NEW YORK – Muni yields climbed another eight to 10 basis points Friday, weakening for the fifth consecutive session as 30-year yields reached a two-year high.
"It’s selling based on fear and emotion, and those are hard things to refute with facts," said Duane McAllister, who manages a $450 million intermediate tax-exempt fund for M&I's Marshall Funds. "Only when you see yields rise to levels that are deemed too cheap that people will say, 'Enough is enough.' Unfortunately it doesn’t feel like we’re there."
The Municipal Market Data triple-A 10-year scale increased 10 basis points Thursday to 3.46%, the 20-year scale rose nine basis points to 4.89%, and the scale for 30-year bonds climbed seven basis points to 5.08%, its highest level since January 2009.
“We’re lacking liquidity right now,” a trader in Los Angeles said. “People who can afford to sit on the sidelines are sitting there, but those that have inventory to move are getting beaten up.”
Randy Smolik wrote in the daily MMD commentary that the muni market “continues its search for support.”
“The selling pressure was evident out of the chute with broker wires showing cuts to offerings,” Smolik wrote. “The weakness was solidified later in the session as another round of customer lists cleared at forced selling levels.”
Rick Taormina, a portfolio manager with J.P. Morgan Funds, said crossover buyers such as insurance companies and cash-rich corporations are beginning to notice the attractive rates on municipal bonds. He expects these buyers to begin taking advantage, and stabilizing yields.
Once that happens, he's hopeful the retail community will feel comfortable wading back into the market. Yields may already be high enough to satisfy retail investors, Taormina said -- they're just scared of putting money to work under such volatile conditions.
"We’re still looking for a bottom here, but things feel a little bit better because you’re starting to see other buyers enter the market," he said. "If you start to see NAVs in mutual funds stabilize that’s exactly what will prompt retail to come back in."
Friday’s triple-A muni scale in 10 years was at 104.2% of comparable Treasuries and 30-year munis were at 112.1%, according to MMD. Meanwhile, 30-year tax-exempt triple-A general obligation bonds were at 120.4% of the comparable London Interbank Offered Rate.
Treasuries showed some losses Friday. The benchmark 10-year note was recently quoted at 3.33% after opening at 3.30%. The 30-year bond was recently quoted at 4.53% after opening at 4.50%. The two-year note was recently quoted at 0.59% after opening at 0.58%.
In economic data released Friday, retail sales increased 0.6% in December, below economists’ estimates, as retail sales for all of 2010 increased by the largest amount in 11 years.
December sales excluding autos increased 0.5%. Sales excluding autos and gasoline stations increased 0.4% for the month.
Economists expected retail sales would increase 0.8% and sales excluding auto would gain 0.7%, according to the median estimate from Thomson Reuters.
Consumer prices rose 0.5% in December, led by a sharp rise in gasoline prices.
However, core prices, which that exclude food and energy costs, edged up only 0.1% for the second consecutive month.
While overall prices increased 1.5% from December 2010 to December 2009, core prices rose just 0.8% during that period. Price inflation for consumer goods during 2010 increased 1.6%, compared to a 0.4% decline in inflation for all of 2009.
Economists expected December consumer prices would rise 0.4% and core prices would rise 0.1%, according to the median estimate from Thomson Reuters.
Industrial production increased 0.8% in December, the largest gain since July, as unusually cold weather led to a surge in utilities output.
Capacity utilization rose to 76.0% from 75.4% in November.
Economists expected industrial production would increase 0.4% and capacity utilization would be 75.2%, according to the median estimate from Thomson Reuters.
The University of Michigan's preliminary January consumer sentiment index reading was 72.7, compared to the final December 74.5 reading.
Economists polled by Thomson Reuters had predicted a 75.4 reading for the index.
Business inventories increased 0.2% in November.
Business sales increased 1.2% for the month. Retail inventories were unchanged from November.
Economists expected business inventories would increase 0.7% for the month, according to the median estimate from Thomson Reuters.
Visible Supply
The Bond Buyer's 30-day visible supply fell $198.7 million to $8.516 billion. The total is comprised of $1.754 million of competitive bonds and $6.762 billion of negotiated bonds.
Previous Session's Activity
The Municipal Securities Rulemaking Board reported 56,340 trades of 17,387 issues for volume of $16.76 billion. Most active was New York City Transitional Finance Authority 5s of 2031 that traded 502 times at a high of 101.275 and a low of 98.472.
