Munis End Weaker as Market Eyes Data, Fed

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Top-quality municipal bonds again finished weaker Wednesday, according to traders, as yields on some maturities ended as much as six basis points higher.

Bonds weakened after strong inflation and retail sales data -- along with rising stocks and gains in the dollar – increased expectations that the Federal Reserve could raise interest rates again as early as its March meeting.

The data came after Fed Chair Janet Yellen's testimony before Congress on Tuesday and Wednesday was seen by market participants as pointing to a more hawkish stance by the central bank.

The 10-year benchmark muni general obligation yield rose six basis points to 2.43% from 2.37% on Tuesday, while the yield on the 30-year GO increased five basis points to 3.17% from 3.12%, according to the final read of Municipal Market Data's triple-A scale.

"We found three elements in Yellen's Humphrey Hawkins opening remarks particularly hawkish," according to a Wednesday market comment from RBC Capital Markets. "The tightening bias is clear from her sentiments that waiting too long to tighten further could be risky. And note that this is without any build-in for fiscal policy. In other words, the risk of falling behind the curve increases not only as the labor market continues to organically tighten further and inflation perks up, but there is a `fat tail' prospect of very expansionary fiscal policy that could significantly accelerate this prospect," RBC said.

"Yellen also reinforced the Fed's optionality for the March meeting – reaffirming both in her statement and Q&A that all meetings are 'live,' " according to RBC. "Finally, she alluded to the idea that as the economy continues to outperform potential (i.e. close the output gap), their assessment of the 'neutral rate' (r*) will likely shift higher. We've been on record as saying that the bottoming process for r* is likely in and that raising this guesstimate will be part and parcel of the Fed's tightening 'toolkit.' Note that shifting down their estimate of r* allowed the Fed to justify very easy policy in an environment where they were not very far away from their inflation and unemployment rate goals (i.e. within a Taylor Rule construct)," RBC said.

Treasuries were also weaker on Wednesday. The yield on the two-year Treasury rose to 1.25% from 1.23% on Tuesday, while the 10-year Treasury gained to 2.50% from 2.47%, and the yield on the 30-year Treasury bond increased to 3.09% from 3.06%.

The 10-year muni to Treasury ratio was calculated at 97.2% on Wednesday compared to 96.0% on Tuesday, while the 30-year muni to Treasury ratio stood at 102.6%, versus 101.9%, according to MMD.

 

Primary Market

After a busy day Tuesday, when most of the week's larger deals come to market, only a few transactions hit traders' screens on Wednesday.

Morgan Stanley priced the West Valley-Mission Community College District, Calif.'s $125.95 million of general obligation refunding bonds.

The $10.42 million of Series 2017A GOs were priced to yield from 0.85% with a 2% coupon in 2017 to 3.13% with a 3% coupon in 2030.

The $115.53 million of Series 2017B GO 2019 crossover bonds were priced to yield from 1.32% with a 5% coupon in 2020 to 3.50% with a 4% coupon in 2035.

The Series 2017A bonds are rated triple-A by Moody's Investors Service and S&P Global Markets.

The Series 2017B bonds are rated Aaa by Moody's and AA-plus by S&P until after the crossover date of Aug. 1, 2019, when the S&P rating on the Series 2017B bonds will reflect the district's then-current long-term debt rating; the district's long-term debt is currently rated AAA by S&P.

Since 2007, the district has come to market only four times, selling about $550 million of bonds in total. The most issuance occurred in 2015 when it sold $178 million of bonds. The district didn't come to market in 2007-2008, 2010-2011, 2013-2014 or 2016.

Bank of America Merrill Lynch priced the Connecticut Housing Finance Authority's $228.23 million of housing mortgage finance program bonds.

The $83.55 million of Series 2017 Subseries A1 bonds, not subject to the alternative minimum tax, were priced at par to yield 3.05% in 2027, 3.10% and 3.15% in a split 2028 maturity, 3.65% in 2032 and 3.875% in 2035; a 2047 PAC bond was priced as 4s to yield 2.37% in 2047 with an average life of 4.9 years.

The $41.46 million of Series 2017 Subseries A2 AMT bonds were priced at par to yield from 1% in 2017 to 3.35% and 3.40% in a split 2027 maturity.

The $87.74 million of Series 2017 Subseries A4 non-AMT bonds were priced at par to yield from 0.90% in 2017 to 3.10% and 3.15% in a split 2028 maturity, and to yield 3.65% in 2032 and 3.85% in 2034.

The $15.5 million of Series 2017 Subseries A5 non-AMT bonds were priced at par to yield from 0.85% in 2017 to 3.10% and 3.15% in a split 2028 maturity, and to yield 3.65% in 2032 and 3.85% in 2034.

The deal is rated triple-A by Moody's and S&P.

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