NEW YORK – After an amazing rally in the municipal market, it appears tax-exempts are facing headwinds Thursday. After yields fell double digits in the past week, customers have purchased enough and are looking to sell.
“There is a very different tone in the market today,” a trader in New York said. “Several customers are putting out large bid-wanted lists and dealers are starting to look for bids for inventory, which could be a sign that the market is starting to feel like the music is slowing down.”
However, this trader added, “It’s still early and could reverse, but the market has opened with a dramatically different feeling than when we left last night.”
Indeed, muni were weaker Thursday morning, according to the Municipal Market Data scale. Yields inside four years were steady. Outside five years, yields rose between one and four basis points.
Wednesday, the 10-year and 30-year muni yields continued to break record lows for the sixth consecutive trading session. Since that streak began on Jan. 10, yields have fallen 15 and 25 basis points, respectively.
The 10-year yield closed down two basis points to 1.67%, beating the previous record of 1.69% as recorded by MMD Tuesday. The 30-year dropped two basis points to 3.15%, beating the previous record of 3.17% registered on Tuesday. The two-year closed steady at 0.35% for its fourth consecutive trading session.
Treasuries were much weaker in Thursday morning trading. The benchmark 10-year yield rose four basis points to 1.94% and the 30-year yield rose six basis points to 3.01%. The two-year was steady at 0.23%.
In the primary market, Goldman, Sachs & Co is expected to price $173.4 million of Alaska general obligation refunding bonds. The credit is rated AAA by Moody’s Investors Service, AA by Standard & Poor’s and AA-plus by Fitch Ratings.
Morgan Stanley is expected to price $160 million of Fairfax County, Va., public improvement refunding bonds, rated triple-A by the rating agencies.
In economic news, consumer prices were unchanged in December following a flat November. Core consumer prices, which exclude food and energy, rose 0.1% in December, after rising 0.2% in November, the Labor Department said.
Economists had predicted that both the CPI and core consumer prices would rise 0.1%.
“Thanks to the third consecutive monthly drop in energy prices, headline CPI fell slightly during the fourth quarter,” wrote economists at RDQ Economics. “However, core CPI inflation decelerated only slightly and ended the year at 2.2%. Ultimately, inflation is a monetary phenomenon and our view is that monetary policy will push inflation higher over the next two years.”
In other economic news, housing starts fell 4.1% to 657,000 in December from 685,000 in November, the Commerce Department said.
Starts were well below the median 680,000 expected by economists.
“We would read nothing into this December drop in housing starts since it was entirely the result of a drop in multi-family housing starts in the Northeast,” RDQ economists said. “Our 2012 view on housing construction is that we will see a modest gain and we see nothing here to dissuade us from that view.”
Initial jobless claims fell 50,000 to 352,000 for the week ending Jan. 14. This decline was from the previous week’s revised 402,000, the Labor Department said. The 352,000 claims were much lower than the 385,000 expected by economists.
“Initial claims are volatile at this time of year and the plunge in claims in the second week of January is likely of no more significance than the surge in the first week of January,” economists at RDQ wrote. “Through the volatility, however, the four-week average of jobless claims has held below 400,000 for ten straight weeks.”
The Philadelphia Fed Index came in at 7.3 in January, up from 6.8 in December. While the region’s manufacturing sector expanded faster in January than the previous month, the index came in below the 10.0 reading economists had predicted.
“Overall manufacturing sentiment in the Philadelphia area improved in January, though by less than forecasts,” RDQ economists wrote. “As with the trend in jobless claims and the Empire State manufacturing survey, there is no indication of a slowing in job creation in January from the more solid pace reported for December.”
