The municipal market was slightly weaker in light trading yesterday, as the Federal Open Market Committee announced its decision to hold the federal funds rate at 2%.
"There's not much going on," a trader in Chicago said. "There's almost a February-ish feeling, where we disconnected. Treasuries have been rallying, and we were off. And now Treasuries are off, and we're off again."
Municipal bonds have cheapened significantly compared to Treasuries in recent days. The ratio between triple-A-rated, 30-year general obligation bonds and 30-year Treasury bonds reached 104.72% Tuesday, its highest level since April 10, according to Municipal Market Data.
"I think we're getting close to the point where people are going to come in," the trader in Chicago said.
After posting losses in the morning, the Treasury market rebounded following the FOMC's statement and was mixed to end the session. The yield on the benchmark 10-year Treasury note, which opened at 4.09%, finished at 4.11%. The yield on the two-year note finished at 2.82%, after opening at 2.87%. The yield on the 30-year finished at 4.65%, after opening at 4.63%.
The markets expected the FOMC to hold the federal funds rate steady at 2%, and instead focused on the Fed's statement, hoping to gain insight into how the Fed will weigh the weakening economy versus the threat of inflation.
"The Fed's statement was very much as expected, and only a slight surprise to the bond market, which was expecting something a bit more hawkish," said Ethan Harris, chief economist at Lehman Brothers.
In its statement, the Fed said "recent information indicates that overall economic activity continues to expand, partly reflecting some firming in household spending." But reiterating comments it made after its April meeting, the Fed remained concerned about softening labor markets, stress on the financial markets, tight credit conditions and the ongoing housing contraction.
The Fed said it expects inflation will be "moderate" this year and next, but "in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high."
The Fed also added that "although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased."
"I think the Fed did a good job doing a circus balancing act it's trying to perform," Harris said. "They're trying to bide time, hoping weakness in the economy will spare inflation."
Harris said he believes the Fed is most likely "nervously on hold," and will try to avoid raising its target rate by talking down inflation in upcoming months. Although Harris sees a chance of a single rate hike at the next few meetings, he expects the weakened economy will help slow inflation by the end of the year. The FOMC's next scheduled meeting takes place Aug. 5.
In other economic news, durable goods orders were unchanged in May after falling 1% in April, consistent with the expectations of economists polled by IFR Markets. However, durable goods orders excluding transportation fell 0.9% after rising 1.9% in April. New home sales data also fell slightly more than analysts expected, dropping 2.5% to 512,000 in May.
In today's new issues, M.R. Beal & Co. priced $442 million of state personal income tax revenue bonds for the Dormitory Authority of the State of New York. Bonds mature from 2009 through 2028, with yields ranging from 2.731% with a 3% coupon in 2010 to 4.77% with a 5% coupon in 2028. Bonds maturing 2009 were not reoffered. The bonds, which are callable at par in 2018, have underlying credit ratings of triple-A from Standard & Poor's and AA-minus from Fitch Ratings.
Morgan Stanley priced $330 million of health facilities revenue bonds for the Louisville and Jefferson County, Ky., Metropolitan Government for the benefit of the Jewish Hospital/St. Mary's Health Care Inc. Project Bonds mature 2022, 2023, 2027, and 2037, with yields ranging from 5.6% with a 6% coupon in 2022 to 6.18% with a 6.125% coupon in 2037. Bonds maturing 2022 are callable at par in 2013, while all other bonds are callable at par in 2018. The bonds are rated A3 by Moody's Investors Services and A-plus by Standard & Poor's.
Bonds from both series are callable at par in 2018. They have underlying ratings of A2 from Moody's, A-plus from Standard & Poor's and A-plus from Fitch.
Meanwhile, details were released on the offering of $1.5 billion of various-purpose GOs Citi priced Tuesday for California. Bonds mature from 2009 through 2031, with term bonds in 2034, 2036, and 2038. Yields range from 2.7% with a 3% coupon in 2010 to 5.3% with a 5.25% coupon in 2038. The bonds, which are callable at par in 2018, have underlying ratings of A1 from Moody's, A-plus from Standard & Poor's, and A-plus from Fitch.
