Treasury yields continued to rise Thursday afternoon following a report by the U.S. Labor Department that showed unemployment claims fell last week. Munis largely avoided the weakening, remaining steady to somewhat softer.
The municipal market is benefitting from the absence of traders and brokers who are on vacation this week, insulating munis from possible weakening associated with treasury movement. Without active participants, yields on tax-exempt bonds have largely remained steady even as Treasury rates weaken, market observers said.
Initial unemployment claims fell 42,000 to 338,000 in the Dec. 21 week. This decline came after two periods of highly elevated claims. There also is a chance that claims will dip again during the Christmas week, given the mid-week holiday causing offices to be partly staffed.
Continuing claims were up 46,000 to 2.923 million in the week ending Dec. 14, higher than the 2.765 million reported in mid-November and a 2.795 million November average, suggesting a slower labor market.
The 10-year Treasury yield reached 3% after a jump of a basis point. Yields on two-year and thirty-year Treasuries rose by two basis points each, to 0.42% to 3.92%, respectively.
"The only thing we're seeing right now is a reaction in Treasuries, which have been down every day this week," a trader in New Jersey said in an interview. "With the Treasury and taper headlines, you'd think we'd slide a little bit, but a lot of people have closed the books for the year."
Year-end silence isn't always the case, the trader pointed out. At the end of last year, the market was affected by expiring George W. Bush-era tax cuts.
"There's nothing like that and I still think there's money to be had in the front of the curve, which is going to be pretty steady," the trader said.
According to the Municipal Market Data triple-A scale, yields on bonds maturing on the short end of the curve softened. Bonds maturing from 2016 to 2019 rose one basis point, as well as bonds maturing in 2023. Bonds with all other maturities were unchanged.
"The drop in jobless claims prompted more selling," according to a report by IFR Markets. "But there were too few players around to move prices all that much."
Traders and brokers agreed that municipals will soften in a manner similar to Treasuries have once the market becomes active again.
"I do at some point expect munis to catch up to treasuries at some point if they keep selling off the way they are," a different New Jersey-based trader said in an interview. "Likely when the primary comes back in January."
Even given the very quiet market, the trader said there was still demand for Puerto Rico bonds.
"We're doing a lot of Puerto Rico today, with low dollar out long and short end insured stuff," he said. "The belly of the curve is a little bit inverted, and the COFINA stuff is tightening up a little bit."
The commonwealth is ready to adopt an overhaul of its teacher's pension system as the government there looks to retain an investment grade rating.
"Reforming the commonwealth's teacher pension system is an important step forward in making the structural changes Puerto Rico needs to strengthen its long-term fiscal health," García Padilla said.
The proposed reform plan would increase employee contributions and raise the retirement age for future teachers to 62 from 55.
Puerto Rico bond yields have soared this year on the secondary market amid investor concern over the commonwealth's persistent budget deficits and weak economy. Moody's Investors Service this month put Puerto Rico on review for a downgrade, naming the reform of the teachers' pension system as one of five things that it would keep an eye on during the review period.
Under the reform legislation, current employees will be switched into a hybrid defined benefit/defined contribution plan, with their future pension accruals going to the contribution side. Benefits from the latter will be paid out on retirement as a lifetime annuity. Employee contributions will increase to 10% from 9% of earnings.
Analysts said the pension overhaul represented progress as Garcia Padilla looks to shore up the commonwealth's finances. Some teachers' unions, however, are threatening to go on strike over the new rules.
Bond trading in the secondary market was mixed, according to data from Markit after bonds were mixed Monday.
Massachusetts highway grant bonds with a 5% coupon maturing in 2022 lost two basis points to 2.62%, and Florida Educational Facilities bonds maturing in 2043 with a 6.125% coupon fell two basis points as well to 7.25%.
California state general obligation refunding bonds with a 5% coupon maturing in 2022, as well as New York GOs, strengthened by a basis point to 3% and 3.36%, respectively.
Virginia Commonwealth transportation revenue bonds with a 5% coupon in 2026 jumped five basis points to 3.43%, and Atlanta airport revenue bonds with a 5% coupon in 2028 gained two basis points.
The trader added that continued selling of taxable swaps on Puerto Rico bonds makes the products more appealing to some investors.
In other economic news, the Treasury Department said Thursday it will sell $20 billion of four-week discount bills Monday. There are currently $59.002 billion of four-week bills outstanding. The bills settle Jan. 2, 2014, and are due Jan. 30, 2014.
The Treasury said it also would auction $30 billion 91-day bills and $26 billion 182-day discount bills Monday. The 91s settle Jan. 2, 2014, and are due April 4, 2014 and the 182s settle Jan. 2, 2014, and are due July 3, 2014.
Currently, there are $49.997 billion 91-days outstanding and no 182s.