The municipal market was unchanged with a slightly firmer tone yesterday, as the Federal Open Market Committee again held the federal funds rate target steady in its 0% to 0.25% range.
“There is still a bit of a firmer tone, but that’s mostly a carry-over from yesterday,” a trader in New York said. “We’ve had that firmer feeling for a little while now. But I’m not really seeing enough to say that it’s solidly better today. It feels somewhat flat to me. But if we’re leaning in any direction, it’s a little better. Maybe a basis point or so at most.”
“You can pick up a basis point or so in spots, but it’s mostly pretty flat,” a trader in San Francisco said. “There is some decent activity, some deals are getting done on the Street, but I’d call it pretty much flat.”
The Treasury market showed losses yesterday. The benchmark 10-year note was quoted near the end of the session with a yield of 3.77% after opening at 3.69%. The yield on the two-year finished at 1.04% after opening at 1.00%. The yield on the 30-year bond finished at 4.63% after opening at 4.58%.
The Municipal Market Data triple-A scale yielded 2.94% in 10 years and 3.79% in 20 years yesterday, compared with Tuesday’s levels of 2.93% and 3.79%. The scale yielded 4.06% in 30 years yesterday, matching Tuesday.
Tuesday’s triple-A muni scale in 10 years was at 79.4% of comparable Treasuries and 30-year munis were at 89.0%, according to MMD, while 30-year tax-exempt triple-A general obligation bonds were at 92.9% of the comparable London Interbank Offered Rate.
In the new-issue market yesterday, Morgan Stanley priced $200 million of transmission contract refunding and improvement revenue bonds for the Lower Colorado River Authority in Texas.
The bonds mature from 2012 through 2025, with term bonds in 2030 and 2040. Yields range from 1.25% with a 4% coupon in 2012 to 4.81% with a 5% coupon in 2040.
The bonds, which are callable at par in 2020, are rated A2 by Moody’s Investors Service, A by Standard & Poor’s, and A-plus by Fitch Ratings.
In the competitive market, the Ohio Water Development Authority sold $40 million of water pollution control loan fund revenue bond anticipation notes to Citi with a true interest cost of 0.24%.
The Bans mature in November 2010 with a 5% coupon, and were not formally re-offered.
The credit is rated MIG-1 by Moody’s and SP-1-plus by Standard & Poor’s.
The FOMC yesterday held the federal funds rate target unchanged in its range of 0% to 0.25%.
This marks the 12th consecutive meeting that the rate has been at such a level, and the 11th straight time the Fed has chosen inaction.
In yesterday’s statement, the Fed opted to again include language stating it “continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”
In a report, Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities, wrote that “the April FOMC meeting statement was very moderately upgraded from that of the March meeting.”
“As we expected, policymakers opted to retain the 'exceptionally low’ and 'extended period’ language with respect to the level of the fed funds rate. The inflation language was again copied verbatim from the previous meeting statement,” he wrote. “While the outdated language on the expired liquidity measures was removed from the statement, the only substantive language modifications related to housing starts and the labor market.
“Policymakers acknowledged the latest upturn in housing starts, but continued to emphasize that they are still at 'depressed levels.’ With respect to the labor market, it was described as 'beginning to improve’ versus 'stabilizing’ previously,” LaVorgna noted. “We doubt that officials who were concerned about another jobless recovery at the time of the January and March meetings have decidedly changed their view given the employment figures of late. However, we continue to believe that a significantly increased pace of hiring is imminent — we are looking for plus-225,000 on April payrolls, which are reported next Friday.”
“We maintain the view that when the labor data meaningfully strengthen, policymakers will become more broadly comfortable with advancing the Fed’s exit strategy,” he wrote. “This is likely to occur in time for a more meaningful language change at the June 23 FOMC meeting, possibly including either the removal of 'extended period’ or the addition of some form of enhanced conditionality.”
In another report, Eric Green, chief of U.S. rates research and strategy at TD Securities, wrote that “the main question from the post-meeting statement is what one can reasonably conclude about the state of play on the rate process from such a boilerplate communication.”
“We do not know if the events in Europe may have encouraged the FOMC to not rock the boat, but from our vantage the overriding theme of caution remains paramount. We expected that to be the case,” he wrote.
“The key point in this 'exceptionally’ dull statement is that the Fed is in no hurry to raise rates, and appears to be in no hurry to take on the headache of managing rate expectations by deleting extended period,” Green continued. “Economic slack coupled with the ongoing deceleration in core prices and a politically charged environment in advance of mid-term elections all suggest that the Fed has little incentive to raise rates this year.”
“The question is when the Fed will delete the extended language commitment,” he wrote. “One can make the case that it is less relevant today as Bernanke has reiterated ad nausea that rates are policy-dependent. However, rates are always policy-dependent in principle and Bernanke also knows that the language, right or wrong, has taken on a life of its own. We continue to believe the Fed is likely to delete that language, thereby moving the Fed on a bona fide data dependant path, at the June meeting, August at the latest.
Federal Reserve Bank of Kansas City President Thomas Hoenig once again dissented with the FOMC’s consensus, objecting to keeping the phrases “exceptionally low” and “extended period” in the statement, feeling they are no longer warranted.
