Munis Firmer as Stocks Keep Falling

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The municipal market was firmer in light trading Friday, with equities showing further declines after Thursday's plunge.

"It seems like we've turned a corner for a bit," a trader in Chicago said. "There's been firmness two days in a row for the first time in a few weeks."

Before falling to 4.78% on firmness Thursday and Friday, the yield on a triple-A rated general obligation bond had risen 21 basis points over a week-and-a-half to hit 4.88% last Wednesday, according to Municipal Market Data. The 30-year GO last showed consecutive gains on June 2 and June 3, when the yield fell to 4.46%.

Traders attributed part of the firmness to the cheapening of municipal bonds compared to Treasuries over the past two weeks. The ratio between triple-A rated, 30-year general obligation bonds and 30-year Treasury bonds reached 105.41% Thursday, its highest point since April, according to MMD.

"At these yields and these crossover rates, I think that's going to bring buyers into the market," a trader in New York said.

However, the municipal market is still dealing with some uncertainty due to insurer downgrades, traders said.

"The secondary market is still confused how to handle some of the insurers," a trader in California said. "For some insured paper, trades are all over the board."

The Treasury market showed mostly gains Friday. The yield on the benchmark 10-year Treasury note, which opened at 4.04%, finished at 3.98%. The yield on the two-year note finished at 2.65%, after opening at 2.65%. The yield on the 30-year finished at 4.53%, after opening at 4.60%.

Continuing Thursday's dive, equities declined again on Friday, after posting small gains in the morning. The Dow Jones industrial average closed at 11,348.06, down 105.36. Thursday, it hit its lowest point since September 2006.

Treasury gains represented a flight to quality, according to Howard Simons, strategist at Bianco Research LLC.

"Nothing else in the market is working, so it's the only place in the world people still feel safe," Simons said.

In Friday's economic news, personal income rose 1.9% in May, higher than analysts' expectations. Economists polled by IFR Markets had predicted a 0.4% increase in the number. Personal consumption expenditures increased 0.9% in May, slightly higher than analysts' expectations of 0.8%.

The difference between the personal income increase and personal consumption could be a sign people are saving their tax rebates or using the money to pay down debt, said Pierre Ellis, senior managing director and global economist for Decision Economics.

"The rebate was targeted to people who they expected to spend it, but it turns out they haven't," Ellis said.

In addition, the University of Michigan consumer confidence index for June fell to 56.4, a 28-year low, below analysts' expectations of 56.9. The index stood at 59.8 in May.

On the inflation front, the May core personal consumption expenditure deflator rose 0.1%, lower than 0.2% expected by economists polled by IFR. The year-over-year increase in that number was unchanged at a 2.1% rate in May.

Likewise, the University of Michigan survey found consumers' five-year inflation expectations remained at 3.4%, still its highest in 13 years, but perhaps providing some relief for the Federal Reserve, according to Ellis. A lower threat of inflation would put less pressure on the bank to raise the federal funds rate, allowing it to focus on the weak economy instead.

"It's not good news, but it avoids the bad news of inflation being worse and worse and worse," Ellis said.

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