After three weeks of rallying, municipal bonds finished the month with a soft week as the market remained largely unchanged Friday.
"There were a lot of things that kind of kept the market at bay today," a New-York based trader said in an interview. "You had a reasonable amount of volatility in Treasuries, you had auctions, and an emerging market dilemma in the background. Also, Bernanke's out and Yellen's in - what will that mean?"
Federal Reserve chairman Ben Bernanke held his final Federal Open Market Committee meeting Wednesday, when the Fed announced it would reduce monthly bond purchases by another $10 billion, effectively accelerating tapering. He will be succeeded by Janet Yellen, former president of the Federal Reserve bank of San Francisco.
Yields on 10-year AAA bonds jumped six basis points on the week, while 30-year bonds on the same Municipal Market data scale gained five basis points since Monday. Muni yields were unchanged Friday.
"The market has pushed enough this month to where yields now are at the point where customers are stepping back and being patient," the trader said.
This past week's weakening wasn't enough to erase gains from the previous weeks, though, with 10-year yields down 26 basis points to 2.53% since Jan. 2, and 30-year bond yields down 35 basis points.
"The market felt pretty weak yesterday and all of a sudden Treasuries went down," the trader said. "I think this morning's move maybe caught some people offside. With our market not trading, we just kind of sit here and underperform from Treasuries."
Treasuries yields dropped Friday morning, with the 10-year yield down to 2.67% and the 30-year yield at 3.61%. The 2-year yield also slid three basis points to 0.34%.
"There hasn't been a lot of new issue supply to focus on amid the volatility in the market," the trader said. "There were some trades today but it's been quiet in general."
Total sales this week reached $4.98 million, according to data from Thomson Reuters. Potential volume next week could reach $4.47 million, according to Ipreo and The Bond Buyer.
Friday also marked the day that Standard & Poor's Dow Jones Indices said it would remove Puerto Rico bonds from its S&P National AMT-Free Municipal Bond Index, saying the bonds are now trading at high-yield corporate levels.
"Puerto Rico municipal bonds also are experiencing varying degrees of liquidity in the secondary market," SPDJI said in a statement Thursday. "As a result, Puerto Rico municipal bonds no longer meet the objective established by this investable investment grade index."
The average yield of bonds in the S&P Municipal Bond Puerto Rico Index has fallen seven basis points to 7.33% so far this year, SPDJI said in its statement. The total year-to-date return is 2.3%, with the lowest yield reaching 7.19% on Jan. 24.
By comparison, investment grade bonds tracked in a separate SPDJI index returned 2.1% so far this year.
Economic news this week was led by an initial jobless claims report Thursday, which climbed 19,000 to 346,000 in the week ended January 25, the Labor Department. Claims for the week ended Jan. 18 were revised up to 329,000 from the initially reported 326,000.
