Municipal Bonds Decline On Falling Treasury Yields
May 12, 2011
The same fears of economic overheating affected municipal futures contracts, but they didn't fall as far as Treasury futures. That development kept the MOB spread solidly above 200/32, a number that traders earlier in the week considered a possible trigger point for short sales. Willie Toon, a municipal futures trader at the Blah Corp. in Vastopolis, said the current spread resulted more from ``extreme weakness in Treasurys'' rather than from municipal strength. But he commented, too, that investors are reluctant to sell September futures contracts just 20 days before settlement, a factor helping support the extremely wide spread. Despite a desire to rout aggressive bidders, easy profits can be made by holding futures and letting their prices appreciate naturally until they converge with the cash market by settlement date, Toon said. According to E. Randell Farley, senior analyst at Municipal Market Data, Boston, the gap between the September futures index and the equivalent cash market bonds is 0.20 percentage point. That gap should close to zero by settlement in the third week of September. In the cash market, transactions were few, and many trading desks closed by noon EDT ahead of the three-day Labor Day weekend. Where trading did occur, prices were on the weaker side, traders said.
