NEW YORK – The tax-exempt market is still firm Thursday morning, but some traders don’t expect the rally to continue much longer.
“Munis are continuing to have a very firm tone,” said a trader in Chicago. “But activity is so muted there is a degree of resistance to nominal low yields.”
He added that while there is “money to be put to work, we may see a push back in yields.”
Munis were most steady to slightly firmer on the long end, according to the Municipal Market Data scale. Yields inside the six-year were steady while yields on the seven-year fell one basis point. Outside the eight-year, yields fell up to two basis points.
On Wednesday, the two-year closed down two basis points at 0.38%. The 10-year fell three basis points to close at 1.79%, beating the previous record of 1.82% as recorded by MMD Tuesday. The 30-year dropped seven basis points to 3.33%, beating the previous record of 3.40% as recorded by MMD on Tuesday.
Treasuries were steady in morning trading. The two-year yield and the 30-year yield were flat at 0.24% and 2.97%. The benchmark 10-year yield rose one basis point to 1.92%.
In the primary market, Morgan Stanley is expected to price $240 million of Orange County, Calif., taxable pension obligation bonds, rated Aa2 by Moody’s Investors Service and A-plus by Standard & Poor’s.
On the competitive calendar, Livingston Township, N.J., is expected to auction about $60 million of general obligation bonds in two pricings, comprised of a $6.38 million deal followed by a $53.67 million deal. The credit is rated Aa3 by Moody’s.
The 10-year and 30-year muni have been outperforming Treasuries so far in 2012 as ratios have fallen. The 10-year muni-to-Treasury ratio fell to 91.9% on Tuesday from 96.4% the week prior. The 30-year ratio fell to 112.2% on Tuesday from 119.4% the previous Tuesday.
The five-year muni bond is underperforming the Treasury. The five-year muni-to-Treasury ratio rose to 100% on Tuesday from 98.9% the prior Tuesday.
In economic news, seasonally adjusted initial jobless claims rose 24,000 to 399,000 for the week ending Jan. 7. Continuing claims also increased 19,000 to 3.628 million, the Labor Department said. Both figures were greater than economists had predicted.
“We do not read much at this point into the surge in claims for the first week of January for two reasons,” wrote economists at RDQ Economics. “First, we have entered the period around the turn of the year where claims are notoriously volatile due to seasonal adjustment issues. Second, the four-week average of claims remains well below the 400,000 mark. We think 2012 is on an improving trend in the labor market.”
In other economic news, retail sales grew 0.1% in December after rising a revised 0.4% in November, the Commerce Department said. Growth in retail sales was lower than expected as economists had predicted at 0.3% median gain.
“The retail sales report for December was disappointing as broad measures of sales decelerated through the fourth quarter and as department store sales declined,” economists at RDQ Economics wrote. “We do not believe that this report marks a retrenchment in consumer demand since we think that employment growth is on a strengthening trend. And we note that consumer confidence has risen significantly since October reflecting this improving jobs picture.”
