Yields Slide on Intermediate and Long Ends

Diverging demand among investor classes set the tone for municipal bond yields Thursday, which continued to decline on the intermediate and long ends of the curve.

Retail investors shied away from high-grade deals while institutions, flush with cash from redemptions, showed some appetite for the day’s moderate supply. More sophisticated individual investors showed interest in the lower-credit bonds, according to a trader in New York.

“It’s the only place to get some type of yield,” he said.

Tax-exempt yields have fallen across most of the curve Thursday, reaching or matching calendar lows. They held steady at the short end, according to the Municipal Market Data triple-A scale. Yields for maturities in the belly of the curve were one to three basis points lower. Longer-term yields fell three to four basis points.

The 10-year benchmark yield ended Thursday one basis point lower at 2.63%, the MMD scale showed. The 30-year yield dropped three basis points to 4.23%, its low since Nov. 12.

The two-year yield was unchanged at 0.42% for the fourth day in a row, its lowest level since Sept. 7, according to MMD numbers. Before that, it had held at 0.44% for 17 consecutive trading sessions.

The Bond Buyer’s one-year note index also reached a record low of 0.34% this week.

Short-term yields appear to have just about reached their tether, said Michael Pietronico, chief executive officer at Miller Tabak Asset Management. “The short end has basically run out of room to rally, because yields are so low,” he said. “Generally speaking, if the market rallies or even sells off, it probably should be led by the intermediate and long end in both directions.”

Treasury yields were mixed Thursday after a dramatic week where they increased sharply on Tuesday and fell steeply Wednesday. The 10-year yield fell four basis points to 2.93%.

The two-year yield rose one basis point to 0.39%. The 30-year yield fell two basis points to 4.17%.

The markets have been in risk-aversion mode for the past couple of days. Muni investors, in particular, have been cautious, traders said. Gloomy economic news coupled with negative headlines in Greece painted a dark picture through the middle of the week.

While Treasury yields fell and rose, equities performed in reverse. The major stock market indexes all vaulted at least 1% on Tuesday, but plummeted on Wednesday by at least 1.48%. On Thursday, the equities market indexes were steadier, mostly mixed, with only modest gains or losses.

Taxables led the way Thursday and provided some follow-up from munis, according to MMD analyst Randy Smolik. But longer serials and the dollar-bond sectors showed the most gains on the day.

New deals, which were expected to total $5.22 billion this week, received a mixed reception. Still, it marked the first time this calendar year that at least $5 billion in new issuance hit the market in consecutive weeks.

JPMorgan was busy with the day’s largest new issues. The firm priced $119.7 million of Missouri Health and Educational Facilities Authority revenue bonds for Washington University. The bonds were issued in two series, both rated triple-A by Moody’s Investors Service and Standard & Poor’s.

The first series of $23.1 million has a 5% coupon and yields 4.37% in 2041. The second series has a $39.2 million 2030 maturity that yields 3.95%, with a 5% coupon, and a $57.4 million 2037 maturity with a 5% coupon that yields 4.34%.

JPMorgan also priced $101.08 million of Puerto Rico Industrial Tourist Educational Medical Environment Authority hospital revenue and refunding revenue bonds. They are rated A-minus by Standard & Poor’s.

Yields range from 3.48% in 2015 to 6.25% in 2033. The debt also offers coupons at 5% in bonds that mature in 2015 through 2021, 6.25% for bonds that mature in 2026, and 6.125% for bonds that mature in 2033.

The day’s deals found some investors with appetite, Pietronico said. By midday, he told clients that the new issue market was doing very well.

Economic indicator data released Thursday projected a thin beacon of hope for the U.S. economy, particularly after following the gloomy numbers published earlier in the week. Housing starts, for one, shined a somewhat brighter hue by beating analysts’ projections.

The Department of Commerce reported that privately owned housing starts in May were at a seasonally adjusted annual rate of 560,000, a 3.5% rise from the revised April estimate of 541,000. But the number falls 3.4% below the May 2010 rate of 580,000. Single-family housing starts in May clocked in at a rate of 419,000. This is 3.7% above the revised April figure of 404,000.

Unemployment claims tagged along. The Department of Labor reported lower claims for weekly unemployment insurance.

In the week ending June 11, the advance figure for seasonally adjusted initial claims was 414,000 — down 16,000 from the previous week’s revised figure of 430,000.

The advance seasonally adjusted insured-unemployment rate was 2.9% for the week ending June 4, which stands unchanged from the previous week’s unrevised rate.

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