The municipal bond market started off the holiday-shortened Labor Day week on a slow note as traders struggled throughout the day to find motivation to trade.
Activity is expected to remain muted throughout the week and so many economists turned their attention to Friday’s jobs report to see how it may impact the Federal Reserve’s September meeting next week and the possibility of more quantitative easing.
On Tuesday, one New York trader pondered how to provide color on a market that’s lacking. “There are a number of people who took off last week and are getting back into the grind,” he said. “Activity is just slow.”
With almost no primary issuance to provide direction, the secondary market struggled. “It looks to me like everyone has comfortable levels of inventory so no one is nervous about what they hold currently. But at the same time, there is not a lot that is driving consumption. Companies aren’t coming in that need to buy bonds. So were staying with the status quo,” the trader said.
The market was quiet in morning trading as well. “There is nothing going on,” a second New York trader said. “It’s too early. There has barely been a trade all morning.”
On Tuesday, the 10-year Municipal Market Data yield fell one basis point to 1.73%. The 30-year yield closed steady for the third session at 2.89% and the two-year closed at 0.29% for the 28th consecutive session.
The 10-year yield now remains only 13 basis points above its record low of 1.60% set July 26. The 30-year trades only 10 basis points above the 2.79% record low set July 25.
After strengthening in the morning on poor economic data, Treasuries ended Tuesday weaker. The two-year yield and the benchmark 10-year yield rose one basis point each to 0.24% and 1.58%, respectively. The 30-year was steady at 2.68%.
In the competitive calendar, Raymond James Morgan Keegan won the bid for $61.4 million of Frederick County, Md., general obligation public facilities taxable refunding bonds, rated Aa1 by Moody’s Investors Service, AA-plus by Standard & Poor’s, and AAA by Fitch Ratings.
Yields ranged from 0.44% with a 1% coupon in 2014 to 0.20% with a 1.66% coupon in 2020.
In the secondary market, trades compiled by data provider Markit showed strengthening. Yields on Montgomery County, Pa., Higher Education and Health Authority 3.75s of 2031 and Indiana State Finance Authority 5s of 2020 dropped three basis points each to 3.86% and 1.88%, respectively.
Yields on New York Liberty Development Corp. 5s of 2041 and De Soto County, Miss., School District 4s of 2017 fell two basis points each to 3.50% and 0.88%. Yields on New Jersey State Turnpike Authority 3.5s of 2030 fell one basis point to 3.50%.
With trading slow, market participants turned their attention Friday’s jobs report. Paul Edelstein, an economist at IHS Global Insight, said the jobs report will be closely scrutinized because of the implications it may have on the Fed choosing to provide additional stimulus at the Sept. 12 and 13 meeting.
Edelstein expects August jobs numbers to come in at 130,000 and the unemployment rate to stay at 8.3% — not enough to dissuade the Fed from deciding on further stimulus.
“In normal course of events, a weak jobs report would be bond market positive,” he said. “But an added dimension is that jobs number could sway the Fed next week. We are in a bit of a sweet spot where it doesn’t look like the economy is going over a cliff but it’s still weak enough that the Fed does something.”
He added the expectation that the Fed will provide more easing is already priced into the market. “The 10-year has been all over the map in August,” he said. “We came into the month with the Fed meeting where they didn’t do anything and the markets took that as they weren’t going to do anything in the future and bond prices tanked. Then the [Federal Open Market Committee minutes] and Jackson Hole came which were all QE3 positive and bond markets rallied. So it is priced in.”
Indeed, the 10-year Treasury yield jumped as high as 1.85% mid-August after starting out below 1.50% at the beginning of the month. Since then, the 10-year yield has fallen back down to the 1.56% range.
“We have to get a really strong jobs report on Friday — above 200,000 and a decline in unemployment — to induce the Fed to hold off in September,” Edelstein said. “And it seems highly unlikely.”
Other economists weren’t as confident that the Fed would act at the September meeting, but agreed that the bond markets had priced in additional stimulus.
“A lot of people have been pricing it in to the market, but personally I don’t think it’s likely to come in the short-run,” said Bob Eisenbeis, chief monetary economist at Cumberland Advisors, adding the rhetoric of the Fed has been the same recently of watching incoming data and monitoring new information. “One of those pieces of information will be the job number and I think it’s going to be interesting to see what that number looks like. But it will be more of the same.”
Eisenbeis added a number less than 150,000 will be disappointing to the market given the average jobs since October 2010 has been 152,000 a month. “While that’s not a rate of growth the Fed would like, I don’t see, given all the controversy of quantitative easing, that they are going to be able to do much. There are diminishing returns when it comes to the unconventional policies and the amount of action that needs to be taken is so great it’s infeasible.”