Municipal market reaction was muted Wednesday after the Federal Open Market Committee affirmed the Federal Reserve would end its quantitative easing economic-stimulus program, as traders reported limited activity following the announcement.
"The end of QE3 was widely anticipated, so this should not come as a shock," said Jeffrey Lipton, head of municipal research at Oppenheimer & Co.
"Near-term, munis are expected to act in concert with Treasury price movement given the geo-political and global economic concerns and Fed policies -- particularly in a post-taper environment," Lipton said, referring to this year's gradual reduction in the bond buying program.
At the close of trading, the 10-year Treasury bond ended yielding 2.32%, up from 2.30% at the start, while the 30-year ended at 3.05%, down from 3.084%, according to Bloomberg.
Municipal yields for bonds maturing in 2015 and 2016 were unchanged at the end of trading, just as they were at the start of trading, but the rest of the scale ended up rising two to six basis points at the end of the day.
In the intermediate range, yields on maturities in 2022 and 2023 increased by as much as six basis points, according to Municipal Market Data. While those on the long end, between 2032 and 2044, rose three basis points.
"I think it was pretty much what everyone anticipated and nothing out of the norm," a Texas trader said. "There is no immediate, knee-jerk reaction to the news."
In the text from its statement, the FOMC announced: "The Committee continues to see sufficient underlying strength in the broader economy to support ongoing progress toward maximum employment in a context of price stability.
"Accordingly, the Committee decided to conclude its asset purchase program this month," it stated.
Traders said the news was expected and the market took it in stride.
"QE3 is over, but there has been talk of ending it for months so there is no great shock there," the Texas trader said.
Further reaction in the municipal market, he said, will be led by the Treasury market - and the reaction overseas -- as early as tomorrow morning, as well as in the days and weeks that follow.
"I expect there will be a near term spike in rates, especially short and intermediate term rates," said Dorian Jamison, municipal analyst at Wells Fargo Advisors. "We have seen the largest spike today in intermediate maturities on the yield curve. However the five-year and 10-year municipal benchmarks are still down more than 200 basis points since reaching their highs back in November 2008 when the stimulus began," he said, noting that the 30-year is down almost 300 basis points.
"Demand for tax-exempt bonds is strong given inflows into muni bond funds, which should help munis weather the storm," Jamison added.
The initial response in the municipal market was lackluster, a New York trader said.
"Everything they said was bearish and hawkish," he said, adding that the municipal market will take a few days to digest the news, even though it was expected.
"No one is taking a real leadership role," the New York trader said. "No one is being a real seller and no one is being a real buyer either," he said. Next week's jobless claims data could amplify the municipal reaction to the FOMC's statement and clear up some of the uncertainty about the future of economic strength and other fundamentals, traders said on Wednesday.
"To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate," the FOMC statement said. "In determining how long to maintain this target range, the Committee will assess progress - both realized and expected -- toward its objectives of maximum employment and 2 percent inflation," it continued. "This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments."
The Texas trader said despite the details outlined in the statement, "there's a lot of head scratching going on over QE3 ending and keeping the policy the same."
"Largely we do have to see how the technicals play out that's going to be the ongoing story for municipals," Lipton said.
"Weekly supply is growing, but demand is still outweighing that growth," Lipton said.
"In my view, through year end, we continue to see muni rates trading in a range. However, there may be opportunities to find more attractive entry points if market volatility and/or heavier supply drive municipal yields higher."
"Going forward, the focus will be on when, not if, the Fed moves to raise interest rates," Lipton added.
"The Committee anticipates, based on its current assessment, that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time following the end of its asset purchase program this month, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored," the statement continued.
The FOMC hedged its statement however with expected plans under other inflationary action.
"If incoming information indicates faster progress toward the Committee's employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated."
In primary activity, the Jackson County, Mo. special obligation revenue refunding that was in an order period early Wednesday was still being finalized at press time and the final scale was not available, according to an underwriter at senior book-runner Oppenheimer.
The Texas trader, meanwhile, said two smaller new deals that his firm served as financial advisor for this week did well on the short-end - for maturities around 10 years and under -- where bonds were oversubscribed and yields got bumped, versus the long end.
"The long bonds struggled, they got done, but it was like the difference between night and day," he explained. "Buyers are very thin on the long end and being choosey, but on the amount of money willing to commit is much, much greater on the short end."
