Market Close: Treasuries Pull Munis Lower

Although bid-wanted activity appeared to taper off today, the municipal market continued to weaken, as jittery investors sold Treasuries ahead of a meeting of the Federal Open Market Committee next week that a growing majority of analysts expect to be hawkish. Traders said tax-exempt yields increased by three to four basis points as prices fell. "It's just another painful day in municipals. I can't even say that it's raining bonds, that there are bid-wanteds everywhere," a trader in New York said. "It's more that people aren't doing anything today. There aren't as many bonds out for the bid today, but, with the continued Treasury softness, buyers certainly aren't coming in. One other factor is that ratios aren't moving in our favor." A trader in Los Angeles said the market was trudging through some illiquidity due to a lack of buy-and-hold investors. "A lot of firms are full to capacity, and that is hurting our activity. People can't shovel out their old stuff fast enough to take in new stuff," she said. "Not everyone is rushing for the door -- they want to -- but they are going to cut bonds. We are seeing some business getting done at nice levels." Although the flow of bid-lists into the market slowed today to a more manageable pace, Employers Reinsurance Corp. reportedly put out for the bid a list of about $350 million bonds, its fourth list of about that size since June 13. ERC is selling a total $7.5 billion of high-grade municipal bonds, according to market sources. Selling by arbitrage accounts was muted today after several days of heavy liquidation. Dealers, however, were not able to enjoy a day's reprieve from red ink because Treasuries slid lower, dragging municipals along. With fairly robust weekly jobs data helping to spook a jumpy market, the yield on the two-year note increased three basis points to 5.24%, its highest level since December 2000. The 10-year Treasury note yield increased five basis points to 5.21%, its highest level since May 2002. The Labor Department reported this morning that first-time applications for state unemployment benefits rose 11,000 to 308,000 in the week ended June 17, slightly lower than the 310,000 level predicted by IFR Markets. The four-week moving average -- typically viewed as a better gauge of unemployment -- was 311,250, a decrease of 5,000 from the previous week's revised average of 316,250. The Chicago Fed National Activity Index for May was negative 0.16, down from a downwardly revised positive 0.26 reading in April. Meanwhile, the three-month moving average remained positive at 0.16 in May, down from a downwardly revised positive 0.21 in April. A positive three-month average indicates national economic growth was above its historical trend and potential exists for inflationary pressure over the coming year. Also, the composite index of Leading Economic Indicators was down 0.6% in May, the Conference Board reported. Municipal yields have been rising steadily since June 9, which is when ERC announced it would be unloading bonds the following week. From June 9 to yesterday morning, the yield on 30-year municipal bonds increased 18 basis points to 4.60%, according to Municipal Market Data's triple-A scale. Similarly, the yields on one- and two-year bonds have increased by 15 and 17 basis points to 3.65% and 4.10% during the same period. Compounding the bearishness in munis, Treasuries have been eroding since the middle of last week, when higher-than-expected consumer price data convinced investors that the Federal Open Market Committee would increase the federal funds rate at least one more time. The FOMC meets Wednesday and June 29, and the fed funds rate currently is 5%. Investors expect an increase of 25 basis points at that meeting, but will carefully parse the FOMC's forward-looking statement for indications about further tightening. In the new issue market, Loop Capital priced the $245 million of Michigan trunk line fund bonds to yield from 3.83% in 2008 to 4.52% in 2021. Reflecting the weakness in the secondary, Loop increased most yields by one to three basis points at repricing. Financial Guaranty Insurance Co. insured the bonds, with have underlying ratings of Aa3 from Moody's Investors Service, AA from Standard & Poor's and AA-minus from Fitch Ratings. Bonds are callable at par in 2016. Lehman Brothers priced $110 million of New Jersey Education Facilities Authority bonds on behalf of Montclair State University. Serial bonds in a $99 million revenue and refunding series were priced to yield from 3.70% in 2007 to 4.58% in 2024. Term bonds had 5% coupon and yielded 4.61% in 2027, 4.66% in 2031 and 4.69% in 2036. A $10 million refunding series was priced to yield from 3.75% in 2008 to 4% in 2012. Bonds are callable in 2016 at par. Ambac Assurance Corp. guaranteed the bonds, which have underlying ratings of A2 from Moody's Investors Service and A from Fitch Ratings. Earlier, Citigroup Global Markets Inc. priced $90 million of Phoenix Union High School District No. 210 school improvement bonds to yield from 3.65% in 2007 to 4.86% in 2025. There is a par call in 2016. MBIA Insurance Corp. insured the bonds, which have underlying ratings of Aa3 from Moody's and AA from Standard & Poor's. Visible Supply The Bond Buyer's 30-day visible supply declined today by $1.4 billion to $5.4 billion. The total is comprised of $999 million of competitive deals and $4.4 billion of negotiated bonds. Previous Session's Activity The Municipal Securities Rulemaking Board reported 40,824 trades yesterday of 16,187 separate issues for volume of $29.76 billion. Most active was Indianapolis Local Improvement Bond Band 4.7s of 2037, which traded 103 times at a high of 99.5 and a low of 98.190.