Munis weakened a bit across most of the yield curve Tuesday but the sell-off looked mild next to Treasuries, where rates simply soared as investors snatched up profits following a six-week rally.
The session provided further confirmation that while tax-exempts underperform during flights to quality, they outperform on the profit-taking sessions.
“We eased up a little bit, but not much,” a trader in New York said. “We didn’t just go down with Treasuries, and new-issue pricing was even firm.”
Tax-exempts in the long end saw yields rise four basis points on average, according to the Municipal Market Data triple-A scale. Intermediate and other long-term yields rose two to three basis points, while bonds maturing within three years held steady.
“Treasuries continued to be a thorn in the tax-exempt market, showing little ability to bounce since early this morning,” said MMD analyst Randy Smolik.
The benchmark 10-year yield rose three basis points to 2.65% and the 30-year yield rose four basis points to 4.28%, the MMD scale showed.
The two-year yield held steady at 0.42%. It declined two basis points Monday, marking the first movement in more than three weeks.
Tuesday’s reversal in Treasuries was major as investors transferred cash from fixed-income markets and into equities. The moves allowed all three major stock market indexes to climb more than 1% — the Nasdaq even boasted a 1.48% gain — following six weeks of losses.
The benchmark 10-year yield climbed 12 basis points to 3.10%, the two-year yield moved four basis points higher to 0.44%, and the 30-year yield jumped 11 basis points to 4.31%.
The New York trader said the price action in munis was simply a by-product of the Treasury market.
“You can’t give up more than 10 basis points in Treasuries and not impact our market,” he said.
Secondary market trading was described by traders as inactive, whereas high-grade product entering the primary was absorbed with ease.
The new deal environment provided the clearest sign that the muni market remained healthy amid the broader sell-off.
The biggest issue in the negotiated market Tuesday was a retail pricing for $620 million of Utah general obligation debt. With top ratings from all three agencies, the deal was underwritten by a team of nine banks led by JPMorgan.
Yields on the deal ranged from 0.43% in 2013 to 2.66% in 2021 — just one and two basis points from the MMD curve.
Utah bonds maturing in 2016 offered 1.23%, or three basis points up from MMD.
An institutional pricing Wednesday is expected to offer maturities from 2022 to 2026.
Citi priced $446.2 million of New York State Thruway Authority bonds. Rated AA by Standard & Poor’s and Fitch Ratings, the bonds offered yields from 0.94% in 2014 to 4.31% in 2031.
Barclays Capital sold $88 million of revenue financing bonds for the Texas State University System. Yields on the double-A rated bonds range from 0.62% in 2013 to 4.74% in 2042.
“The prime-quality forward calendar doesn’t give the market much of a break,” Smolik wrote in his closing comment, noting that Georgia is expected to price $920 million of GO bonds via competitive sale next Tuesday.
A second New York trader correctly predicted early in the session that the sell-off in Treasuries would have limited impact on munis because of light trading and strong technicals.
“We’ll either stay steady or drift higher,” he said. “You still have a lot of cash going into the market, and that’s helping to keep things steady. And there aren’t enough negative factors to really hurt the market.”
In new economic data, retail sales fell for the first time in 12 months, dipping 0.2%. The Street had been forecasting a 0.4% drop, so it wasn’t weak enough to stop the surge in equities or drive money into Treasuries.
But economists nonetheless took a dim view of the report.
“The diffusion of spending was not healthy across the economy in May, with many sectors reporting declines,” wrote chief economist David Resler at Nomura Global Economics. He called the results “broadly consistent” with real consumer spending growth in the second quarter at a less-than-robust pace of 2%.
“May was not a good month for consumers or retailers,” said senior economist Chris Christopher at IHS Global Insight. “The employment figures were very disappointing, the stock market is volatile, consumer confidence is depressed, and home prices are still bouncing around the bottom. The crumb of good news is that gasoline prices started to fall, but are still relatively high.”
The producer price index posted a 0.2% advance in May, a temperate increase next to the 0.8% climb in April or the 0.7% jump in March. Broadly anticipated by markets because of falling energy costs, it was the slowest gain in 10 months but did little to offset recent gains: year-to-year headline inflation picked up half a percentage point to 7.3%.
“We believe that inflation pressures will remain elevated over the next year and that inflation will be both a global and prolonged problem, given the current settings of monetary policy in major economies,” said analysts at RDQ Economics.
The core index — finished goods excluding foods and energy costs — also moved higher by 0.2%.
