NEW YORK – Secondary muni market trading is at a standstill, according to traders, but the order-driven new-issue market has muni prices on the rise.
The theme continues to be the waiting game.
“Everyone is frozen,” said a trader in Los Angeles, “even though Treasuries are up, because of this debacle the federal government is in. Until this clears – and everyone is confident it will – everyone is waiting on the sidelines just waiting to see what happens.”
Secondary market trading is usually slow on a Friday, particularly in the summer, and “now it’s even worse with everyone just sitting on their hands,” he said.
A midday read from Municipal Market Data has short-term muni prices holding steady but intermediate yields are dropping as many as three basis points and long-term yields are flat to two basis points lower.
So why are rates dropping? That’s easy: A broad flight to quality has pushed the 10-year Treasury yield down 11 basis points to 2.84% -- its lowest yield in 2011. So much for bond vigilantes.
The 10-year muni-Treasury ratio rose as high as 94% in early trading, compared with 86.3% on July 1.
“Munis found some inspiration from today's gains in Treasuries,” said MMD analyst Randy Smolik. “Finally, the tax-exempt sector saw some buyers reaching. Overall activity was modest and bidders were still hesitant. Longs were more prone to bump levels that show flexibility.”
The two-year Treasury is five basis points lower at 0.38% and the 30-year yield is eight basis points lower at 4.18%.
A trader in Dallas said the MMD scale isn’t capturing how illiquid the market is.
He said the 177 Aaa-rated public finance issuers that are now on review for downgrade, as published by Moody’s Investors Service Thursday, has scared some traders.
“When you print the list off and look at it, it all of a sudden hits home,” he said.
The review involves $69 billion of debt from 162 local governments, 14 housing finance programs, and one university.
The trader said previous actions by Moody’s, like placing pre-refunded munis on notice for possible downgrade, was anticipated; but seeing the best local credits on similar review is chilling.
“If you’re a trader and you’re long a block of Dallas GOs, you must figure your bonds are now worth last than they were,” he said. “It creates so many problems in a market that’s already thinly traded.”
He assumes that lower-rated credits not in the report are all worth less now too. “The city of Fort Worth, for example, it will be worth less – the whole thing will be worth less.”
The Dow Jones Industrial Average has recovered somewhat from earlier lows yet remains in the red for a sixth consecutive day. At 1:30 it was off 60 points, or 0.49%.
The culprit was fresh weak economic data showing second-quarter GDP growth rose just 1.3% on an annualized basis, while revisions slashed first-quarter growth to just 0.4% from a previous estimate of 1.9%.
“In Q2, personal consumption hardly rose (0.1%), and the weakness was not solely in the auto space where a shortage of cars delayed demand,” said Sal Guatieri at BMO Capital Markets, who noted spending on non-durables was virtually flat and demand for services remained soft at 0.8%.
“Despite some rebound in federal defense spending, deep cutbacks at the state and local levels spurred a 1.1% drop in government spending, the third decline in a row and a taste of what’s ahead,” he added.
The Chicago Business Barometer, a measure of services and manufacturing in the Midwest, missed forecasts too as it declined to 58.8 in July from 61.1 in June.
