.S. and global economies fueled a municipal market rally to record levels Thursday.
Muni bond yields along most of the curve saw strong gains. The benchmark 10-year muni yield reached an all-time low.
The muni market overall, which finished a week of relatively well-received new issuance, is strong, a trader in California said. But there are still concerns about liquidity for all but the strongest credits, he added.
“There continue to be liquidity concerns, especially if you’ve got zero coupon bonds, or lower-credit-quality bonds, and you look at the Treasury market and think that you’re going to catch a good bid on your municipal bond position,” he said. “If you don’t have gilt-edged, high-quality municipal securities, you’re going to have difficult time trying to find decent liquidity.”
The stock market, which suffered under the weight of frightened investors, reacted to several signs Thursday. First, Morgan Stanley cut its global forecast and cautioned that the economies of the U.S. and Europe were drifting toward recession. Then the Department of Labor and others published some negative economic indicators. Traders noticed how the combination pulled nontraditional buyers over to munis.
But Municipal Market Data analyst Randy Smolik disagreed with the trader regarding the limits of Thursday’s rally. “We saw a broad rally in munis that not only encompassed cheaper quality names that had been performing poorly this week but also sub-$5-million blocks,” he wrote in a report on the day’s session. “This was not a rally that was being pulled by a crossover bid anymore.”
Tax-exempt yields saw impressive gains along most of the curve Thursday, according to the MMD scale. Bonds maturing through 2013 were flat. Debt maturing from 2014 to 2017 was two to eight points lower. Maturities beyond 2017 plunged six to seven basis points.
Munis yields plummeted across but the front of the curve on the day. The 10-year muni yield slipped seven basis points to 2.15%, its lowest level ever recorded on MMD. Its equivalent yield on the competing scale, Municipal Market Advisors, also reached a record low.
The 30-year muni yield also ticked down seven basis points to 3.78%, its lowest level since Oct. 25. And the two-year muni yield remained at 0.30%, its lowest yield in more than 40 years.
Treasury yields also fell across most of the curve. The benchmark 10-year Treasury yield fell seven basis points to 2.09%. It fell a few basis points below 2.00% briefly, a record, before softening.
The 30-year yield dropped 12 basis points to 3.44%. The two-year yield held steady at 0.20, two basis points above its all-time low.
Some large deals reached the markets Thursday. Volume this week should rise to around $5.28 billion from the minuscule $2.25 billion of municipal bond sales seen last week, according to industry estimates.
Leading off, Barclays Capital priced $400.2 million Regents of the University of California general revenue bonds in taxable and tax-exempt series. The bonds were rated Aa1 by Moody’s Investors Service, AA by Standard & Poor’s, and AA-plus by Fitch Ratings.
Yields for the first series, $355.3 million of tax-exempt 2011 series AB bonds, range from 0.30% priced at par in 2013 to 4.39% with a 5.00% coupon in 2041. Credits maturing in 2012 were offered in a sealed bid. Yields either increased or decreased by at most one basis point at repricing.
The spread to Treasuries for $44.9 million of taxable 2011 series AC bonds range from 60 basis points in 2013 to 160 basis points in 2041.
Goldman, Sachs & Co., priced $288.6 million of South Carolina Public Service Authority revenue bonds. The bonds are rated Aa3 by Moody’s, AA-minus by Standard & Poor’s, and AA by Fitch.
Yields range from 0.48% with a 5.00% coupon in 2013 to 2.70% with 4.00% and 5.00% coupons in a split maturity in 2021. The yields fell as much as seven basis points in repricing.
The major equities indexes are churning the markets once again, with all three down by at least 3.68% crossing noon. The Dow Jones Industrial Average plunged almost 420 points.
The day’s economic news showed a U.S. economy slowly gaining downward momentum. The Labor Department reported Thursday that initial and continuing jobless claims jumped higher than the estimates of one survey of economists. The Labor Department also reported that the consumer price index rose 0.5% in July on a seasonally adjusted basis, again higher than some economists predicted.
This month’s Federal Reserve Bank of Philadelphia Report on Business showed that the region’s manufacturing sector slumped in August, as the general business conditions index dipped to a number well below one survey of economists.
The National Association of Realtors reported Thursday that existing home sales fell 3.5% in July to its lowest level since November.
