Market Close: Short End Strengthens Following Fed Comments

A stronger municipal market weathered more comments by the Fed through solid technicals, decent reception to new issuance and buyer interest at the short end.

The last time Federal Reserve chairman Ben Bernanke spoke, the muni market careened into a deep sell-off. But on Wednesday, Bernanke’s comments to Congress about the status of the Fed’s current accommodative monetary policy prompted early buying and firming tax-exempt yields followed by an afternoon fade. Muni investors in the heart of coupon season with money to put to work have been selling at the long end of the market and buying at the short end, a trader in New York said.

“Any money that’s coming into the muni market is coming in short,” he said. “They’re looking for less volatility, so that just drives that desire for that 10-year-and-shorter stuff. There’s not a lot of supply there.”

Bernanke said in his semiannual monetary policy testimony to Congress that monetary policy would remain highly accommodative for the foreseeable future due to high unemployment and low inflation. He also told the House Financial Services Committee that the Fed’s bond buying program would continue until labor market conditions improve dramatically. But while some traders said another rally would send retail scurrying for the sidelines again, others said retail still likes what it sees in the market.

“Retail investors have opened up their statements; they’ve seen the worst of the carnage,” a trader in Florida said. “Some of that selling might slow down a touch. You’re starting to hear more commentary by the talking heads pointing out how cheap munis are compared to other products. With the steepness of the curve, those buyers are still getting that message.”

At the same time, the market expects a sizable increase in new issuance this week, at roughly $9.65 billion, according to Ipreo LLC and The Bond Buyer. Last week, a revised $5.38 billion arrived, according to Thomson Reuters.

In the negotiated market, Morgan Stanley priced for retail $496.9 million of Miami-Dade County water and sewer system revenue refunding bonds in two series. The bonds are rated Aa3 by Moody’s Investors Service and A-plus by Standard & Poor’s and Fitch Ratings.

Yields in the first series, $347.8 million of water and sewer system revenue bonds, ranged from 4.42% with a 5.00% coupon in 2030 to 4.72% with a 5.00% coupon in 2037. Debt maturing in 2042 was not offered to retail. The bonds are callable at par in 2022.

Yields for the second series, $149.1 million of water and sewer system revenue refunding bonds, ranged from 4.11% with a 5.00% coupon in 2027 to 4.45% with a 4.375% coupon in 2029. The bonds are callable at par in 2023. Half of the credits maturing in 2027 through 2029 will be offered during the retail order period.

RBC Capital Markets priced $376.9 million of San Diego Community College District general obligation bonds in four series. The bonds are rated Aa1 by Moody’s and AA-plus by S&P.

Yields on the first series, $103.7 million, ranged from 0.50% with a 2.00% coupon in 2015 to 4.30% with a 5.00% coupon in 2032. Debt maturing in 2014 was offered in a sealed bid. Yields for the second series, $129.2 million, include 0.50% with a 3.00% coupon in 2015 and 4.55% with a 5.00% coupon in 2043. Credits maturing in 2014 were offered in a sealed bid.

Debt in the third series, $61.1 million of capital appreciation bonds, matures between 2015 and 2032, with yields to maturity of between 1.35% and 5.95%.

Convertible CABs offered in the last series, which mature in 2041 with a yield of 6.23%, carry a conversion date and post-conversion optional call in 2032.

Tax-exempt yields ended Wednesday mostly firmer, according to one market gauge. Yields were steady at one year and beyond 16 years. Those between two and 16 years fell one to three basis points, with the most pronounced strengthening between four and 10 years.

The 10-year triple-A tax-exempt dipped three basis points Wednesday to 2.61%, according to the Municipal Market Data scale read. The 30-year yield held at 4.00% for a fourth straight day; the two-year slipped two basis points to 0.43%.

Yields on the Municipal Market Advisors 5% scale mostly fell Wednesday. The 10-year yield dropped three basis points to 2.79%. The 30-year yield slipped a basis point to 4.10%. The two-year also inched down one basis point to 0.53%.

Treasury yields, which fell early in the day, settled slightly lower across the curve. The benchmark 10-year yield slid three basis points to 2.50%. The two-year yield fell two basis points to 0.31, while the 30-year yield inched down a basis point to 3.57%.

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