Munis Weaken on Yellen Rate Comments

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Top-rated municipal bonds were substantially weaker at mid-session, traders said, as muni yields rose by as much as eight basis points, following Treasuries. The market interpreted comments made by Federal Reserve Board Chair Janet Yellen on interest rates as being particularly hawkish for the future.

In the primary, the last of the week's big deals were coming to market, topped by the city of Chicago's general obligations.

Secondary Market

On Wednesday, Yellen said she isn't able to predict when rates will be raised or how high they will go, but suggested a "few" increases each year until the fed funds rate target nears 3% by the end of 2019. She added the U.S. economy is "close" to the Fed's dual mandate of price stability and full employment.

The 10-year benchmark muni general obligation yield rose five to seven basis points from 2.17% on Wednesday, while the yield on the 30-year GO increased six to eight basis points from 2.92%, according to a read of Municipal Market Data's triple-A scale.

"Fed Chair Yellen use to be the dove that kept Fed governors in line," MMD Senior Market Analyst Randy Smolik wrote in a Thursday market comment. "Now, she looks to hasten the process of rate normalization as inflation and economic activity have met Fed targets. Her words of a few rate hikes a year through 2019 resonated in weaker Treasury trading."

The yield on the two-year Treasury rose to 1.23% from 1.19% on Wednesday, while the 10-year Treasury yield gained to 2.48% from 2.39%, and the yield on the 30-year Treasury bond increased to 3.06% from 2.99%.

On Wednesday, the 10-year muni to Treasury ratio was calculated at 90.8% compared to 92.0% on Tuesday, while the 30-year muni to Treasury ratio stood at 97.8%, versus 98.3%, according to MMD.

MSRB: Previous Session's Activity

The Municipal Securities Rulemaking Board reported 44,096 trades on Wednesday on volume of $12.89 billion.

Primary Market

Goldman Sachs is pricing the week's biggest deal -- the city of Chicago's $1.1 billion of tax-exempt and taxable general obligation bonds.

The $888.76 million of Series 2017A tax-exempt GO project and refunding bonds were priced to yield 5.80% with a 5.625% coupon in 2029, 5.88% with a 5.625% coupon in 2030, 5.96% with a 5.625% coupon in 2031, 6.08% with a 5.75% coupon in 2033, 6.14% with a 5.75% coupon in 2034 and 6.20% with a 6% coupon in 2038.

According to a market source, the tax-exempts had been pre-marketed on Wednesday to yield from 5.80% with a 5.75% coupon in 2029 to 5.96% with a 5.75% coupon in 2031 and to yield from 6.08% with a 6% coupon in 2033 to 6.19% with a 6% coupon in 2035. A 2038 maturity was pre-marketed as 6s to yield 6.25%.

On Wednesday, the taxable portion of the deal opened for indications of interest. The $274.24 million of Series 2017B taxables were offered to yield about 475 basis points above the comparable Treasury security in 2029, according to a market source.

The deal is rated BBB-plus by S&P Global Ratings and Kroll Bond Rating Agency and BBB-minus by Fitch Ratings.

Barclays Capital priced the Texas Transportation Commission's $760.51 million of Series 2017 A and B general obligation mobility fund refunding bonds.

The $292.24 million of Series 2017A GOs were priced as 5s to yield from 2.68% in 2030 to 2.92% in 2034. The $468.27 million of Series 2017B GOs were priced as 5s to yield from 2.62% in 2029 to 3.01% in 2036. The deal is rated triple-A by Moody's Investors Service, S&P and Fitch.

Since 2007, the TTC has issued about $20.59 billion of debt, with the largest issuance occurring in 2014 when it sold roughly $5.52 billion of debt. The commission did not come to market at all in 2011 or 2013. The TTC has issued more than $2 billion four times and more than $1 billion eight times since 2007.

RBC Capital Markets priced the Los Angeles Department of Water and Power's $500 million of Series 2017A power system revenue bonds for institutions after holding a one-day retail order period.

The issue was priced as 5s to yield from 1.57% in 2022 to 2.98% in 2037, 3.05% in 2042 and 3.10% in 2047. The deal is rated Aa2 by Moody's and AA-minus by S&P and Fitch.

In the competitive arena, the University of Houston System Board of Regents sold two separate deals totaling $404.5 million.

Bank of America Merrill Lynch won the $392.85 million of Series 2017A consolidated revenue and refunding bonds with a true interest cost of 3.41%. The issue was priced as 5s to yield from 1.05% in 2018 to 3.21% in 2038.

Robert W. Baird won the $11.64 million of Series 2017B taxable consolidated revenue and refunding bonds with a TIC of 3.62%. Both sales are rated Aa2 by Moody's and AA by S&P.

Bond Buyer Visible Supply

The Bond Buyer's 30-day visible supply calendar decreased $1.94 billion to $11.88 billion on Thursday. The total is comprised of $2.79 billion of competitive sales and $9.09 billion of negotiated deals.

Tax-Exempt Money Market Fund Outflows

Tax-exempt money market funds experienced outflows of $829.3 million, bringing total net assets to $130.81 billion in the week ended Jan. 16, according to The Money Fund Report, a service of iMoneyNet.com. This followed an inflow of $1.37 million to $131.64 billion in the previous week.

The average, seven-day simple yield for the 236 weekly reporting tax-exempt funds decreased to 0.23% from 0.24% in the previous week.

The total net assets of the 863 weekly reporting taxable money funds decreased $26.25 billion to $2.506 trillion in the week ended Jan. 17, after an outflow of $14.38 billion to $2.532 trillion the week before.

The average, seven-day simple yield for the taxable money funds increased to 0.26% from 0.25% in the previous week.

Overall, the combined total net assets of the 1,099 weekly reporting money funds fell $27.08 billion to $2.637 trillion in the week ended Jan. 17 after outflows of $13.01 billion to $2.664 trillion in the prior week.

Gary Siegel contributed reporting on the Fed to this post.

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