The municipal market was flat to slightly weaker Friday in fairly light secondary trading activity.
“The short and long ends are pretty flat, but there is a bit of weakness in the intermediate maturities,” a trader in New York said. “I’d say in that 10- to 20-year range, we’re down maybe a basis point or two, but we’re flat outside of that. The secondary is fairly quiet, but there are some bits and pieces trading.”
The Municipal Market Data triple-A 10-year scale was unchanged Friday at 3.22%, the 20-year scale remained at 4.53%, and the scale for 30-year debt held at 4.74%.
“There was a bit of a bump in Treasuries, but we basically ignored that,” a Los Angeles trader said. “You could make a good argument for the market being unchanged.”
Treasuries showed gains Friday. The benchmark 10-year note finished at 3.33% after opening at 3.39%. The 30-year bond was quoted near the end of the session at 4.48% after opening at 4.51%. The two-year note closed at 0.59% after opening at 0.66%.
In economic data released Friday, nonfarm payrolls rose less than expected in December, expanding by 103,000 workers as the unemployment rate dropped to a 19-month low.
The jobless rate fell to 9.4% from 9.8% in November. However, economists warned that the decline was largely due to discouraged workers giving up on finding new work, rather than new jobs. The median estimate in a Thomson Reuters survey of economists predicted payrolls would increase by 125,000 jobs and the unemployment rate would dip to 9.7%.
In the daily MMD commentary, Randy Smolik wrote that the payrolls data had little effect on munis given that municipal bond outflows remain significant and a $100 million high-grade bid-wanted list surfaced soon after the data.
Friday’s triple-A muni scale in 10 years was at 97.0% of comparable Treasuries and 30-year munis were at 105.6%, according to MMD. Meanwhile, 30-year tax-exempt triple-A general obligation bonds were at 112.9% of the comparable London Interbank Offered Rate.
In a research note, John Dillon, chief municipal bond strategist at Morgan Stanley Smith Barney, wrote that many headwinds confront the muni market in 2011.
“Without the benefit of the Build America Bonds program, the longer end of the yield curve may be vulnerable to steepening and downside volatility, as key pillars that supported this range prior to BABs are not what they were before the financial crisis and the inception of the BABs program,” Dillon wrote.
“The confluence of headline risks, budget gaps and an increased sensitivity to mutual fund flows may invite greater market volatility, mirroring the fourth quarter of 2010, and facilitate trading opportunities during bouts of illiquidity.”