The midterm elections dominated traders' attention this week as Republican's seized control of the U.S. Senate, fanning concern that the municipal tax exemption may be changed.
Increases in muni yields, which had started after the Institute for Supply Management's manufacturing report beat expectations, continued until Friday, when they recovered some lost ground after U.S. employment data were weaker than forecast. One of the larger deals on next week's calendar, a $355.35 million Wisconsin general obligation refunding, was placed on day-to-das status because of its sensitivity to market conditions in a rising rate climate, according to an underwriter at senior book-runner Morgan Stanley & Co.
'"While the broader election results putting both houses of Congress under Republican control should not lead to significant, immediate consequences for munis, comprehensive tax reform talk could again raise market concerns over the potential for the muni tax exemption to be revisited," Patrick Early, chief municipal analyst at Wells Fargo Advisors, wrote in a report released on Wednesday, after the election. "We continue to believe that comprehensive tax reform with the potential to affect the muni exemption is not a near term concern, but with both chambers now under Republican leadership, we expect that the issue of tax reform could return as a headline risk item for munis."
The 10-year triple-A benchmark general obligation bond yield rose by eight basis points to 2.18% from Monday to Thursday, according to Municipal Market Data's triple-A scale. The 30-year increased by five basis points to 3.09% during the same period.
A worse than forecast employment situation report brought the municipal market's sell-off to a halt on Friday morning, and bonds strengthened by the end of the day, according to traders. Yields on bonds maturing from eight to 26 years fell by one basis point, according to MMD's triple-A scale. Those on bonds maturing from 27 to 30 years dropped by two basis points.
Traders attribute the market's strengthening on Friday to the employment report.
"Everyone was nervous it would cause the market to sell-off more, especially after the [ISM Manufacturing Index] number came out earlier," a trader in the south said. "But the employment numbers, sure unemployment rate fell, what? 0.1? All the underlying numbers were weak."
The employment situation report showed that nonfarm payrolls grew for the month of October, though the increase came in below analysts' expectations at 214,000.
Average hourly earnings month over month increased by 0.1%, shy of analysts' estimate of rise between 0.2% and 0.3%. Private payrolls for the month were 26,000 beneath analysts' predictions at 209,000.
Some traders were disappointed the sell-off is not continuing.
"There is so much cash on the side lines these days!" a trader in Chicago said. "If munis became significantly cheaper to buy than Treasuries it could have been a really opportunity, a real chance for the municipal market to be flooded with cash."
Treasuries strengthened on Friday with the two-year note yield falling by two basis points to 0.54%, the 10-year dropping by seven basis points to 2.32%, and the 30-year by four basis points to 3.05%.
Inflows Gain After Three-Week Fall
Municipal bond fund inflows rose after declining for three straight weeks.
Funds that report weekly had $85.3 million of inflows for the period ending Nov. 5, up from $37 million the week before, according to Lipper FMI.
Assets of all weekly reporting municipal funds dropped to $313.7 billion from $313.9 billion. The four-week moving average dropped to $151.8 million from $321.0 million.
Flows for long-term muni funds were negative, as they reported $191.7 million in outflows. This is worse than last week when long-term muni funds showed $12.8 million in outflows.
Long-term municipal mutual fund assets dropped to $164.8 billion from $165.1 billion last week. The four-week moving average for the long-term funds was an inflow of $90.8 million, down from $224 million last week.
High yield funds recovered, reporting inflows totaling $18.4 million following outflows of $20.8 million previously. Assets rose to $48.1 billion from $47.98 billion last week. The four-week moving average fell to $82.7 million from $143 million.
