Typically quiet, the Friday before Labor Day was instead full of activity, as Federal Reserve chairman Ben Bernanke said the Central Bank would provide additional accommodation if needed, while speaking at the annual symposium in Jackson Hole, Wyo.
Subsequently, muni yields followed Treasury yields lower. Traders said there was some buying and it was a good day for selling.
Fixed-income analysts read Bernanke’s comments with scrutiny and most arrived at the consensus that additional quantitative easing could come at the September Federal Open Market Committee meeting.
“Bernanke’s statements are fully consistent with our view that another round of easing is coming at the Sept. 12 meeting,” wrote Paul Edelstein, director of financial economics at IHS Global Insight. “Our expectation is that the Fed will at least extend its forward guidance for the fed funds rate into 2015 and will likely initiate QE3.”
Other economists agreed. “The Fed is going to ease further, likely with communication tools on Sept. 13,” wrote Michael Gregory, senior economist at BMO Capital Markets. “The odds of QE3 are building and will likely move into the most probable range by the turn of the year.”
Treasuries rallied, and munis followed. “Govies are higher,” a New York trader said. “There is some buying.”
“We are understaffed today so we are actually keeping busy,” one trader tweeted. “We are cleaning some off the books. It’s a good day for selling.” Trades can get done with a “little work at decent levels.”
On Friday, the 10-year Municipal Market Data yield and the 30-year yield closed steady at 1.74% and 2.89%, respectively. The two-year closed at 0.29% for the 27th consecutive session.
Over the course of August, muni yields ended higher. The 10-year finished eight basis points above the 1.66% yield on Aug. 1. The 30-year yield finished four basis points higher than where it started the month at 2.85%.
Treasuries posted strong gains on Friday. The benchmark 10-year yield plummeted six basis points to 1.57% while the 30-year yield plunged seven basis points to 2.68%. The two-year yield dropped four basis points to 0.23%.
In the secondary market, trades compiled by data provider Markit showed mostly firming. Yields on Connecticut Health and Educational Facilities Authority 5s of 2041 plummeted five basis points to 4.02%, while Wisconsin Public Finance Authority 5.25s of 2028 fell three basis points to 4.51%. Yields on Oklahoma City 5s of 2020 dropped two basis points to 1.49%.
While Standard & Poor’s dropped Illinois debt to A from A-plus, bonds issued by Illinois have not had a big reaction, according to JR Rieger, vice president of fixed-income indexes at S&P’s Dow Jones Indices. “Bonds issued by the state and municipalities within the state have so far held their own and have performed in line with the overall market,” he said.
The rest of the muni market has performed well year to date. Rieger said high-yield bonds continue to outperform, with the S&P Municipal Bond High Yield Index returning 13.1% year to date compared to the S&P National AMT-Free Municipal Bond Index which returned 5.54%.
Munis also outperformed the seven- to 10-year Treasury index, which returned 3.75%, and the 20-year-plus Treasury index, which returned 5.23% year to date.