Market Close: Munis Stay Light Ahead of Friday's Jobs Number

Amid a quiet session Wednesday ahead of the Independence Day holiday, dealers kept inventory light in anticipation of Friday’s employment situation report.

And while buying slowed to a crawl Wednesday, market participants said that attractive entry points exist for municipal bond investors, as muni-to-Treasury ratios are over 100% and new issue supply is down year-over-year, creating potential positive forces in the market.

“Ratios are nice, especially out 20 or 30 years,” an Ohio trader said. “However, after getting run over by a train two weeks ago, traders may have some hesitancy to position long duration paper ahead of important economic data coming Friday, especially given the substantial illiquidity due to the holiday-shortened week.”

Yields ended flat across the curve Wednesday in a shortened trading session. But a selloff over the past two months has pushed yields higher and muni-to-Treasury ratios closed above 100% across the curve.

Since May 1, the 10-year Municipal Market Data yield has jumped 90 basis points to 2.56% and the 30-year yield has climbed 104 basis points to 3.83%. The two-year has risen 21 basis points to 0.50%.

The 10-year Municipal Market Advisors yield has jumped 99 basis points to 2.72% and the 30-year yield has climbed 100 basis points to 3.95%. The two-year yield rose 21 basis points to 0.53%.

Muni-to-Treasury ratios on the short and intermediate part of the curve started May above 100% but fell throughout the month. By the beginning of June, the five-year and 10-year ratios had fallen to 93.1% and 98.1%, respectively. The massive selloff in June pushed ratios back up to 99.3% and 102.4% on the five- and 10-year, respectively.

Ratios on the long end look even more attractive heading into the second half of the year. As of July 3, the 20-year and 30-year ratios rose to 110.2% and 109.7%, respectively. That is up from 98% at the beginning of May.

In the last few sessions of June, investment grade municipal bonds as tracked by the S&P National AMT-Free Muni Bond Index recovered some of the June losses, rebounding 1.93% from a low of negative 4.97% on June 24. For the month, the index still finished a negative 3.04%.

Five-year non-callable bonds tracked by the S&P AMT-Free Muni Series 2018 Index saw yields jump from 1.29% at the end of May to 1.99% on June 25. Yields then fell 25 basis points to end the month at 1.74%.

Yields on the 10-year non-callable bonds in the S&P AMT-Free Muni Series 2023 Index started June at 2.64% and peaked at 3.46% on June 24. Yields then fell 37 basis points to end the month at 3.09%.

High-yield bonds suffered the most during the June selloff. The S&P Municipal Bond High Yield Index fell 4.73% in June as yields rose 78 basis points. Tobacco bonds led the fall, with the tobacco index returning negative 7.26% for June. The Puerto Rico index fell 5.27% for the month and Illinois finished down 3.18%.

Still, traders were cautious Wednesday. Trades compiled by data provider Markit showed a mix of strengthening and weakening.

Yields on California’s Golden State Tobacco Securitization Corp. 5.125s of 2047 fell six basis points to 6.96% and New York State Environmental Facilities Corp. 5s of 2019 fell four basis points to 1.78%.

Yields on Philadelphia Hospitals and Higher Education Facilities Authority 5.625s of 2042 and California 4.5s of 2030 slipped two basis points each to 5.88% and 4.31%, respectively.

Other trades were weaker. Yields on Hawaii 5s of 2019 rose three basis points to 1.99%.

Yields on New Jersey State Transportation Trust Fund Authority 5s of 2042 and Mesa, Ariz., 5s of 2032 increased one basis point each to 4.58% and 4.02%, respectively.

Wednesday, yields on the Municipal Market Data scale ended mostly unchanged across the curve. The 10-year and 30-year yields were steady for the fifth session at 2.56% and 3.83%, respectively. The two-year was flat at 0.50% for the sixth session.

Yields on the Municipal Market Advisors scale ended mostly flat as well Wednesday. The 10-year yield slipped one basis point to 2.72%. The 30-year yield was unchanged at 3.95% for the fourth session and the two-year was steady at 0.53% for the fifth session.

Treasuries ended weaker Wednesday. The benchmark 10-year yield rose four basis points to 2.51% and the 30-year yield increased three basis points to 3.50%. The two-year yield rose one basis point to 0.36%.

In economic news Wednesday, initial jobless claims fell 5,000 to 343,000 for the week of June 29. The claims were better than the 345,000 figure expected by economists.

“The initial jobless claims data continue to give an encouraging signal on the labor market as the four-week average in claims continues its fitful trend downwards,” the RDQ economists said. “At a minimum, these data suggest there has been no increased layoff activity among employers. However, the signal from jobless claims over the next few weeks could be overwhelmed by volatility due to auto shutdowns for retooling. In short, there are a lot of moving parts in next week’s claims data and it may be a few weeks before we begin to get relatively clean jobless readings again.”

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