U.S. Muni Market: Surprisingly Strong U.S. Economy Sparks Fixed-Income Sell-Off

Texas Set to Add to Taxable Supply

Investors have generally witnessed a recent rise in the yields of municipal bonds, as prices of U.S. government notes have fallen amid a rosier risk-taking backdrop. 

Market participants widely attribute the better risk tone in large part to a recent cooling in the U.S.-China trade battle, as well as an upbeat October employment report.

Nuveen analysts Bill Martin and John Miller noted that fixed income yields, in general, rose in the past week, but the sell-off was “orderly.” 

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They added that markets continue to “adjust to the fact that the economy is not as weak as was feared over the summer,” while progress in the U.S.-China trade talks “made investors even more confident in the U.S. economy.”

Indeed, the upbeat mood in the financial markets remained intact Tuesday, after U.S. President Donald Trump made clear in a speech at the Economic Club of New York that it is the U.S. that is deciding whether it wants to strike a trade agreement with China. “We’re close,” to a partial deal, he said. “A significant phase-one trade deal with China could happen … could happen soon.”

The yield on the 10-year U.S. Treasury note was last bid at around 1.93%, an increase of 46 basis points since its recent trough of 1.47% set at the start of September. The spread between the 2-year and 10-year notes has also gapped wider by more than 25bps after having inverted briefly in late August.  

Against this backdrop, yields on longer-dated tax-exempt issuance ended last week higher by about 15bps, amid a bear steepened yield curve.

Analysts at Janney Montgomery observed that the1.62%, 10-year benchmark yield reached its highest level since early July, and the spread between the 2-year and 10-year yield has widened by more than 20bps to 45bps in the past month.

Janney added that most of last week’s new sales have traded at “cheaper levels” compared to their original pricing, including the 30-year maturity of New Jersey Economic Development Authority’s (NJEDA) school facilities construction bonds, with blocks of the deal’s 4% trading at 3.78% yield-to-call, 5bps less expensive than its initial offering and 150bps over the ‘AAA’ benchmark yield.

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DISCLOSURE: AUTHOR SECURITY HOLDING: NO POSITIONS

The author does not hold any positions in the financial instruments referenced in the materials provided.

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