After a stable morning, the municipal market gained two basis points in the late afternoon as the Dow Jones industrial average suddenly dropped almost 1,000 points, or 9.2% and closed down 347.80, or 3.20%.
The panic selling followed comments from European Central Bank president Jean-Claude Trichet, who said the bank didn’t discuss the option of purchasing regional government bonds in its monetary policy meeting.
“Treasuries are very, very strong,” one trader said. “Municipals haven’t caught up, but we’ve improved by two basis points. If this stays the way it is, we’ll catch up eventually, but at the moment we haven’t.”
Treasuries were mostly unchanged at the open but then strengthened sharply across the curve while equity markets sold off.
The benchmark 10-year yield, which closed Wednesday at 3.55%, ended the day at 3.38% — its lowest level since late November. The 30-year Treasury improved 20 basis points compared to Wednesday, closing at 4.17%, its lowest since late November. And the two-year yield closed at 0.79%, nine basis points stronger than Wednesday’s close and its lowest yield since early March.
“The muni market died,” one trader said. “Nobody cares to bid anything — they’re trying to figure out the new level. Are we going to trade in a range down here — who knows?”
“When the stock market goes off 900 points, people just kind of freak out,” he added. “There are offers out there, but I’m not paying attention to them.”
The trader said September 2008 was “the last time I can remember Treasuries jumping like that. And this is on top of a run-up in the last couple of days.”
Among a number of new issues yesterday, the biggest was a multi-state $999.7 million sale of revenue bonds to benefit the Sisters of Charity of Leavenworth Health System of Lenexa, Kan.
JPMorgan priced the deal of unenhanced, fixed-rate bonds, which were issued in five separate series. All were rated Aa3 by Moody’s Investors Service, AA by Standard & Poor’s, and AA-minus by Fitch Ratings. All were new-money issues except for the larger Montana series, a refunding issue.
Two of the pieces were for the Colorado Health Facilities Authority. One issue for $323.0 million offered yields ranging from 1.53% in 2012 to 4.95% in 2035. The second issue for $265.6 million offered yields ranging from 1.53% in 2012 to 4.92% in 2032.
The Kansas Development Finance Authority offered $197.8 million of bonds with yields ranging from 1.53% in 2011 to 4.95% in 2035.
In the fourth and fifth pieces, the Montana Facility Finance Authority offered $103.0 million with yields ranging from 4.95% in 2035 to 5.00% in 2040, as well as $110.4 million with yields ranging from 1.53% in 2012 to 4.65% in 2024.
Following a retail period on Wednesday, the Michigan State University Board of Trustees sold $289.2 million of general revenue refunding bonds. The issue was underwritten by Bank of America Merrill Lynch and offered yields ranging from 0.67% in 2011 to 4.55% in 2044. The bonds were rated Aa2 by Moody’s and AA by Standard & Poor’s.
Meanwhile, Barclays Capital priced $239.5 million of revenue financing system bonds for the Texas A&M University Board of Regents.
The deal was in two series. The first, for $93.36 million, offered yields ranging from 0.80% in 2012 to 4.35% in 2029. Earlier in the morning, the range of yields was 0.82% to 3.99%. Sealed bids were used to sell 2010 and 2011 maturities.
In Series B, for $146.11 million, yields ranged from 0.80% in 2011 to 4.27% in 2039. Earlier in the morning, the short-end yield was 0.82%. The 2011 bonds were sold via sealed bid.
Both series are rated Aa1 by Moody’s and AA-plus by Standard & Poor’s and Fitch.
While Treasuries continue to firm, munis were relatively cheap despite historically low yields.
Wednesday’s triple-A muni scale in 10 years was at 83.1% of comparable Treasuries, its highest level since late January, according to Municipal Market Data. The 30-year triple-A yield was 91.6% of comparable Treasuries, its highest since Feb. 26.
The MMD triple-A scale yielded 2.96% in 10 years yesterday, a point higher than Wednesday’s 2.95% but much stronger than the late March level of 3.09%. The 20-year yield was 3.72%, three basis points stronger than Wednesday, while the scale yielded 3.99% in 30 years, also three basis points stronger than Tuesday.
In a research note published yesterday morning, Peter Hayes, managing director of municipal bonds at Blackrock Investments LLC, said munis are expected to take more direction from Treasury rates this year.
“In 2009, munis traded as a risk asset, actually moving opposite and outyielding Treasuries on a pre-tax basis at certain points,” he wrote. “Going forward, we expect the market to move in a direction similar to U.S. Treasuries due to more normal yield ratios.”
In economic news, the Bureau of Labor Statistics said first-quarter productivity increased by 3.6%, higher than economists were expecting, while unit labor costs fell 1.7%, a percentage point more than expected. In the fourth quarter of last year, productivity climbed 6.3% while labor costs were slashed 5.6%.
The Department of Labor said initial claims for jobless benefits fell 7,000 to 444,000 in the period ending May 1, marking the third consecutive drop.
The four-week average of claims fell to 458,500.