Munis Slightly Firmer, Lag Treasury Rally

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The municipal market was slightly firmer Friday, lagging the rallying Treasury market, which has seen yields drop significantly due to weaker than expected consumer price index data.

"The market really is not in touch with this Treasury rally," a trader in New York said. "We have a firmer feel, which is more notable on the long end than on the short end. Secondary trading is fine for the time being, but I expect that to greatly diminish as we enter the afternoon. Overall, we're one to two basis points firmer on the day."

Trades reported by the Municipal Securities Rulemaking Board Friday were flat to slightly firmer. A dealer sold to a customer California 5s of 2031 at 5.13%, down one basis point from where they were sold Thursday. A dealer sold to a customer Hawaii 5s of 2031 at 5.00%, even with where they were traded Thursday. A dealer sold to a customer insured Essex County, N.J., 5.5s of 2027 at 4.79%, one basis point lower than where they traded Thursday. Bonds from an interdealer trade of New York City Municipal Water District 5s of 2039 yielded 5.13%, down one basis point from where they were sold Thursday.

"We're a little firmer, but we're definitely lagging Treasuries right now," a second trader in New York said. "After the data, Treasuries just started rallying, and we're not really keeping pace. But we're firmer a basis point or two maybe. There's a firmer tone at least."

The Treasury market showed gains Friday. The yield on the benchmark 10-year Treasury note, which opened at 3.53%, finished at 3.43%. The yield on the two-year note was quoted near the end of the session at 1.46% after opening at 1.63%.

"It's been kind of a weird day. Treasuries are up like a rocket, but the Street doesn't seem to care about anything," a trader in Los Angeles said. "But also, there's an awful lot of product that came to market this week, and my guess is that people are spending their time digesting what they got, and filling the customer inquiries. I don't think the Street cares too much about bidding on anything right now, because they've got so much paper from the new issues."

Also holding down further positive movement in the muni market Friday, market sources indicated that a Bear, Stearns & Co. tender-option bond program was reported to be selling $100 million of bonds into the municipal market.

In economic data released Friday, the consumer price index was unchanged in February after a 0.4% increase in January. Economists polled by IFR Markets had predicted a 0.4% rise.

The core CPI was unchanged in February after a 0.3% uptick the previous month. Economists polled by IFR had predicted a 0.2% increase.

The University of Michigan's preliminary March consumer sentiment index reading was 70.5, compared to the final 70.8 reading for February. Economists polled by IFR had predicted a 69.5 reading for the index.

Additionally, this week, a slate of economic data will be released. Today, industrial production for February will be released, along with February capacity utilization. Tomorrow, February housing starts and February building permits will be released, along with the producer price index and PPI core readings for February. On Thursday, initial jobless claims for the week ended March 15, continuing jobless claims for the week ended March 8, and the composite index of leading economic indicators for February will be released.

Economists polled by IFR Markets are predicting a 0.1% dip in industrial production, 81.3% capacity utilization, 990,000 housing starts, 1.025 million building permits, a 0.4% rise in PPI, a 0.2% jump in PPI core, 360,000 initial jobless claims, 2.840 million continuing jobless claims, and a 0.3% drop in the LEI.

Activity in the new-issue market was light Friday.

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