The market for tax-exempt municipal bonds firmed Thursday as yields followed Treasuries after a government report showed low inflation.
The core consumer price index, a measure of inflation, was unchanged in December from the month prior, remaining 1.7% higher than this time last year. The small change means the Federal Reserve may be encouraged to keep interest rates low.
"Inflation data has been benign and from my perspective we'll be looking at outflows today," a Florida-based trader said in an interview. "I think the market expects we're closer to unchanged so if it's a higher number, the market will take that a little negatively."
Concern that municipal bond mutual fund outflows could spike this week gave market participants pause, even as the government report on inflation lent credibility to the belief that the Federal Reserve's tapering program won't be accelerated.
The trader said outflows were visible on Monday and Tuesday of this week. Municipal bond mutual funds recorded $19 million of outflows in the week ended Jan. 8, the smallest amount since May 2013. Weekly data from Lipper FMI was expected Thursday afternoon.
"We got through the primary market pretty well this week and the CPI was right as anticipated, so the market is up a little bit," one trader in New York said in an interview. "We're seeing some trades, steady for the first few years, with a few basis points lower from 2015 and out."
Yields on the Municipal Market Data triple-A scale were down as much as six basis points on bonds with maturities beyond 2040. Those in the front and intermediate part of the curve were down by as much as two to four basis points, respectively.
Yields on the Municipal Market Advisors 5% AAA scale were lower by as much as four basis points on the long end of the yield curve.
"When treasuries backed off traders sympathized with that, but today we're grinding a little bit lower again," the trader in Florida said "The back end is probably a couple basis points better than the front. Traders and customers think there could be some continued flattening."
Treasury yields strengthened Thursday morning, with the benchmark 10-year yield down four basis points to 2.84% and the 30-year yield down five basis points to 3.77%. The two-year yield remained unchanged at 0.40%.
Potential long-term volume is expected to pick up this week to an estimated $4.88 billion, including $855 million of New York City Transitional Finance Authority bonds.
The deal, led by JP Morgan Securities LLC, held two days of retail pricing beginning Tuesday. Institutional pricing for the bonds was held Thursday, broken into $505 million of tax-exempt subordinate bonds and $350 million of tax-exempt subordinate refunding bonds.
Yields on the first series of bonds ranged from 0.51% with a 5% coupon maturing in 2016 to 4.3% with a 5% coupon in 2040. Bonds maturing in 2015 were offered in a sealed bid.
Yields on the second series of bonds ranged from 0.51% with a 3% coupon maturing in 2016 to 3.92% with a 3.75% coupon in 2030. Bonds maturing in 2014 and 2015 were offered in a sealed bid. Both series of bonds are callable at par in 2024.
"Pricing on the TFA deal is going very well and once that deal clears we might see a little more advancement," the Florida-based trader said.
Other deals, including New Jersey transit bonds and New York Dormitory Authority bonds, were trading up a few basis points, the trader said
Market sources said that a Saginaw County, Mich., deal originally delayed in July after Detroit's bankruptcy was well-received Thursday.
"We understand the Saginaw deal had about $220 million in orders on the $51 million offered," Matt Posner, managing director at MMA, said in an email. "It also had about 40 different buyers."
The spread to treasuries on bonds maturing in 2028 with a 5.07% coupon meant a 223 basis point spread above treasuries, as opposed to a 255 basis point-spread when the deal was originally scheduled to come to market.
Loop Capital Markets also brought $130.7 million of Cook County, Illinois, general obligation refunding bonds Thursday. The bonds were rated A1 by Moody's, AA by Standard & Poor's, and AA-minus by Fitch.
Yields on the bonds ranged from 0.65% with a 4% coupon maturing in 2015 to 3.38% with a 5% coupon maturing in 2022. Bonds maturing in 2014 were offered in a sealed bid. The bonds do not feature an optional call.
The secondary market showed strengthening, according to trades compiled by data provider Markit. Lehigh County, Penn, water and sewer revenue bonds with a 5.125% coupon maturing in 2047 fell three basis points to 5.06%, while Ohio general obligation highway capital improvement bonds with a 5% coupon in 2028 also fell three basis points to 3.27%.
