NEW YORK – The tax-exempt primary and secondary markets are diverging Thursday morning and deals have been very well received in the primary, but the secondary market is showing weakness.
“You are seeing cheaper trades today,” a New York trader said. “I feel like we’re just seeing a little divergence between the primary and secondary. Primary deals are coming at attractive spreads and the technical side of the market is still positive in terms of cash and muni mutual fund inflows. Even though the calendar was about $8 billion, $3 billion of that was California, so it was still relatively manageable.”
But the secondary told a different story, he said. “The bid side seems to be weaker. The month-end was yesterday which probably caused some people to trim balance and square off positions ahead of month-end.”
All in all, “there seems to be less investor interest in the secondary because of the good deals in the primary.”
Munis were weaker Thursday morning, according to the Municipal Market Data scale. Yields inside five years were steady while yields outside six years rose between one and five basis points across the curve.
On Wednesday, the two-year yield ended steady at 0.26%, its record low as recorded by MMD on Feb. 16. The 10-year and the 30-year yields rose one basis point each to 1.85% and 3.23%, respectively.
Treasuries were weaker on positive economic data. The benchmark 10-year yield and the 30-year yield each rose five basis points to 2.03% and 3.14%, respectively. The two-year was steady at 0.31%.
In the primary market, JPMorgan is expected to price for institutions $2 billion of California various purpose general obligation refunding bonds, following a two-day retail order period. The credit is rated A1 by Moody’s Investors Service and A-minus by Standard & Poor’s and Fitch Ratings.
Retail investors placed $765 million of orders in the first day of retail, or 38.4% of the total offering. By the end of the second day of retail, $930.7 million orders had been placed, or 47% of the total offering.
“We were hoping for strong demand, and we weren’t disappointed,” said State Treasurer Bill Lockyer. “This is an excellent retail result. Now it’s on to wrapping up the deal and putting the savings into taxpayers’ pockets.”
He added the retail deal was repriced to lower yields on maturities outside 10 years by about one basis point.
JPMorgan is also expected to price $125.4 million of State of New York Mortgage Agency homeowner mortgage revenue bonds in four series, rated Aa1 by Moody’s.
In the competitive calendar, Louisiana is expected to sell $445.2 million of GOs in two auctions – a $400 million deal and $45.2 million. The credits are rated Aa2 by Moody’s and AA by Fitch.
In economic news, seasonally adjusted initial jobless claims fell 2,000 to 351,000 for the week ending Feb. 25. Continuing claims fell 2,000 to 3.402 million for the week ending Feb. 18. Continuing claims are the lowest since August 2008 when they were 3.395 million.
The initial claims were slightly below analyst expectations of 353,000 in claims. The continuing claims came in higher than analyst expectations of 3.400 million.
“The jobless claims data have shown remarkably little volatility in recent weeks as initial claims have settled down within a whisker of the 350,000 mark,” wrote economists at RDQ Economics. “In our view claims are signaling a marked improvement in the pace of job creation. Combine this with an improved assessment of the labor market in the February consumer confidence report and we have the makings of a strong February payroll number.”
In other economic news, personal income rose $37.4 billion, or 0.3%, in January following a 0.5% gain in December. Income was short of the 0.4% increase expected by economists.
Personal spending rose $23.2 billion, or 0.2%, in January following a flat December. Personal spending was lower than the 0.4% increased expected by economists.
“We are simply not buying the picture of the consumer and the economy painted by the real PCE data,” RDQ economists wrote. “According to these data, real consumer spending has been flat for three months and is no different in January than it was on average in the fourth quarter. We expect spending to pick up significantly but Bernanke dwelled at length on risks to the consumer yesterday and he is unlikely to be comforted by today’s data.”
In other economic news, the Institute for Supply Management manufacturing index fell to 52.4 in February from 54.1 in January. The index was far from meeting analyst expectations of an increase to 54.6.
“Given the run of stronger regional manufacturing surveys, this report is bound to be viewed as a disappointment,” economists at RDQ noted. “However, it is still consistent with fairly solid expansion in manufacturing activity and the new orders index remains well above the overall index.”
