NEW YORK – The tax-exempt market held steady in Thursday morning trading as Treasuries saw a sell off.
“They bumped that scale so much yesterday that what happens is you get a two-tiered market,” said a trader in New York. “They bumped the scale so much because they ran up crazy. So you will see some weakness today.”
“You see the triple-A rated deals and they go crazy, but then all of a sudden there’s a lot of supply in new issues,” he added. “The guys buy into that and then where is the follow up? What happened to it? We still have a market that is almost schizophrenic.”
The trader added that the market is still very much led by institutional buyers. “We still have a market that people can’t figure out. Look at the long-end in retail names – the market hasn’t moved. So it is still very institutionally driven,” he added.
The institutional strength also comes from banks that have a lot of money but don’t yet want to loan. “That story hasn’t changed,” the trader said.
Muni yields were flat across the curve, according to the Municipal Market Data scale, after rallying Wednesday.
On Wednesday, the two-year munis closed at 0.42% for its seventh consecutive trading session. The 10-year muni yield finished down six basis points to 2.23%, the lowest it has been since Sept. 30 when it hit 2.22%. The 30-year muni yield closed down three basis points to 3.73%.
Treasuries slipped in Thursday morning trading, ending Wednesday’s rally and paring all gains. The 10-year yield was back up above 2%, trading up eight basis points to 2.05%. The 30-year was up six basis points to 3.09%. The two-year was flat at 0.24%.
The primary market will not provide direction for munis as both calendars are light. “It is not a busy day,” the New York trader added. “It’s a day before the long weekend again and there is still a lot of uncertainty.”
Jefferson County, Ala., filed for bankruptcy Wednesday night, making it the largest municipal bankruptcy in history. Most analysts don’t expect the bankruptcy to have a ripple effect on the markets.
“Although this is certainly a headline event, the filing did not catch the market by surprise since the situation has been brewing for years,” Alan Schankel, managing director at Janney Capital Markets, wrote in a morning research note.
“We continue to view this as an isolated instance and although we have concerns about the stress of some municipal credits we do not think that there are many credits that will follow their lead,” MMD analyst Daniel Berger noted.
In economic news, initial jobless claims fell 10,000 to 390,000 on a seasonally adjusted basis for the week ending Nov. 5. This was the lowest level since April 2 when claims were at 385,000, Labor Department reported Thursday.
The initial claims figure was lower than the 400,000 median estimate from economists polled by Thomson Reuters.
Trade data was also much better than expected. The U.S. September trade balance was a $43.1 billion deficit, much better than the $46 billion deficit expected. Imports increased $700 million and exports grew $2.5 billion.
The U.S. also reported its highest monthly surplus on record with Hong Kong, netting a $4.3 billion surplus in September after a $2.4 billion surplus in August.
Jennifer Lee, economist at BMO Capital Markets, noted that good news coming out of the U.S., including improved jobless claims and a narrowed trade gap, support the view that growth continued. But she warns, “There are still those frigid winds blowing from across the Atlantic.”
