Investors said they expect the municipal market to hold its ground, even if Friday's Employment Situation Report shows a pickup in the economy.
Reaction probably would be muted because Federal Reserve chair Janet Yellen indicated earlier this week that she won't raise interest rates in the near future.
"We don't think the economic numbers coming out are generally going to force Yellen to do anything more aggressively more quickly," a trader in New York said.
Investors had expressed some anxiety about the employment situation report. They pointed out that the Fed has said the strength of upcoming economic data will contribute to its decision on rates and that the economy may be stronger than January and February's data indicated, because the numbers may have been distorted by the severe weather in those two months.
"The headline numbers [in past economic reports] were strong, but the underlying info was not nearly as strong, in some cases a bit weaker," Brian Rehling, chief fixed-income strategist at Wells Fargo, said in an interview last week. "The market is looking deeper into those reports than headline numbers."
The trader said the numbers coming out now are important because they will show whether the economy is strong or mediocre, though he also doubts they will move the market.
"Yellen seems to want to focus on a number of economic statistics coming out of the labor market," he said. "As long as inflation is not getting out of hand, I think it will be considerable time before she does anything dramatic."
Rehling said that while he does expect interest rates to rise gradually, he does not expect them to increase much in the second quarter.
"I do think the short-term interest rates will stay relatively contained," he said in an interview on Wednesday.
The municipal market weakened Wednesday, following the Treasury market, which began selling off after the ADP Employment report announced private payrolls for March rose to 191,000 from 178,000 in February.
"The size of the down trade post-ADP suggests, however, that some accounts used Wednesday morning to enter new shorts ahead of Friday's data," Janney Capital Markets said in a report released on Thursday.
Treasury yields rose across the curve with the two-year note increasing two basis points to 0.47%, the 10-year by six to 2.82% and the 30-year by five to 3.65%.
"Interest rate markets were under pressure in Wednesday trading, as the set-up for Friday's nonfarm payrolls release continued," Janney said in its report.
By Thursday muni yields on the long end had already started to rebound, however, with yields on bonds maturing in 23 to 25 years falling one basis point, and from 26- to 30-years dropping by two, according to Municipal Market Data.
Yields on the short and intermediate parts of the curve were steady with the two-year remaining at 0.41%, the five-year at 1.31% and the 10-year at 2.55%, Municipal Market Advisors data says.
Michael Schroeder, president and chief investment officer of Wasmer, Schroeder & Co., said in an interview at The Bond Buyer's National Municipal Bond Summit in Miami last week that investors who do want to protect themselves against potential rising interest rates should adopt a barbell strategy.
"Our portfolios have a substantial amount of bonds maturing in the first five years of the yield curve," Schroeder said. "With the expectation of a little bit of flattening of the yield curve, short-term rates rising a little more, long-term rates staying about where they are, we'll probably extend duration and maybe do a little bit of barbelling."
Bonds in the belly of the curve, around five years out, are currently overvalued, Schroeder said. Instead, WSC portfolios will focus on bonds in the 11- to 15-year range, as well as in the very short term, where Schroeder said value can still be found in certain revenue bonds.
Trading was light on Thursday as investors prepared for Friday's report, a trader in Dallas said, adding that "there is a great deal of anticipation going into tomorrow's job report." A West Coast trader said a lack of activity in the primary and secondary market on Thursday "could be people holding off for tomorrow's number."
A part of the largest deal of the week, a two-fold University of California deal totaling $968.2 million of tax-exempt and taxable bonds, was priced Thursday. Wells Fargo Securities brought $556.7 million of tax-exempt bonds to market. Yields ranged from 0.15% with a 4% coupon in 2015 to 4.21% with a 5% coupon in 2049. The bonds mature serially from 2017 to 2034, with terms in 2034, 2044 and 2049. The bonds are callable at par in 2024.
"A year in a half or two years ago, California spreads were much wider," the New York trader said. "Those spreads really tightened, which is an indication of a better perception and reality of California's improved credit quality."
Goldman, Sachs & Co is the lead underwriter for the taxable bonds, while Wells Fargo is joint book-runner. An indication of interest period was expected Wednesday. The deals are rated Aa2 by Moody's Investors Service and AA by Standard & Poor's. "If you want a California credit with good credit quality, this deal will probably suit your needs," the trader in New York said.q
Treasury yields for the two-year note fell one basis point to 0.46%, three basis points to 2.79% for the 10-year and three to 3.62% for the 30-year.
