Quantcast
News

Market Close: Munis Weaken on Supply, QE3 Announcement

The tax-exempt market weakened for a third straight session Wednesday as too much supply forced yields higher.

Muni yields also followed Treasury yields higher as concerns about inflation took center stage after the Federal Open Market Committee announced plans to expand its QE3 program to include $40 billion a month of mortgage-backed securities and $45 billion a month of long-term Treasuries.

“People are now anticipating inflation to set in, which is why yields are rising,” a New York trader said, adding that muni yields are rising but at a lag.

“Munis are pretty quiet today,” he said. “There was a fair amount of new issues and munis are off anywhere from two to four basis points, depending on where on the curve you’re looking.”

He added the weakening is driven primarily by too much supply.

“This week has seen heavy supply and I think guys spent a lot of money last week on deals but it hasn’t been paid for, so there were a fair amount of bid lists out at the beginning of the week to pay for purchases over the past few weeks. Munis were just overbought.”

Other traders agreed too much supply in the market pushed yields higher.

“Yields are going to continue to rise,” a second New York trader said.

In the competitive market, triple-A rated Georgia auctioned $292 million of general obligation bonds in two pricings.

Bank of America Merrill Lynch won the bid for $234.9 million of general obligation bonds.

Yields ranged from 0.19% with a 3% coupon in 2014 to 3.01% with a 3% coupon in 2033. The bonds are callable at par in 2023.

JPMorgan won the bid for $57.1 million of federally taxable general obligation refunding bonds.

Yields ranged from 0.47% with a 4% coupon in 2015 to 1.03% with a 3% coupon in 2018.

Spreads ranged from 15 basis points to 40 basis points above the comparable Treasury yields.

On Wednesday, yield on the Municipal Market Data scale ended as much as four basis points higher after climbing eight basis points Tuesday.

The 10-year yield and the 30-year yield jumped four basis points each to 1.62% and 2.69%, respectively. The two-year finished flat at 0.30% for the 53rd consecutive trading session.

Treasuries weakened after a selloff Tuesday. The benchmark 10-year yield jumped five basis points to 1.70% while the 30-year yield spiked up seven basis points to 2.90%. The two-year was steady at 0.25%.

In economic news, the FOMC announced plans to continue its third round of quantitative easing into 2013. The FOMC said it plans to continue buying $40 billion a month of mortgage-backed securities while making outright Treasury purchases of $45 billion a month to coincide with the end of Operation Twist.

The FOMC also ended its calendar date of “mid-2015” for the timing of the increase in the initial funds rate and instead said it “expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.”

The FOMC said it plans to keep the funds rate between zero and 0.25% “at least as long as the unemployment rate remains above 6% to 6.5%.”

And market participants were quick to react. “There is not one hint of restraint in the actions the Fed intends to take in 2013 and beyond,” said economists at RDQ Economics.

“The Fed replaced the $45 billion balance-sheet neutral Operation Twist with a $45 billion outright purchase program of medium-to-long term Treasuries which, combined with the $40 billion MBS purchase program, will boost the Fed’s balance sheet by about $1 trillion in 2013,” the RDQ economists wrote.

The economists also added the Fed has placed the importance of unemployment ahead of its mandate on controlling inflation.

“The purchase program is open-ended and is strongly tied to the labor market since the Fed pointedly noted, 'If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until such improvement is achieved in a context of price stability.’

“We read this statement as further raising the importance of the unemployment rate relative to inflation since the tolerance to above-target inflation was acknowledged by the conditions under which the Fed intends to keep rates at zero.”

All in all, these economists said the Fed’s expansion of QE3 will make it harder to unwind its accommodative monetary stance.

“We think these actions have complicated the Fed’s eventual exit from ultra-accommodative monetary policy, both by increasing the future size of the Fed’s balance sheet and by showing that some 3.5 years into recovery, the Fed is not willing to let as inconsequential a program as Twist expire without replacing it with a higher-octane program.”

Other economists agreed over the surprise of putting unemployment ahead of inflation and said the Fed will have a hard time unwinding QE when the time comes.

“As expected, the second QE3 shoe has dropped,” said Michael Gregory, senior economist at BMO. “More of a surprise was the use of threshold values of inflation and the unemployment rate for forward guidance on the funds rate. This replaces the prior reference to mid-2015.”

He added, “A total $85 billion of QE per month is an additional $1.02 trillion of excess reserves by the end of 2013. The bigger this gets, the more unwieldy the exit becomes.

JOIN THE DISCUSSION

SEE MORE IN

Comments (0)

Be the first to comment on this post using the section below.

Add Your Comments:
Not Registered?
You must be registered to post a comment. Click here to register.
Already registered? Log in here
Please note you must now log in with your email address and password.

Upcoming Events

Already a subscriber? Log in here
Please note you must now log in with your email address and password.