Weak Data Rallies Treasuries, Helps Steady Munis

A weak batch of economic data prompted Treasuries to rally to their lowest yields in 2011 and helped breathe some life into the sleepy tax-exempt market.

“It looks like munis are stable for the time being, barring something unexpected,” a trader in New York said.

The Municipal Market Data triple-A scale showed tax-exempt yields were flat across the curve, except for a single basis point decline among bonds maturing in 2012. The two-year held at 0.44%, the 10-year stayed at 2.65%, and the 30-year remained at 4.30%.

The biggest deal on this week’s calendar hit the market Tuesday as Morgan Stanley priced for retail a $510 million offering for the New York State Environmental Facilities Corp. The bonds carry high double-A ratings from Moody’s Investors Service, Standard & Poor’s, and Fitch Ratings.

Day one of retail pricing featured yields from 0.57% in 2012 to 4.27% in 2031. The 10-year offered a 3% yield, a spread of 35 basis points from MMD’s triple-A scale.

Thursday’s institutional pricing is expected to offer about $100 million of bonds maturing in 2036 and 2041.

Just $2.5 billion of new issuance is anticipated in the primary from Tuesday through Friday, giving investors little direction in terms of where bonds should be priced.

“I think its going to take a little time for the market to gear up,” a second trader in New York said at the open. “We don’t have a very large calendar so the only thing that could help our market is if we continue to have improvement in the Treasury market — we might get some follow-through there.”

The quiet session caps off a strong month for munis. According to Anthony Valeri, fixed-income investment strategist at LPL Financial, muni prices jumped 1.7% in May, led by long-term bonds with a 3% gain, while high-yield munis got in on the action and increased 1.6%.

The iShares S&P National AMT-free municipal bond fund, a $2.1 billion exchange-traded fund used as a proxy for the market, jumped 1.73% in the month to $103.65. Year to date the index is up 4.51%, but its net-asset value remains about $1.50 below its pre-November sell-off price.

The muni rally paused all last week, and June is typically a weak period for municipal bonds, but Valeri said a sell-off in the coming two weeks should be limited as buyers will have to fight for the slim volume of new paper.

The second New York trader said light issuance could enhance demand for tax-exempt paper this week, but demand tapered off last week and the consensus is it will remain relatively light until coupon payments come into play during the summer reinvestment period.

“My suspicion is the market will begin to pick up then,” he added.

Preliminary estimates put the total volume of bonds sold in the first five months of the year at $83.65 billion, according to Thomson Reuters. In the previous decade, the January to May period has always exceeded $100 billion.

From mid-June through the end of July, Valeri believes demand should pick up as “a heavy slate of maturing bonds leads to reinvestment demand that bolsters the market.”

Along with a rallying Treasury market, the light issuance has played a huge role in helping muni prices climb and then remain elevated over the past seven weeks.

“Treasuries trading at new yield lows sparked some life into the tax-exempt secondary,” wrote MMD analyst Randy Smolik, speaking of the Tuesday rally.

Treasuries experienced a broad sell-off in early trading on speculation that the European Union was putting together another restructuring for Greek debt. That turned the risk trade on, and global equities jumped more than 1%, but three pieces of U.S. data all missed forecasts and prompted a flight back to Treasuries.

Each benchmark yield finished Tuesday at a calendar year low: the two-year yield fell nearly two basis points to 0.46%, the 10-year yield dropped two basis points to 3.05%, and the 30-year yield declined two basis points to 4.22%.

Weak data included the Case-Shiller Home Price Index, which fell 0.2% in March and left prices among the 20 metro areas surveyed 3.6% lower than one year ago.

Joseph LaVorgna, managing director at Deutsche Bank, noted the broad-based decline — 13 of the 20 cities showed monthly declines — puts the index back near the low reached in May 2009.

“The future trend in home prices will depend on two factors: the labor market and bank lending practices,” he said. “If the labor market continues to improve, then the demand for housing should rise, as the housing affordability index is already near an all-time high.”

Consumers might not be in buying mode, however. The Conference Board survey of consumer confidence unexpectedly tumbled 5.2 points in May to 60.8, its lowest since November. Of particular concern, with Friday’s employment report coming up, was the jobs “plentiful” versus the jobs “hard to get” component. It fell one point to negative 38.3%.

“This isn’t particularly positive for this Friday’s report, and suggests that the jobless rate will be little changed in May from April’s 9.0% reading,” wrote senior economist Jennifer Lee from BMO Capital Markets.

To top it off, the Chicago Business Barometer fell 11 points in May to 56.6, its slowest pace since November 2009.

Economists at RDQ Economics said the regional report caused them to cut their projection for Wednesday’s nationwide Institute for Supply Management manufacturing sector by two points to 56.5.

Still, they concluded: “The general picture painted by this report is of manufacturing expansion at a solid, though ­slower, pace accompanied by elevated price ­pressures.”

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