The municipal market was mostly weaker yesterday, with long-end yields higher by as much as three to five basis points, as Puerto Rico came to market with the week’s largest transaction.
Traders said that while tax-exempts yields were higher by about three basis points overall on the long end, bonds maturing inside of 20 years were fairly unchanged.
“We’re definitely cheapening up on the long end again,” a trader in New York said. “We’re [weaker] a good two or three basis points out long, maybe even more. The rest of the curve is fairly flat, but we’re definitely down a bit out long again.”
“We’re seeing losses of a good three to five basis points on the longer end of the curve,” a trader in Los Angeles said. “There’s definite weakness out there. I’m not sure paper inside of 20 years or so isn’t pretty much flat, though, maybe even a little bit firmer. But I’d call it unchanged mostly, and overall I’d say we’re a little weaker.”
In the new-issue market yesterday, Citi priced $1.84 billion of sales tax bonds for the Puerto Rico Sales Tax Financing Corp. in three tranches. Bonds from the $1.54 billion component mature from 2016 through 2027, with term bonds in 2030, 2037, 2039, 2040, and 2042. Yields range from 3.375% priced at par in 2016 to 5.65% with a 5.5% coupon in 2042. The bonds are callable at par in 2020, except bonds maturing in 2030 with a 5.625% coupon, which are callable at par in 2015. Bonds maturing in 2040 are insured by Assured Guaranty Corp. The remaining bonds are uninsured.
The deal also contains $150.0 million of capital appreciation bonds maturing from 2031 through 2026, with yields to maturity ranging from 6.65% in 2031 to 6.77% in 2036. These bonds are not callable. Additionally, a $150.2 million component of CABs matures in 2029 and 2033, with yields to maturity of 6.125% and 6.25%, respectively. The bonds are not callable.
The credit is rated A2 by Moody’s Investors Service, A-plus by Standard & Poor’s, and A by Fitch Ratings.
The Federal Open Market Committee yesterday held the federal funds rate target unchanged at its 0% to 0.25% range yet again, as was widely expected. It also reaffirmed its commitment to keeping the rate “exceptionally low” for an “extended period,” according to the statement released accompanying the meeting’s close.
However, this was not a unanimous decision, as Federal Reserve Bank of Kansas City president Thomas Hoenig dissented, favoring the removal of the reference to keeping the rate “exceptionally low.”
Joseph LaVorgna, managing director and chief U.S. economist at Deutsche Bank, wrote in a commentary that Hoenig’s dissent was the “biggest surprise.”
He also wrote: “The fact that the statement differentiated between the contraction in bank lending and growth-supportive financial market conditions suggests that this may have been a point of contention among meeting participants.”
“Perhaps policymakers are puzzled as to why banks are not lending more aggressively given the accommodative stance of policy,” LaVorgna added. “If this is the case, it could be evidence of a limited consensus on the optimal method and extent to which the Fed should address the excess reserve situation. Nonetheless, even without making a significant shift in policy tone, the stance of monetary policy is set to become less accommodative as the Fed is winding down several of its emergency liquidity facilities.”
The Treasury market showed losses yesterday, following the FOMC decision. Yields had shown little movement previously. The yield on the benchmark 10-year note opened at 3.62% and was quoted near the end of the session at 3.64%. The yield on the two-year note opened at 0.85% and was quoted near the end of the session at 0.91%. The yield on the 30-year bond was quoted near the end of the session at 4.57%, after opening at 4.55%.
Yesterday’s Municipal Market Data triple-A scale yielded 3.00% in 10 years and 3.80% in 20 years, compared to levels of 3.00% and 3.78% on Tuesday. The scale yielded 4.21% in 30 years yesterday, following Tuesday’s level of 4.15%.
As of Tuesday’s close, the triple-A muni scale in 10 years was at 83.6% of comparable Treasuries, and 30-year munis were 91.8% of comparable Treasuries, according to MMD, while 30-year tax-exempt triple-A general obligation bonds were at 93.7% of the comparable London Interbank Offered Rate.
Elsewhere in the new-issue market yesterday, Barclays Capital priced $235.9 million of revenue bonds for the Southern California Public Power Authority.
The bonds mature from 2011 through 2030, with terms from 0.60% with a 4% coupon in 2011 to 4.54% with a 4.5% coupon in 2030. The bonds, which are callable at par in 2020, are rated A1 by Moody’s and AA-minus by Standard & Poor’s.
Bank of America Merrill Lynch priced $215.9 million of water pollution control and drinking water refunding revenue bonds for the Missouri Environmental Improvement and Energy Resources Authority. The bonds mature from 2011 through 2024, with yields ranging from 0.28% with a 2% coupon in 2011 to 3.41% with a 5% coupon. The bonds, which are callable at par in 2020, are rated triple-A by both Moody’s and Fitch.
In economic data released yesterday, new home sales dropped 7.6% in December to 342,000 homes purchased at an annual rate, the lowest monthly total since March. Economists expected 370,000 new home sales for the month, according to the median estimate from Thomson Reuters.
