The tax-exempt market finished lower Wednesday, following Treasuries, ahead of Thursday’s Federal Open Market Committee meeting announcement.
Muni yields followed Treasury yields higher as there was limited primary issuance and secondary trading activity to provide direction.
Throughout the day, traders agreed that munis took their lead from Treasuries. “I am hearing, seeing, and feeling all of the above,” one New Jersey trader said, adding activity is better in the secondary market than it was earlier in the week, but lower Treasuries are the driving force behind lower munis.
“There are some bids-wanted but it’s stale in the secondary,” he said. “There is nothing new to note on the new issue side. I would say there are still some bonds left on the books.”
He also added that while the market is anticipating the FOMC announcement, munis are primarily looking to Treasuries. “Treasuries will have more of an effect than the meeting.”
Another trader agreed munis were lower and that activity had picked up from earlier in the week. “Activity is picking up a little,” a New York trader said.
In the primary market, Bank of America Merrill Lynch priced $266.3 million of California State Public Works Board lease revenue and lease revenue refunding bonds. The lease revenue bonds are rated Aa3 by Moody’s Investors Service and BBB-plus by Standard & Poor’s and Fitch Ratings. The refunding bonds are rated Aa2 by Moody’s, AA-minus by Standard & Poor’s and AA by Fitch.
Yields on the first series, $117.9 million of lease revenue bonds, ranged from 0.82% with a 4% coupon in 2015 to 3.98% with a 5% coupon in 2037. The bonds are callable at par in 2022.
Yields on the second series, $56.2 million of lease revenue bonds, ranged from 0.35% with a 2% coupon in 2013 to 4.10% with a 4% coupon in 2037. The bonds are callable at par in 2022.
Yields on the third series, $92.2 million of lease revenue refunding bonds, ranged from 0.30% with 3% and 1.5% coupons in a split 2014 maturity to 2.23% with a 5% coupon in 2022. Credits maturing in 2013 were offered via sealed bid.
JPMorgan priced $157 million of City of Colorado Springs, Colo., utility system revenue bonds, rated Aa2 by Moody’s and AA by Standard & Poor’s and Fitch.
Yields on the first series of $113.9 million, ranged from 0.39% with a 3% coupon in 2014 to 3.74% with a 3.625% coupon in 2042. Credits maturing in 2013 were offered via sealed bid. The bonds are callable at par in 2022.
Yields on the second series of $43.1 million, ranged from 0.39% with a 3% coupon in 2014 to 3.27% with a 5% coupon in 2042. Credits maturing in 2013 were offered via sealed bid. The bonds are callable at par in 2022.
Morgan Stanley priced and repriced $87.4 million of Jacksonville Port Authority revenue refunding bonds, subject to the alternative minimum tax. The bonds are rated A2 by Moody’s and A by Fitch.
Yields ranged from 2.95% with a 4% coupon in 2020 to 4.25% with a 5% coupon in 2038. The bonds are callable at par in 2022. Yields were lowered five and seven basis points on long end.
In the competitive market, JPMorgan won the bid for $190 million of Iowa Board of Regents hospital revenue bonds for the University of Iowa hospitals and clinics. The bonds are rated Aa2 by Moody’s and AA by Standard & Poor’s.
Yields ranged from 1.55% with a 4% coupon in 2018 to 3.85% with a 4% coupon in 2038. Bonds maturing between 2014 and 2017 and in 2022 were not formally re-offered. The bonds are callable at par in 2022.
On Wednesday, the 10-year Municipal Market Data yield jumped three basis points to 1.84% while the 30-year yield spiked up four basis points to 2.98%. The two-year closed at 0.29% for the 34th consecutive session.
Treasuries weakened on positive Eurozone news and the start of the FOMC’s two-day meeting. The benchmark 10-year yield jumped six basis points to 1.76% while the 30-year yield soared eight basis points to 2.92%. The two-year yield fell one basis point to 0.25%.
In the secondary market, trades compiled by data provider Markit showed a mix of stronger and weaker trades. Yields on Florida Board of Education 5s of 2022 jumped six basis points to 2.07%. Yields on Connecticut 5s of 2022 and Puerto Rico Commonwealth Aqueduct and Sewer Authority 5.25s of 2042 rose three basis points each to 2.06% and 5.27%, respectively.
To be sure, a few trades showed strength in the market. Yields on California’s Golden State Tobacco Securitization Corp. 5.75s of 2047 dropped three basis points to 6.87% while New York’s Metropolitan Transportation Authority 4s of 2038 fell one basis point to 3.61%.
Fixed income markets kept eyes on Thursday’s FOMC meeting to see if the Fed would launch additional stimulus. Guy LeBas, chief fixed income strategist at Janney Capital Markets, said he does not expect the Fed to launch Quantitative Easing 3, but says they could extend the low rate guide to mid or late 2015.
“QE3 could come at December’s FOMC meeting to coincide with the end of Operation Twist,” he said. He added that if the Fed does launch QE3, it will most likely steepen the yield curve of the Treasury market and compress spreads on non-Treasury assets, such as mortgage-backed securities, corporates, and munis.
“The more likely effect of QE3 is it will keep short and intermediate yields depressed so we are not too hesitant to recommends longer bonds,” he said. “The Fed is forcing investors into other types of higher-yielding assets.”
