Munis End Flat Following FOMC News

The tax-exempt market pared morning losses in the afternoon upon news that the Federal Open Market Committee would not take further action. While munis ended the day mostly flat, traders said the focus of the market was on the long end.

“Munis were mostly flat throughout the day,” a trader in Los Angeles said. “Munis have been on fire for the past few weeks given the lack of supply, so if anything, it’s a function of everyone having so much cash and waiting for rates to improve. But they aren’t improving, so people have no other choice but to get in.”

Munis turned firmer after the Federal Open Market Committee said it has no additional policy accommodations. It maintained its 0% to 0.25% target range for the federal funds rate and noted, “The economy has been expanding moderately, notwithstanding some apparent slowing in global growth.”

“The Fed continues to be disappointed in the pace of the recovery and the evolution of inflation, while acknowledging a better growth trajectory recently,” wrote Paul Edelstein, U.S. economist at IHS Global Insight. “So any decision on additional stimulus is deferred until next year, at which point the Fed’s likely move would be to increase its holdings of mortgage-backed securities to help improve conditions in housing.”

After the announcement, a New York trader said munis turned positive, but dealers are trying to lighten up before the end of the year. “I just talked to a big money manager and he is sitting on a lot of cash.”

Traders also said the focus of the market was on the long end.

“We are getting spurts of sporadic buying,” the New York trader said. “Dealers aren’t stocking a whole lot ahead of 10 years” as the end of the year approaches. If buyers are purchasing bonds inside the 10-year, most of the bonds are pre-refunded, he said.

A trader in Atlanta said the market seems quieter Tuesday than it was last week. “It’s unchanged and retail has slowed a little with the lower yields we’ve had,” he said. “There is more interest in longer end of the market.”

Munis were mostly flat to slightly stronger, according to the Municipal Market Data scale. Yields inside the 10-year were unchanged, but yields between the 10- and 13-year fell one basis point. Yields were unchanged between the 14- and 25-year maturities. Yields dropped one basis point beyond the 26-year maturity.

On Tuesday, the two-year muni yield closed flat at 0.36% for its fifth consecutive trading session. The 10- and 30-year muni yield closed down one basis point each to 1.96% and 3.68%, respectively.

Treasuries rallied in the afternoon after the FOMC announcement.

The benchmark 10-year yield jumped up three basis points in the morning to 2.06% and then fell nine basis points from there to close at 1.97%. The 30-year yield rose three basis points in morning trading to 3.09% and then fell eight basis points to 3.01%. The two-year yield closed flat at 0.24%.

In the primary market, the competitive calendar took the lead with New York’s Empire State Development Corp. bringing two pricings totaling $700.3 million. Bank of America Merrill Lynch won the bid for both issues. The deals are rated AAA by Standard & Poor’s and AA by Fitch Ratings.

The Atlanta trader said Empire State is one of the “most interesting deals” on Tuesday.

Yields on the first series, $542.9 million of state personal income tax revenue bonds, ranged from 1.01% with a 5% coupon in 2016 to 3.80% with a 4% coupon in 2032. Credits maturing between 2012 and 2015, 2025, 2033 to 2036, and 2041 were sold but not available. The debt is callable at par in 2021.

Yields on the second series, $157.4 million of federally taxable state personal income tax revenue bonds, ranged from 0.25% priced at par in 2012 to 2.79% priced at par in 2021. Credits maturing in 2014 were sold but not available.

In the negotiated market, Wells Fargo priced for retail $200 million of District of Columbia income tax secured revenue bonds. The credit is rated Aa1 by Moody’s Investors Service, AAA by Standard & Poor’s, and AA-plus by Fitch.

Yields ranged from 0.30% with a 2% coupon in 2012 to 4% priced at par and 3.98% with a 5% coupon in a 2036 split maturity. The debt is callable at par in 2021.

Barclays Capital priced $155 million of Massachusetts State College Building Authority project revenue bonds. The credit is rated Aa2 by Moody’s and AA by Standard & Poor’s.

Yields ranged from 0.51% with a 3% coupon in 2013 to 4.15% with a 5% coupon in 2041. The debt is callable at par in 2022.

In the secondary market, most trades showed munis were flat to slightly weaker.

Bonds from an interdealer trade of Massachusetts Development Finance Agency 5s of 2041 yielded 4.57%, four basis points higher than where they traded Monday.

A dealer sold to a customer Massachusetts Development Finance Agency 5s of 2036 at 4.46%, three basis points higher than where they traded Monday.

A dealer bought from a customer Washington 5s of 2041 at 4.13%, two basis points higher than where they traded last Friday.

A dealer sold to a customer Ohio 5s of 2022 at 0.32%, two basis points higher than where they traded Monday.

But one trade in the afternoon showed significant firming. A dealer bought from a customer Birmingham, Ala., Baptist Medical Center 5s of 2030 at 5.90%, seven basis points lower than where it traded Monday.

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