A whole lot of nothing took place in the muni market Thursday. New issuance was slim and secondary trading was light as both issuers and buyers decided it was best to wait for the political turmoil in Washington to settle before making any major moves.
“There’s been a total lack of activity,” said Alan Schankel, head of fixed-income research and strategy at Janney Capital Markets. “A lot of people are doing virtually nothing so it’s been lucky for the municipal market that this has been a very low-volume week.”
A trader in New York added that the Aug. 2 deadline to raise the debt ceiling is making market participants nervous, but a broad consensus still believes that one way or another the problem will get resolved.
No major deals were priced Thursday and total issuance for the week was estimated at $4.12 billion, roughly half the level of the previous week.
If budget talks are resolved on time, the trader said, weekly issuance should jump back up; if not, it could be halved again.
Municipal Market Data’s triple-A scale was mixed to reflect a preference for parking money in short-term paper and lightening up on the long end, leading to a steepening yield curve.
Munis maturing in four and five years — already the richest spots on the curve — saw yields fall one and two basis points, respectively. The two-year yield held steady at a calendar-year low of 0.40%, where it has been since July 12.
But intermediate and long-term muni yields have been rising slowly the past two weeks. The 10-year finished one basis higher Thursday at 2.70%, compared with 2.66% on July 20, while the 30-year held steady at 4.37%, versus 4.30% on July 14.
“It’s not surprising that you would see a lot of activity on the front end of the curve, given the uncertainty in Washington,” a California trader said. “There is less activity further out and maybe a touch of weakness 15 years and out.”
He said selling pressure on the long end would be more pronounced if the market wasn’t confident that a deal on the debt ceiling will be reached, but most observers think some kind of agreement will be found. Still, he added, there’s a fair bit of talk about lightening up on the long end.
“The further one traveled out the serial curve, the less defined were markets as activity has been compromised by the confusion over the debt ceiling-budget debates,” MMD analyst Randy Smolik wrote in a daily note.
The Treasury market reflects that flight to safety as traders can’t seem to find another place to stuff their money. The two-year, 10-year, and 30-year yields all fell two basis points, to 0.42%, 2.96%, and 4.27%, respectively.
Though longer tax-exempts have failed to benefit from a safe-haven trade, muni-Treasury ratios are looking more attractive as Treasuries richen. The 10-year ratio was 91.5% Thursday compared with 86.3% at the start of the month; the 30-year ratio was 102.6%, up from 99.1%.
The lack of municipal issues on the calendar Thursday was a blessing, as dealers are still struggling with unsold balances from competitive deals won in the past week or two.
“We continue to see a lot of the investable dollars go to paper five years and in, primarily as a safety trade,” a Florida trader said. “I haven’t seen traders pull back yet, but the point is that a lot of the paper hasn’t been sold. A lot of buyers are sitting on their hands.”
Retail trading was described as a little bit slow. The last day to book a trade for the month was Tuesday, so there is less urgency to buy more paper now, the California trader said.
Political inaction had further influence on munis as Moody’s Investors Service placed 177 Aaa-rated public finance issuers on review for downgrade, “given the possibility of a default if there is a failure to raise the statutory debt limit.”
The review involves $69 billion of debt from 162 local governments, 14 housing finance programs, and one university, the University of Washington. Last week, Moody’s placed five of the 15 Aaa-rated states on similar review.
“In the event the U.S. government’s Aaa rating is downgraded, Moody’s will determine the outcome of each review by evaluating the strength of the sovereign linkages to each affected credit, including direct and indirect reliance on federal spending, sensitivity to deteriorating macroeconomic conditions, and vulnerability to disruptions in the financial markets,” the report said. “Moody’s will also consider positive credit attributes of each issuer such as financial position, operating flexibility and management responsiveness.”
Meantime, two positive economic reports helped buoy the stock market in the early morning. The main indexes were up as much as 1.26% at midday, but momentum was lost in the afternoon and the Dow Jones Industrial Average dropped 62 basis points to mark a fifth day of losses.
The optimistic data included initial jobless claims falling 24,000 in the week ending July 23 to 398,000, the first week under the 400,000 mark since early April. The drop is the third in four weeks and pushed the four-week average to a 13-week low of just less than 414,000.
“The decline in initial claims below 400,000 for the first time since the beginning of April is the first sign in the labor market data that job creation might be on the verge of picking up,” said economists at RDQ Economics. But “in thinking about payroll growth for July released next Friday, Aug. 5, there is not enough information, at this point, to project a pickup in underlying job growth.”
The National Association of Realtors also reported the pending home sales index had ticked up 2.4% in June, helping the year-over-year sales number gain 19.8%.