The grand saga of the municipal market concluded another brief chapter Thursday without advancing the story arc very much.
The day’s trading session, marked by lethargy, sparse new issuance and lackluster activity, concluded without incident. Still, market participants eked out their living with some modest trading.
“Municipal market transaction levels occurred on mostly a customer inquiry-only basis, while dealer swapping and arb-related activity was also prevalent ahead of quarter end and Rosh Hashanah,” Municipal Market Data analyst Domenic Vonella wrote in a research post. “Wide bid-ask spreads and light trading volume undermined the price discovery process much of this week and left many players confused. So with the exception of an improving Treasury bid into futures close today, there was little reason for the Street to get excited.”
Tax-exempt yields Thursday once again rose on the intermediate to long end of the curve. They were steady through the first two years, according to the MMD scale.
From three to 19 years, they rose two or three basis points. Beyond that point, they were one or two basis points higher.
The 10-year muni yield climbed three basis points in Thursday’s session to 2.21%. It has more than erased the rally gains that brought it to a record low of 1.97% late last week.
The 30-year yield ticked up one basis point on the day to 3.56%. The two-year yield held for a second session at 0.34%.
Treasury yields, though, ended the day with little movement. In the past few sessions, traders have seen rate increases that reversed the incredible rally at the intermediate and longer parts of the curve last week.
The benchmark 10-year Treasury yield was flat on the day, at 1.99%. The two-year yield inched up one basis point to 0.27%.
The 30-year yield, which plunged as much as 53 basis points last week, firmed three basis points to 3.05%.
The Federal Open Market Committee’s Operation Twist sought to flatten the yield curve for Treasuries. For a few days, it succeeded. And it worked for munis as well.
But the effect turned out to be short-lived. This week, both markets’ yields reversed course completely.
Retail investors reacted during the period between roughly Sept. 22 and Sept. 27 with heavier trading activity, including increased selling, according to Chris Shayne, senior market strategist at BondDesk Group. But median yields for all retail trading activity fell about 25 basis points over the period as well, even as Treasury yields rose.
Across the entire muni market, though, tax-exempt yields continued to play catch-up to Treasury yields. Over the last few weeks, munis consistently underperformed Treasuries, especially in these rallies.
And then munis proceed to outperform the following sessions, in a Treasury sell-off, said John Dillon, chief municipal bond strategist for Morgan Stanley Smith Barney.
“We have a lagged effect,” he said. “It takes a little while for municipal investors to get re-engaged. They don’t necessarily chase it right on the same day, but there will be follow-through demand, such as we saw late last week.”
Tax-exempt yields have already backed up significantly on the week, a trader in Chicago said. They continued to Thursday, even though there wasn’t too much activity.
“If you’ve got to do something, you do it in the short end, because you can’t be that wrong,” the Chicago trader said. “A lot of guys are fairly full of stuff. And there just isn’t much action. There was some stuff out for the bid that traded at pretty cheap levels the last couple of days, and I haven’t seen that much of that stuff out for the bid today, for whatever reason.”
The market expects new supply this week to have seen a slight decline, following a substantial boost in issuance last week. This week, the market expected an estimated $6.83 billion in new supply. Last week saw a revised $7.86 billion of volume.
There were no significant deals of size on either side of the primary market Thursday.
Economic news from earlier in the day was largely positive. Leading off, the Labor Department reported Thursday that initial jobless claims fell to 391,000 on a seasonally adjusted basis for the week ending Sept. 24. Continuing claims fell to 3.729 million for the week ending Sept. 17.
Initial claims haven’t been this low since the week ending April 2, when they were 385,000. Continuing claims haven’t been this low since the week ending July 30, when they were 3.695 million.
Economists polled by Thomson Reuters predicted higher numbers for both. They estimated 420,000 initial claims and 3.730 million continuing claims.
In addition, the Commerce Department reported Thursday that real gross domestic product expanded 1.3% at an annual rate. It was the third estimate for the second quarter.
Second-quarter GDP was revised up 0.3 percentage points from the second estimate in August. The revision brings it back in line with the initial estimate.
An upward revision to personal consumption, a downward revision to imports, and an upward revision to exports account for the overall increase, the report noted.
In addition, consumer spending rose 0.7%. This represents an increase of 0.3 percentage points from the previous estimate last month. The results were higher than economists’ estimates.