NEW YORK — The Federal Reserve has spoken, and Treasury yields have reacted, flattening the curve. As of early Thursday, municipal yields are definitely following them, pushing lower from levels already wallowing in the trenches.
With little in the secondary market, and investors snapping up most new issuance quickly, there is incredible buying interest amid little product. Dealers, in turn, are holding onto bonds. Inventory is proving difficult or expensive to replace in this environment, a trader in New York said.
“Everyone is scrambling,” he said. “No one anticipated the overnight move to be as much. People’s perception is that we’re going to be here a long time.”
Muni yields were mostly much firmer across all but the front end of the curve to start Thursday’s session, according to the Municipal Market Data scale. Yields are steady out to four years. They are flat to nine basis points lower for maturities between five and eight years. Beyond that, yields are nine to 15 basis points lower.
The 10-year muni yield Wednesday fell three basis points to 2.09%, still up two basis points from the all-time low recorded early last week. The 30-year yield also dropped three basis points to 3.62%. The two-year yield stayed at 0.32% for a fifth straight session.
Treasury yields continue to firm across the curve. The benchmark 10-year Treasury yield, after falling eight basis points Wednesday to 1.86%, its lowest yield in many decades, has fallen another seven basis points to an almost unbelievable 1.79%.
The 30-year yield plunged 18 basis points Wednesday, settling at 3.02%. To start the morning, it has fallen another 13 basis points.
The two-year yield has inched down one basis point to 0.20%.
“Guys are going to reach for bonds,” the trader said. “The bid side’s up a solid 12 to 13 basis points, and there’s not a lot around to pay for.”
Furthermore, the time is ripe for new issues, wrote Alan Schankel, an analyst with Janney Capital Markets, in a morning research post. That’s because 10-year muni ratios to Treasuries reached 112%, after averaging 93% in 2011. At the same time, 30-year ratios jumped to 121%, based on MMD numbers.
“It’s an ideal environment for new issues,” Schankel wrote, “so most of this week’s $8.5 billion slate is being well absorbed with issues such as the $2.6 billion California GOs moving up sharply in post sale secondary trading.”
The trader agreed with the assessment. “Munis have gone up, and are probably are pretty safe at these percentages,” he said. “You probably don’t get nicked up too bad if there’s a reversal.”
The market expected a substantial increase in volume this week to $8 billion, significantly larger than the $4.6 billion weekly average this year. Last week saw a revised $6.2 billion of issuance.
The equities markets also had a strong and rapid reaction to the FOMC message, with all major indexes falling precipitously after announcements of the decision surfaced. The Dow Jones Industrial Average followed a 2.5%, 283-point-plunge Wednesday with a lousy opening. So far on the morning, it has nose-dived 3.33%, losing 370 points from the previous session’s close.
In economic news, the Labor Department reported Thursday that initial jobless claims fell 9,000 to 423,000 on a seasonally adjusted basis for the week ending Sept. 17. Continuing claims fell to 3.727 million for the week ending Sept. 10.
With the exception of a one-week drop to 399,000 in August, initial claims have now topped 400,000 every week since April. Economists polled by Thomson Reuters predicted 420,000 initial claims and 3.730 million continuing claims.
