Secondary activity in the tax-exempt market was subdued Wednesday despite big movements among Treasuries before and after the Federal Open Market Committee’s afternoon monetary policy statement.
“There were a lot of people looking for muni bonds and not a lot of people looking to sell them and take losses on any of their positions,” said a trader in Florida.
He described the trading mood as full of tension in the early afternoon, but once the FOMC statement came out with few surprises, the muni market quieted down.
“People were holding their breath,” he said, “but once they heard what they knew they were going to hear, everything kind of quieted down.”
The AAA-rated 2-year and 10-year yields remained flat at 0.46% and 2.51%, respectively, according Municipal Market Data. The AAA-rated 30-year yield weakened by two basis points to 3.90%, but that softening was mild compared to how long-term Treasuries “got slammed,” as one trader put it.
The key event of the day was the FOMC announcing details of its second round of quantitative easing. The Fed said it intends to purchase a further $600 billion of Treasuries by mid-year 2011 — a pace of about $75 billion per month.
The Fed statement left the total amount of planned purchases open-ended, instead opting to review the pace and overall size of the asset-purchase program “in light of incoming information” regarding employment and inflation.
Economists were expecting the Fed to purchase between $80 billion and $100 billion of assets per month, according to a Thomson Reuters poll from Tuesday.
Guy Lebas, chief fixed income strategist at Janney Capital Markets, said he believes the second dose of quantitative easing will extend through the third-quarter and “measure around $1 trillion when all is said and done.”
The FOMC also said it would continue to reinvest principal payments from agency debt and agency mortgage-backed securities into longer-term Treasuries.
The Fed’s Open Market Trading Desk in New York, which conducts the program, said it expects to purchase, in total, nearly $900 billion of purchases, or roughly $110 billion per month, until the end of the second quarter 2011.
Under its first QE program, the Fed concentrated its purchases of Treasury bonds in the two-to-10-year maturity range. With investors expecting the Fed to double-down on that effort, Treasury yields at that portion of the curve have come down.
In the three months leading up to the announcement, yields on 2-year, 10-year, and 30-year Treasuries fell by 22 basis points, 43 basis points, and 19 basis points, respectively.
Brian Bethune, chief U.S. economist at IHS Global Insight, said the Federal Reserve already achieved the intended effect of providing further monetary stimulus merely by speaking about renewed quantitative easing over the past three months.
“The important point to keep in mind is that markets have already discounted the FOMC’s action — both bond and equity prices have moved up, while long-term yields have moved down — in the past three months in anticipation of these moves by the Fed,” Bethune wrote Wednesday morning.
Long-term Treasuries ran up Wednesday in anticipation of the FOMC statement but then quickly shed those gains once it became clear the Fed would not be buying much long-term product.
Just 4% of Fed purchases will be in the 17-30 year range, according to the Open Market Trading Desk, which said 63% of purchases will be in the 2.5 to 7-year range.
The 30-year Treasury yield began the day at 3.93%, moved to 3.87% ahead of the FOMC announcement, and then fell back to 4.10%. It closed the day at 4.06%, 17 basis points weaker than Tuesday’s close.
The benchmark 10-year yield closed the day at 2.63%, or four basis points weaker than Tuesday’s close, and the 2-year note ended at 0.34%, equivalent to Tuesday’s close.
The Fed currently owns roughly 12.5% of all outstanding Treasury bonds and notes, according to Thomson Reuters, which said if the Fed were to buy $1 trillion more in this expanded program, its holdings of outstanding Treasuries could jump to 27%.
Michael Zezas, municipal strategist at Morgan Stanley, said that kind of additional support for Treasuries should reinforce existing trends in the municipal market, by keeping credit spreads tight.
“This should prolong technical support for munis by keeping the ratio of real muni to real Treasury rates high, which is a positive indicator for muni fund flows,” Zezas wrote Monday. He added that technical factors are masking what he sees as elevated credit risks for state and local governments.
In the new-issue market Wednesday, Goldman, Sachs & Co. priced $310 million of special revenue tax-exempts for the Love Field Facilities Modernization Corp.
The bonds are rated Baa3 by Moody’s Investors Service and BBB by Standard & Poor’s. The entire deal matures in 2040 with a 5.375% yield.
Elsewhere, Goldman priced $124.5 million of taxable refunding and improvement bonds for the city of Atlanta and Fulton County Recreation Authority.
The bonds are enhanced by Assured Guaranty Municipal and are rated Aa3 by Moody’s and AA-plus by Standard & Poor’s. Underlying ratings are Aa2 and A; both agencies have a negative outlook on the bonds.
Bonds maturing in 2011 and 2012 offer respective yields of 1.005% and 1.147% — an 80 basis point spread over comparable Treasuries. A bigger portion of the deal, totaling $116.4 million, matures in 2028 and offers a 6.5% yield.
