After weeks of enjoying the continued “flight to quality” and record-setting auction results, last Wednesday Treasury yields rose. On Monday, the 10 year and the 30 year Treasury bonds opened at yields of 2.04% and 3.11 % respectively after having touched their lows of the previous week, 1.89% and 2.94%. This adjustment represents a sell-off of 15 and 17 basis points, most of which occurred between last Wednesday and Friday.
The pundits are always are quick to offer explanations for every flutter in the markets, and in this case they reference a potential “flood of liquidity” from the European Central Bank and the International Monetary Fund lowering its increased reserve target from $1 trillion to $500-$600 billion. Since markets rarely trade in a straight line fashion, we expect a bit of a breather here and possibly some retrenchment before the next directional move.
Tax-exempt bonds broke record low rates for several days in a row last week before weakening. The AAA municipal scale last Wednesday touched a low of 1.67% for the 10 year and a 3.15% for the 30 year before correcting to yields of 1.83% and 3.34% on Friday. It seemed to us that initial unemployment claims posting a level of 352,000 versus the consensus estimate of 385,000 would not alone be enough to initiate that type of correction; we believe it was most likely profit-taking that drove the market down to the point that there were more than $500 million in bids-wanted in just one day.
However, in the face of this downdraft, mutual fund inflows continued to remain positive at $1 billion for the week ending January 18, with another $265 million going into high yield funds after posting just under $500 million for the previous week. There is still a lot of cash out there, and high yield bonds are still cheap on a relative basis. Once levels are adjusted, this could lead to another round of buying. New issue supply this week is expected to be the largest so far this year at $4.5 billion, led by a $402 billion Florida JEA water and sewer issue and a $400 million New York City water and sewer financing. HJ Sims, as a joint manager, will be pricing $49,535,000 Red River Health Facilities Development Corporation bonds for Eden Home in New Braunfels, Texas with maturities ranging from 2022 to 2047. Other higher yielding deals on the negotiated calendar include a $16,500,000 Pima County Arizona charter school issue and $129 million Baa1/BBB Martin County Florida Health Facilities revenue bonds.