Municipal bond yields declined as much as three basis points in early trading Thursday, but demand failed to keep pace in the afternoon. At day’s end, yields were flat to a single basis point firmer.
The catalyst in both cases was the Treasury market, as Wednesday’s broad-based rally was nearly erased Thursday.
“We’ve done a nice job of surviving what the Treasuries did,” a trader in New York said. “In munis it’s really coming down to supply and demand — there is just enough demand in high-grades to keep them from weakening, but not enough to move them ahead.”
Tax-exempts maturing between 2015 and 2035 finished the day with yields a basis point lower, while all others remained flat despite strength earlier strength, according to the Municipal Market Data triple-A scale.
“Activity seemed to wane into the afternoon on drifting Treasuries,” MMD analyst Randy Smolik said in a daily commentary.
He said bids on Maine’s $76 million competitive general obligation issue were “very aggressive.”
The two-year and 30-year tax-exempts remained at calendar-year lows of 0.44% and 4.15%, respectively. The benchmark 10-year yield fell one basis point to 2.61%, leaving it just two basis from its calendar-year low in mid-May.
Treasury yields jumped in early trading and continued to sell all day as investors snatched up profits. A broad rally on Wednesday pushed the 10-year yield down 11 basis points through the 3% barrier for the first time since December, but it backed up nine basis points to close at 3.03% Thursday.
The yield on the 30-year bond jumped 11 basis points during the day, versus a seven basis point decline Wednesday. The two-year yield rose two basis points to 0.46%, an equivalent climb to Wednesday’s descent.
Munis, known to react with a lag, firmed in early trading but were unable to sustain strength given how violent the reversal in Treasuries was.
The 10-year muni-to-Treasury ratio fell to 85.86% Thursday, down from 88.5% a day before.
“It’s the same story we’ve been talking about — same supply situation, the same grind, muni ratios became relatively cheap again because Treasuries ran so much,” said a second trader in New York. “There is money out there.”
He described secondary activity as relatively busy, but noted it is limited as investors wait for Friday’s all-important employment report.
A trader in Chicago said trading was quiet: “We’ve gone from a high-speed market yesterday to pedaling the bicycle today.”
New-issue pricing was described as strong. In the competitive market, Citi won the Dormitory Authority of the State of New York’s $653.9 million deal, rated AAA by Standard & Poor’s and AA by Fitch Ratings.
Yields on the personal-income tax revenue bonds range from 1.09% in 2015 to 4.45% in 2041.
JPMorgan won Maine’s $68.5 million competitive issue, which is rated Aa2 by Moody’s Investors Service and AA by Standard & Poor’s. Yields range from 0.44% in 2013 to 2.70% in 2021.
The sale marks the state’s first foray into the competitive market with GOs in about two decades.
“Competitive underwriters were throwing very aggressive levels on deals again as they strived to establish rankings and contemplated whether June redemption money will come off the fence,” Smolik wrote.
In the negotiated market, Goldman, Sachs & Co. priced $143.7 million of electric system revenue bonds for the Omaha Public Power District. The bonds carry Aa1 ratings from Moody’s and double-A ratings from Standard & Poor’s. Yields range from 0.86% in 2014 to 3.38% in 2024.
Though Treasury rates rose from Thursday, new economic data failed to change the diminished outlook for the U.S. economy.
The final week of May produced 422,000 new jobless claims, a slightly higher number than the 420,000 expected by the Street and far higher than the 395,000 average in March.
According to the Labor Department, tornadoes in the Midwest were one reason why claims remain elevated, but other factors are present too, as shown by Wednesday’s Automatic Data Processing employment report, where net growth in May’s private labor market was just 38,000.
“With the wave of higher input prices and greater uncertainty about the economic outlook, firms continue to be reluctant to hire,” said economist Jeffrey Greenberg at Nomura Global Economics.
The median forecast for private job growth in Friday’s nonfarm payrolls report is now just 175,000 versus an average monthly gain of 253,000 over the previous three months, according to Bloomberg LP. Private job growth in April was 268,000, the most in more than five years.
Total employment is anticipated to grow by 165,000 compared with 244,000 the month before.
“Recent volatility puts a lot of weight on the employment number,” the second New York trader said. “A low figure will mean we’re back to the races.”
The latest factory orders report also posted a disappointing 1.2% decline in April, versus forecasts of a 1% decline, though an upward revision in the prior month’s data to 3.8% from 3.5% softened the headline impact.