NEW YORK – Municipal bonds are flat to slightly weaker in early trading as equities sell off in reaction to a much weaker than expected durable goods report.
Secondary trading remains relatively quiet as muni players are hesitant to make any big moves given the uncertainty caused by debt ceiling talks and a possible downgrade of the U.S. sovereign credit.
“It’s a pretty quiet morning, I haven’t seen anything that would indicate any great changes,” said a trader in New Jersey.
The Municipal Market Data triple-A curve suggests short-term yields are steady, while bonds maturing from 2021 to 2041 are flat to two basis points weaker.
“The muni market lacks direction as the Washington impasse continues,” wrote Janney Capital Markets’ Alan Schankel in a Wednesday note. “Concerns about the impact of federal budget cuts on municipal issuer ratings are generating uncertainty.”
Schankel noted investors willing to push out the yield curve are being rewarded, as the yield differential between one- and 10-year AAA munis is 248 basis points, and the one- to 30-year spread 415 basis points.
Equities are where the action is after a morning report said new orders for durable goods fell 2.1% in June, more than erasing the 1.9% gain in May and adding to the 2.5% loss in April.
The S&P 500 was down as much as 1.50% at 10:30 am, while the Dow Jones Industrial Average had lost more than 110 points, or 0.90%. The NASDAQ was hit the worst, dropping more than 2% in the first hour of trading.
“Volatile aircraft and defense orders are most of the weakness,” said economists at IHS Global Insight. “While durable goods orders is the shorthand name for the report, the key data came not from orders, or even shipments, but in durables inventories. Durables inventory building downshifted from 1.2% gains in both April and May to only a 0.4% increase in June — while a bit earlier than expected, that slowing in inventory additions keeps stocks from surging out of line with sales.”
Treasuries were weaker at the open but are now mostly flat except for some softness among short-term debt. The 10-year and 30-year Treasury yields are flat at 2.95% and 4.28% in early trading, while the two-year yield is two basis points higher at 0.42%.
In Tuesday’s muni market, short-term tax-exempts strengthened two basis points while intermediate yields backed up one basis point, according to MMD. The 10-year yield was steady at 2.68%, the two-year yield remained at a calendar-year low of 0.40%, and the 30-year yield remained at 4.35%.
About $4.1 billion in new deals are expected this week, roughly half of last week’s supply as issuers are hesitant to make a push into the market amid the uncertainty.
