NEW YORK – Municipal bonds were weaker in early trading but the dynamic could change quickly as a weak consumer sentiment survey cut gains in the stock market and drove money into Treasuries.
The University of Michigan’s consumer sentiment survey plunged 7.7 to 63.8, its lowest level in 16 months.
BMO economist Jennifer Lee called the decline “totally understandable” in light of the stalled debt talks in Washington. She said the government defaulting on its debt is “an inconceivable concept that is becoming more of a reality as the clock ticks.”
An early read from Municipal Market Data scale showed high-grade yields maturing between 2017 and 2041 were flat to two basis points higher, but a trader in Chicago described the market as firm. He said trading was inactive – “in vacation mode” – as people focus on the political game in Washington.
“The closer we get to the end of the day, the tighter the time span is and the more risk we have,” he said in reference to the debt ceiling debate.
Political uncertainty is causing traders to hesitate before making any big moves, particularly as rating agencies threaten to strip the sovereign credit of its AAA status. Most recently, Standard & Poor’s said late Thursday there is more than a one-in-two chance the U.S. rating will get slashed in the coming 90 days.
“It’s a big gamble here,” the trader said. “It’s not a good time to be too involved.”
Once certainty returns to the market, a great deal of July 1 rollover cash is ready to be deployed into the tax-exempt market, he added.
In Thursday’s market, the benchmark 10-year muni yield was flat at 2.66%, 32 basis points beneath its average for 2011, while the 30-year yield was steady at 4.30%, also 32 basis points under its 2011 average.
The two-year yield maintained a 0.40% yield for a third consecutive day.
