Prices of top-rated municipal bonds were weaker in early trading on Friday after the U.S. jobs report for October came in much better than expected.
The yield on the 10-year benchmark muni general obligation was two to four basis points stronger from 2.10% on Thursday, while the yield on the 30-year GO was one to three basis points stronger from 3.11%, according to an early read of Municipal Market Data's triple-A scale.
Treasury prices plunged while stock prices slipped after the Labor Department reported that non-farm payrolls rose 271,000 last month. Economists surveyed by IFR Markets had expected a gain of 189,000 in non-farm payrolls.
Bond traders now see a 70% chance the Federal Reserve will hike interest rates when it meets next month, up from a 56% chance before the jobs release, according to Bloomberg.
For municipals, any future rate increase by the Fed may see a muted response from the market.
"If the Fed raises rates in December, the reaction by the municipal bond market probably will be modest and not last very long," J.R. Rieger, Global Head of Fixed Income at S&P Dow Jones Indices, said in a market comment.
A rate hike has long been anticipated by traders and is most likely already built into the muni bond market, Rieger said. He also said there were other factors to consider when looking at the market.
"On the surface, municipal bond new issue supply looks like it has rebounded, but the majority of that new debt is refunding older higher coupon debt, actual 'new money' borrowings have remained lower than previous years," he said. "Demand is still outweighing supply."
After the jobs report, the yield on the two-year Treasury rose to 0.90% from 0.84% on Thursday, its highest level since 2010. The Treasury 10-year yield rose to 2.32% from 2.24% and the 30-year yield increased to 3.07% from 3.01%.
Stock prices were a bit lower in early trading. The Dow Jones Industrial Average was off about 15 points while the Nasdaq Composite Index dropped around five points and the S&P 500 Index lost nearly seven points.
On Thursday, the 10-year muni to Treasury ratio was calculated at 93.7% versus 93.7% on Wednesday, while the 30-year muni to Treasury ratio stood at 103.3% compared to 103.5%, according to MMD.
"The historical litmus test for determining whether municipal bonds are rich or cheap to U.S. Treasuries has been the yield ratio (tax-free yield over U.S. Treasury Bond yield). The historical yield ratio has been 70% to 80% of US Treasuries," Rieger added. " It is hovering around 95% to 100% indicating the municipal bond market has established itself in the cheaper range of historical trends."
The Week's Primary Market
Traders were kept busy this week with many sales, both in the negotiated and competitive sectors.
In the competitive arena, JPMorgan Securities won two issues from the Clark County School District, Nev., totaling over $538 million. JPMorgan won the $338.45 million of Series 2015C limited tax general obligation building and refunding bonds with a true interest cost of 3.06% and the $200 million of Series 2015D limited tax GO school bonds additionally secured by pledged revenues with a TIC of 3.22%. The issue was rated A1 by Moody's Investors Service and AA-minus by Standard & Poor's.
The Metropolitan Atlanta Rapid Transit Authority competitively sold $181.57 million of Series 2015B Third Indenture Series sales tax revenue bonds and Series 2015C refunding bonds to Wells Fargo Securities, who won the issue with a TIC of 3.45%. The bonds were rated Aa2 by Moody's, AA-plus by S&P and AA-minus by Fitch Ratings.
The Louisville and Jefferson County, Ky., Metropolitan Sewer District competitively sold $226.34 million of Series 2015 sewer and drainage system subordinated bond anticipation notes. Bank of America Merrill Lynch won the issue with a TIC of 0.39%. The notes were rated MIG-1 by Moody's and SP-1-plus by S&P.
Citigroup priced the Massachusetts Commonwealth Transportation Fund's $500 million of Series 2015A special obligation revenue bonds under the Rail Enrichment Program. The bonds were rated triple-A by Moody's and S&P.
Morgan Stanley priced the state of Hawaii's $245.14 million of airport system Series 2015A AMT and Series 2015B non-AMT revenue bonds. The bonds were rated A1 by Moody's, A-plus by S&P and A by Fitch.
Bank of America Merrill Lynch priced the Los Angeles Municipal Improvement Corp.'s $297.71 million of Series 2015A taxable convention center lease revenue refunding bonds. The issue was rated A-plus by S&P and Fitch and AA-minus by Kroll Bond Rating Agency.
Siebert Brandford Shank priced the Department of Airports of the city of Los Angeles' $299.84 million of Series 2015D AMT and Series 2015E non-AMT senior revenue bonds. The issue was rated Aa2 by Moody's and AA by S&P and Fitch.
Barclays Capital priced the California Health Facilities Financing Authority's $378.69 million of Series 2015 refunding revenue bonds for the Cedars-Sinai Medical Center. The issue was rated Aa3 by Moody's and AA-minus by Fitch.
JPMorgan priced Anchorage, Alaska's $310.44 million of GO and GO refunding bonds. The issue was rated triple-A by S&P and AA-plus by Fitch.
RBC Capital Markets priced the Pennsylvania Housing Finance Agency's $231.15 million of Series 2015-118A AMT and Series 2015-118B non-AMT single-family mortgage revenue bonds. The issue was rated Aa2 by Moody's and AA-plus by S&P.
Loop Capital Markets priced the New York Triborough Bridge and Tunnel Authority's $156.22 million of general revenue bonds for the MTA bridges and tunnels, Series 2015B and Subseries 2008B-3. The issue was rated Aa3 by Moody's, AA-minus by S&P and Fitch and AA by Kroll.
Raymond James priced the Virginia Resources Authority's $107.76 million of infrastructure revenue bonds. The deal was rated triple-A by Moody's and S&P.
Bank of America Merrill Lynch priced the a joint Guadalupe County and city of Seguin, Texas, $199.01 million of Series 2015 hospital mortgage revenue refunding and improvement bonds. The issue was rated BB by S&P and Fitch.
Wells Fargo Securities priced San Antonio, Texas' $235 million of new Series 2015 electric and gas system revenue bonds. The bonds were rated Aa1 by Moody's, AA by S&P and AA-plus by Fitch Ratings.
Citigroup priced San Antonio's $100 million of Series 2015C variable-rate junior lien electric and gas systems revenue bonds. The bonds were rated Aa2 by Moody's, AA-minus by S&P and AA-plus by Fitch.
Municipal Bond Funds See Inflows for 5th Straight Week
Municipal bond funds reported inflows for the fifth week in a row, according to Lipper data released on Thursday. Weekly reporting funds experienced $62.996 million of inflows in the week ended Nov. 4, after inflows of $349.038 million in the previous week.
The latest inflow brings to 24 out of 45 weeks this year that the funds have seen cash flowing in. Inflows for the year to date are in the green, totaling about $3 billion.
The four-week moving average remained positive at $293.390 million after being in the green at $456.144 million in the previous week. A moving average is an analytical tool used to smooth out price changes by filtering out fluctuations.
Long-term muni bond funds also experienced inflows, gaining $39.828 million in the latest week, on top of inflows of $423.093 million in the previous week. Intermediate-term funds had inflows of $30.657 million after inflows of $107.447 million in the prior week.
National funds saw inflows of $39.185 million after inflows of $356.881 million in the prior week. High-yield muni funds reported inflows of $52.653 million in the latest reporting week, after an inflow of $264.632 million the previous week.
Exchange traded funds saw inflows of $9.996 million, after inflows of $201.311 million in the previous week.
MSRB: Previous Session's Activity
The Municipal Securities Rulemaking Board reported 36,730 trades on Thursday on volume of $8.10 billion.
Bond Buyer Visible Supply
The Bond Buyer's 30-day visible supply calendar fell $117.8 million to $7.15 billion on Friday. The total is comprised of $3.06 billion competitive sales and $4.09 billion of negotiated deals.
