Munis Strengthen After Fed Holds Rates

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Munis were stronger as the Federal Open Market Committee announced that interest rates will be held where they are. Yields on some maturities dropped by as many as three basis points, traders said.

The yield on the 10-year benchmark muni general obligation was three basis points lower to 1.42% from 1.45% on Tuesday, while the yield on the 30-year muni was two basis points lower to 2.13% from 2.15%, according to a final read of Municipal Market Data's triple-A scale.

U.S. Treasuries were stronger at the close on Wednesday. The yield on the two-year Treasury slipped to 0.73% from 0.75% on Tuesday, as the 10-year Treasury yield declined to 1.52% from 1.55% and the yield on the 30-year Treasury bond slid to 2.23% from 2.26%.

On Wednesday, the 10-year muni to Treasury ratio was calculated at 93.7% compared to 93.0% on Tuesday, while the 30-year muni to Treasury ratio stood at 95.6% versus 94.3%, according to MMD.

Primary Market

Just one larger deal hit screens on Wednesday, as market participants were waiting for the Fed's announcement.

North Carolina competitively sold $200 million of general obligation public improvement bonds for Connect NC. Citi won the deal with a true interest cost of 2.08%. The bonds were priced to yield from 0.45% with a 5% coupon in 2017 to 2.62% with a 2.50% coupon in 2036. The deal is rated triple-A by Moody's Investors Service, S&P Global Ratings and Fitch Ratings.

Since 2006, the state of North Carolina has issued about $8.7 billion of debt. The largest issuance came in 2013, when it sold $1.6 billion of securities.

"Buoyant treasuries encouraged an aggressive bid on the competitive sale of $200mln North Carolina GO's bought by Citi," said Randy Smolik, senior market analyst at MMD. "The North Carolina bid inspired modestly reaching trades in the secondary,"

Thursday will be similar to Wednesday, as there will be little to no action other than one larger deal.

RBC Capital Markets is expected to price the state of Wisconsin's $317 million of GO refunding bonds on Thursday. The deal is rated Aa2 by Moody's and AA by S&P and Fitch.

Fed Holds Rates

The federal funds rate target was left unchanged at 0.25% to 0.50% by the Federal Open Market Committee, according to its statement released Wednesday, which hinted at coming rate hikes by saying risks to the short-term outlook have "diminished."

The FOMC statement pointed to a stronger labor market and moderate economic expansion, with string growth in household spending. The negatives include business fixed investment.

"Inflation has continued to run below the Committee's 2% longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports," the statement said. "Market-based measures of inflation compensation remain low; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months."

Near-term inflation will be low, but in the medium term it will grow to 2%. "Near-term risks to the economic outlook have diminished," the statement said.

Federal Reserve Bank of Kansas City President Esther L. George was the lone dissenter in the 9-1 vote, as she wanted a 25 basis point rate hike.

"There was no policy change from the Fed, but economic comments left open at least one rate hike later this year, causing slight flattening to the treasury curve," Smolik said.

Bond Buyer Visible Supply

The Bond Buyer's 30-day visible supply calendar increased $691.4 million to $12.61 billion on Thursday. The total is comprised of $5.10 billion of competitive sales and $7.51 billion of negotiated deals.

Gary Siegel contributed to this column.

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