Municipal bonds weakened Thursday amid investor concern that a report on employment scheduled to be released on Friday morning may worsen the selloff.
Investors are worried that the unemployment rate will drop and that nonfarm payroll employment will rise enough to hurt the municipal market. They are especially wary of the report because the ISM Manufacturing Index on Monday beat analysts' predictions, and the municipal market began to sell-off, and the weakening continued for the rest of the week. Traditionally when positive economic news is reported, municipal bonds weaken with other fixed income securities.
The employment report is a stronger indicator of where the United States' economy is at, a trader on the west coast said. Therefore, if the report shows a strong economy it will affect municipal bonds more than the ISM Manufacturing report.
The trader said it does not help that nonfarm payrolls rose the last three months.
"Why would October be any different," he said.
A trader in the south also pointed out if a strong employment report comes out, the subsequent potential sell-off may further be exacerbated by the weakening in Treasuries that began on Thursday.
Typically municipal bonds and Treasuries behave in near lock-step, with municipal bonds' yield rising when Treasuries do and vice versa. This week however, Treasuries were stable Monday through Wednesday while yields on municipal bonds rose.
Treasuries did begin weakening on Thursday, though, with the two-year note's yield increasing by three basis points to 0.55% from market close on Wednesday. The 10-year's yield grew by two basis points to 2.38%, and the 30-year's by 3.10%.
Yields on municipal bonds grew by two basis points for bonds maturing from six to eight years, according to Municipal Market Data's triple-A scale. They rose by three basis points for bonds maturing from nine to 30 years.
Health and Higher Ed Credits Top Thursday Trading
Health and Higher Education Authorities' bonds dominated both the primary and the secondary muni markets Thursday morning.
Investors said the $127.3 million Maryland Health and Higher Education Facilities Authority's refunding revenue bonds for its Anne Arundel Health System is one of the most attractive deals in the primary.
The top two most actively traded Cusips according to EMMA are the Health and Education Facilities Authority of Missouri's health facilities revenue 4.25s of 2048 and 4s of 2045. Traders said the bonds were active because they just became free to trade, and because investors are genuinely interested in the credit itself.
"It's difficult to get Maryland credits that carry yield," a trader in the south said. "They issue general obligation bonds frequently, but those are triple-A any everyone wants them, so even after the bonds are purchased they are usually repriced lower and lower."
The Maryland Health and Higher Educational Facilities Authority bonds are rated A3 by Moody's Investors Service, and A-minus by S&P and Fitch.
Yields on the bonds ranged from 0.22% with a 2% coupon in 2015 to 3.84% with a 5% coupon in 2039.
Citigroup is the deal's managing underwriter, the bonds can be called in 2024 and they have sinking funds on term bonds in 2034, and two in 2039.
Traders said they are looking at the Missouri bonds for the same reason. Health and some education credits, particularly higher education securities, are typically higher yielding than state's GOs or utility bonds.
Investors said the Missouri bonds were attractive because their yield was elevated after Mercy Health's outlook was revised by both Moody's and S&P to negative from stable. Moody's rated the bonds Aa3 and S&P AA-minus.
"It's why the long bonds are trading so much," a trader in Chicago said. "People want yield, and these Mercy Health bonds are giving it to them."
The 4.25s of 2048 are trading at a high yield of 4.44% and a low of 4.23% according to EMMA. The bonds are being bought in both odd lot and block trades.
The 4s in 2045 are trading between a high of 4.30% and a low of 4.09% and they are also trading in both odd lot and block trades.
Primary Citigroup won the bid for the $500 million Maryland GO consolidated public improvement bonds. These bonds are rated triple-A by the three major rating agencies, and carry yields from 0.16% with a 5% coupon in 2015 to 3.11% with a 4% coupon in 2034.
The bonds can be called at par in 2024.
A second $321.9 million part of the deal was won by Barclays with yields from 0.38% with a 5% coupon in 2016 to 2.53% with a 5% coupon in 2028. These bonds can also be called at par in 2024.
Bank of America Merrill Lynch won the bid on the $141.6 million part of a $250.5 million total Massachusetts Water Resources Authority general revenue and general revenue refunding bond deal.
The bonds' yields range from 0.88% with a 5% coupon in 2018 to 3.71% with a 4% coupon in 2041.
These bonds earned ratings of Aa1 from Moody's, and AA-plus from S&P and Fitch. They can be called at par in 10 years.
The $234.6 million California Public Works Board deal was priced by JPMorgan with yields on a $137.1 million section of the three-part deal ranging from 0.63% with a 5% coupon in 2017 to 1.91% with a 5% coupon in 2021. These bonds have no optional call.
The $79.12 million segment's yields went from 0.20% with a 2% coupon in 2015 to 2.88% with a 5% coupon in 2026.
The final $18.41 million part had yields from 0.20% with a 2% coupon in 2015 to par with a 3% coupon in 2026.
The final two parts of the deal have an optional par call in 2024, and all the bonds are rated A1 by Moody's, A by S&P and A-minus by Fitch.
The Los Angeles Department of Water and Power sold $271 million water system revenue bonds with yields from 1.06% with a 4% coupon in 2019 to 3.41% with a 5% coupon in 2044.
There are sinking funds on a 2039 and a 2044 term bonds, and the bonds contain a par call option in 2024.
Morgan Stanley was the managing underwriter and the bonds are rated Aa2 by Moody's and AA by S&P and Fitch.
MMF Losses Shrink, But Outflows Continue
Tax exempt money market funds fell $992.5 million and total net assets declined to $251.65 billion in the week ended Nov. 3, according to The Money Fund Report, a service of iMoneyNet.com.
The losses are down from $2.93 billion that escaped from the industry in the prior week.
The seven-day yield for the 409 weekly reporting tax-exempt funds was unchanged at 0.01%.
Taxable money market funds grew by $1.80 billion to $2.403 trillion, down from inflows of $3.89 billion in the previous week.
The seven-day yield for the 1,005 weekly reporting taxable money funds was stable at 0.01%.
Overall the combined total net assets of the 1,414 weekly reporting money funds rose $804.6 million and total net assets settled at $2.655 trillion, which is down from the $962.6 million they added in the prior week.
