Tax-exempts continued their quiet rally for a third day Friday, guided by a strengthening Treasury market initiated by the slimmest non-farm jobs gain in 2011.
“It’s been a steady grind higher with people wondering what they are going to do for munis in the coming weeks,” a trader in San Francisco said, referring to light supply.
Tax-exempt yields were flat to two basis points firmer Friday, according to Municipal Market Data’s triple-A scale.
Modest gains in the week pushed the 30-year muni yield to a fresh calendar-year low of 4.25%. The benchmark 10-year yield fell five basis points in the week to 2.60%, just one basis point from its 2011 low in mid-May. The two-year yield held at 0.44%, also a calendar-year low.
The 10-year Treasury yield fell as low as 2.95% after it was reported the economy added just 54,000 jobs to the economy in May, versus 232,000 in the prior month. Its yield finished the day where it started, at 3.02%.
MMD’s Randy Smolik noted the taxable market appeared indecisive as weak U.S. data contrasted with upbeat news that European sovereign debt issues could find near-term resolution.
The volatile trading, coupled with broad losses in the equity market, kept muni trading limited on Friday.
This week should provide better pricing guidance, as new supply is anticipated to jump to $4.68 billion from $2.3 billion last week, according to Ipreo and The Bond Buyer.
Traders say new-issue pricing should remain firm to strong as the market enters the summer reinvestment period, but secondary trading could be light as retail demand continues to wane owing to low nominal yields.
“Retail demand is falling off — they just aren’t excited with where yields are at,” the San Francisco trader said.
The iShares S&P National AMT-Free Bond Fund, a $2.1 billion exchange-traded fund, rose 0.13% Friday and 0.83% for the week, ending at $103.90.
But not is well in Muni Land. Outflows among muni mutual funds continued for the 29th consecutive week in the period ending June 1. The Lipper FMI data showed net outpourings of $436 million from muni funds that report their flows weekly, versus $296 million in the week before. Even high-yield bonds saw outflows of $44 million, breaking a three-week trend propelled by cross-over buyers anticipating credit spreads to tighten.
When weekly outflows fell to just $95 million three week ago, there was widespread speculation that funds would begin to see inflows and provide support for the muni market.
“Over the last few weeks however, outflows have been slowly increasing,” noted Chris Mauro, director of muni research at RBC Capital Markets. He estimated that total outflows since November now total close to $50 billion.
The San Francisco trader said the outflows have, at least, created opportunities in the marketplace that would otherwise be absent considering how light issuance has been.
“The best thing that ever happened to the muni bond market was for Meredith Whitney to come out with what she said,” the trader added, referring to the Wall Street analyst’s call for massive muni defaults. “It created opportunities to buy in the market place. Without that outflow from mutual funds, the market would have completely seized up without any new issue supply.”
ECONOMIC DATA
Weak labor data was the clear trigger for Friday’s flight to safety.
The economy added just 54,000 jobs in May, versus 232,000 in the prior month, according to the Bureau of Labor Statistics. Private sector payrolls rose 83,000, a pitiable figure compared to the 251,000 gain a month before.
“The slowdown in job creation reflected weakness across the board,” said economist Nigel Gault at IHS Global Insight. “Supply-chain problems from Japan’s natural disaster probably explain the 3,000 jobs lost in autos, but that was a trivial contributor to the overall slowdown.”
Several economists spoke of the possibility of the U.S. economy entering a double-dip.
“There is now little doubt that economic growth hit a major headwind in May,” said analysts at RDQ Economics. “The one silver lining in this report was the increase in factory hours worked, which points to a solid gain in manufacturing activity in May, but the rest of the report screams slowdown.”
Meanwhile, the Institute for Supply Management’s non-manufacturing index beat the Street’s expectations, rising to 54.6 in May from 52.8 in April. The index tracks the services, financial, and construction sectors.
The employment component rose to 54 in May from 51.9 in April.
“For the first time in three months, the U.S. non-manufacturing ISM rose, an encouraging sign that the U.S. economy has not fallen off a cliff,” said economist Jennifer Lee from BMO Capital Markets. “For non-manufacturers at least, activity did rebound somewhat in May.”
