The municipal bond market was driven by Treasuries Wednesday as tax-exempts and taxables headed lower after better-than-expected gross domestic product data and an unchanged Federal Open Market Committee announcement.
Investors warmed to riskier assets following the positive GDP report, pushing safe haven assets, like municipal bonds and Treasuries, lower Wednesday. GDP increased at an annual rate of 1.7% in the second quarter of 2013, according to the advance estimate released by the Commerce Department. The increase was better than the 1% growth expected by economists.
"Real GDP growth - although still below levels that the Fed would judge to be consistent with sustainable job growth that would lower the unemployment rate over time - was moderately ahead of expectations in the second quarter on a fairly solid gain in consumer spending and business equipment spending and another double-digit increase in residential investment," wrote economists at RDQ Economics.
"The one argument from the report in favor of continuing [quantitative easing]is the slow nominal growth rate of GDP, which has run at only 2.9% over the last year," the economists added, referring to the Fed's bond buying program. "However, we are skeptical of the quality of the early GDP data and the employment data suggest that job growth is consistent with a somewhat stronger picture for GDP growth than is being reported."
In the afternoon, the FOMC said it will continue to purchase $85 billion-a-month of longer-term securities, including $45 billion of Treasuries and $40 billion of mortgage-backed securities. The FOMC also decided to keep the target range for the federal funds rate at zero to 0.25% and said it currently anticipates that exceptionally low levels for the federal funds rate will likely be warranted as long as the unemployment rate remains above 6.5% and inflation is projected to be no more than 2.5%.
The Fed said labor market conditions have shown some improvement in recent months, but that the unemployment rate remains elevated.
"July's FOMC statement was largely a dud, insofar as providing new information," wrote Guy LeBas, chief fixed income strategist at Janney Capital Markets. "Despite Bernanke being 'deputized' to provide verbal guidance on bond buying at the June press conference, the July statement included no references to reducing the pace of QE.
"The biggest change was greater emphasis on inflation, with the note that 'inflation persistently below its 2 percent objective could post risks to economic performance,' " LeBas added. "On the short term rate front, the Fed slightly strengthened its commitment to keep short rates low and 'reaffirmed its view that that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends.' That reaffirmation supports our positive thesis on value in the curve from late 2015 to 2016."
On the economic data, Treasuries were weaker for most of the day then ended firmer in a choppy session. The benchmark 10-year yield fell two basis points to 2.58% and the 30-year yield slid three basis points to 3.64%. The two-year yield fell one basis point to 0.32%.
Munis weakened with Treasuries weaker in the morning, though the move was less pronounced. "Munis are not following Treasuries as much," a New York trader said. "They are outperforming Treasuries or not performing as badly."
Others said trading was lethargic as the day progressed. "The primary calendar wasn't that big today and the secondary has dropped off a little so it's just very lethargic," a New Mexico trader said. "It's a couple basis points off with Treasuries."
Yields on the Municipal Market Data scale ended flat. The 10-year and 30-year yields were steady at 2.67% and 4.20%, respectively. The two-year finished flat at 0.43% for the 11th consecutive session.
Yields on the Municipal Market Advisors scale ended as much as one basis point weaker. The 10-year and 30-year yields rose one basis point each to 2.88% and 4.28%, respectively. The two-year was steady at 0.54% for the sixth session.
In the largest deal of the day in the primary market, Bank of America Merrill Lynch bought $600 million of Massachusetts general obligation bonds, rated Aa1 by Moody's Investors Service and AA-plus by Standard & Poor's and Fitch Ratings.
Yields ranged from 2.87% with a 5% coupon in 2023 to 4.70% with a 4.5% coupon in 2043. The bonds are callable at par in 2021.
"It's kind of rich, but Massachusetts is always like that," a New York trader said. "The 5% coupons are through the double-A Municipal Market Data scale. Even though it's through the double-A scale, it will sell."
Goldman, Sachs & Co., priced $292 million of Lehigh County Authority water and sewer revenue bonds for the city of Allentown, Pa., rated A by Standard & Poor's.
The bonds yielded 5.13% with a 5% coupon in 2038, 5.23% with a 5% coupon in 2043, and 5.40% with a 5.125% coupon in 2047. The bonds are callable at par in 2023.
In the secondary market, trades compiled by data provider Markit showed weakening.
Yields on Connecticut 5s of 2022 and New York City Municipal Water Finance Authority 5s of 2044 rose two basis points each to 2.89% and 2.67%, respectively.
Yields on Mansfield, Texas, Independent School District 5s of 2025 increased two basis points to 3.27% and Fort Bend County, Texas, 5s of 2021 rose one basis point to 2.50%.
Yields on Los Angeles Department of Water and Power 5s of 2043 and Port Authority of New York and New Jersey 5s of 2030 rose one basis point each to 4.61% and 4.04%, respectively.
