NEW YORK — The municipal market started Friday slightly hung over, marked by light trading and steady yields.
The market emerged from a week of hard rallying. Yields have fallen to levels not seen since last fall. And as eye-popping for munis as the week has been, the rally in Treasury yields has been even more substantial.
But a somewhat positive employment report this morning put out the bonfire, unplugged the speakers, and stopped yields in both markets from free-falling any further.
According to the Municipal Market Data triple-A scale, muni yields started the morning flat. But they sure moved yesterday.
The benchmark 10-year muni yield dropped seven basis points, finishing Thursday at 2.38%. That equals its lowest yield in two years, dating to Oct. 7. It has dropped 29 points in a week.
The 30-year muni yield ended at 3.95%, its lowest since early November. Its yield has dropped 40 basis points since last Friday.
The two-year muni yield ticked down another basis point to 0.35%, its lowest yield since Aug. 31, 2010.
Treasury yields softened Friday morning, after a huge rally Thursday. The 10-year Treasury yield climbed six basis points to 2.48%, backing off its lowest level since Oct. 12, achieved during the rally.
The two-year Treasury yield rose from its lowest level ever, rising three basis points to 0.30%.
After falling 21 basis points on Thursday and 67 basis points on the week, the 30-year yield to a break from its plunge. It jumped five basis points on the morning to 3.73%.
Institutions have led the market, wrote Alan Schankel of Janney Capital Markets, in a morning report.
“Although munis largely followed Treasuries, a light new issue calendar combined with $25 billion in August reinvestment flows, has investors scrambling to find bonds in what has for now become a market largely driven by institutional buying,” he wrote.
And after showing mostly inflows over a period of several weeks, municipal bond funds saw the largest outflows since the week of April 20. And this past week’s results — $861 million in outflows — suggested numbers and a pace that bring to mind the 29 straight weeks between mid-November and early June when muni funds hemorrhaged money.
What’s more, the withdrawals are up from those of the previous week, according to Lipper FMI. In the week ended July 27, there were net outflows of $129 million for muni bond funds that report their flows weekly, Lipper said.
Investor interest in muni bond funds, which recently had been rebounding, showed signs of flagging. But the industry well remembers how, for more than six months, money left muni bond funds, often by more than $1 billion a week.
High-yield muni funds appear to be losing their footing — they had seen inflows for the ninth time in 11 weeks, before experiencing accelerating outflows the past two weeks. Funds that report weekly saw outflows of $118 million, Lipper reported. The previous week, high-yield funds reported outflows of $28 million.
But retail investors, largely AWOL, of late, should return to the muni market, wrote MMD’s Daniel Berger. This is partly because tax-exempt bonds appear undervalued when compared with Treasuries. One thing the debt deal does is it lets munis achieve outperformance. This is because municipal-Treasury ratios are at one of the highest points this year. They’re much higher than they were in March, when sizable professional bidding support emerged, Berger wrote.
“Once retail investors are aware of these factors,” he added, “they will want to participate in this rally and we will witness another inflow into municipal mutual funds.”
The U.S. employment picture improved beyond expectations, but otherwise not too significantly overall, according to new numbers the Labor Department reported Friday. Employers added 117,000 total jobs in July and 154,000 private workers. The unemployment rate ticked down to 9.1%, on a seasonally adjusted basis.
In addition, payrolls for May and June were both revised higher. They added a combined 56,000 jobs.
Economists polled by Thomson Reuters predicted an increase of 90,000 total jobs and 115,000 private payrolls, according to the median estimate. They expected the unemployment rate to be 9.2%.
Traders pointed to the BLS report as an important indicator for the week, after recent markers made a darker assessment of the U.S. economy’s recovery efforts. They noted on Thursday how a negative report would resonate poorly, and would likely throw the stricken equities markets further into despair.
In fact, so hotly anticipated was this report that the BLS’s Web site early Friday morning crashed for 10 minutes in response to so many inquiries for it.
For their part, the equities markets mostly started the morning relatively flat.
