NEW YORK — The municipal market maintains a strong tone for the day in the face of limited paper. But while the European Central Bank cut rates, its reluctance to become a lender of last resort has pushed Treasury yields lower. Muni yields are likely to ride in the wake of rallying Treasury yields, traders say, enough to maintain the week’s gains.
“The tone hasn’t changed very much,” said Howard Mackey, president of the broker-dealer unit of Rice Financial Products. “I don’t see a lot of activity. But we’ve seen the tone of the market remain fairly firm over the past few days.”
Muni yields are mostly trending firmer crossing noon, according to the Municipal Market Data scale. They are steady through four years. Thereafter, they are flat to three basis points lower. The six- to 11-year range remains the strongest sector of the market.
The benchmark 10-year yield dropped seven basis points Wednesday to 2.00%. This lowered its ratio to Treasuries to 98.51% from 106.37% two days ago, putting it firmly below 100%. It now sits close to the 2011 calendar-year average of 97.25%.
The muni-Treasury ratio has gotten richer recently, falling almost 20 percentage points in nine sessions, since Nov. 23, and almost 30 percentage points from its calendar-year high of 128.42%, achieved on Oct. 5.
The two-year yield skipped down three basis points to 0.36%. The 30-year yield fell six basis points to 3.70%.
Treasury yields started the day with a sluggish gait, but rallied once they caught wind of what the ECB was willing and unwilling to do. The benchmark 10-year yield has fallen four basis points to 1.99%.
The two-year yield inched down a basis point to 0.24%. The 30-year yield has dropped five basis points to 3.02%.
Primary market volume is expected to weigh in around the $6 billion range this week. Industry estimates for anticipated market volume total $5.82 billion, against a revised $5.88 billion last week. So far, investors anxious to put reinvestment money to work have snapped up much of the week’s supply, leaving little left over.
“Nothing that we’ve seen on the horizon will have a big impact on the [muni] market, so it will continue to remain firm,” Rice’s Mackey said. “But I don’t see anything that will catapult the market into new lower levels.”
The Treasury market has reacted to news that the European Central Bank on Thursday cut interest rates by 25 basis points — back to a record low of 1% — in response to rising concerns about deflation and recession in the euro zone. It introduced new measures to help the region’s troubled banks.
But as yet, ECB President Mario Draghi has given no indication the central bank will be a lender of last resort to sovereigns through any large-scale purchase program of euro zone government bonds.
