The tax-exempt market saw most of its rally in the afternoon, following Treasuries, after the Federal Open Market Committee announcement buoyed safe-haven assets.
On Wednesday afternoon, the FOMC said it plans to keep the fed funds rate target at zero to 0.25% as it anticipates economic conditions to warrant exceptionally low rate levels at least through late 2014.
“Fed policymakers extended the expected period for 'exceptionally low levels’ of the fed funds rate to 'at least through late 2014,’ some 1.5 years longer than the 'at least through mid-2013’ phrase employed previously,” wrote Michael Gregory, senior economist at BMO Capital Markets.
In addition, he said, “all parts of the yield curve, both the parts the Fed is selling — three years and less — and buying — six years and longer — will benefit from a near-zero anchor for essentially the next three years. The Fed’s game plan appears to be to flatten the yield curve as much as possible … and then some.”
After that, Treasuries rallied as yields fell two to 12 basis points across the curve. Immediately following the news, Treasuries fell from their highs of the day but still closed firmer. The two-year yield fell one basis point to 0.24% and the 30-year yield fell two basis points to 3.13%. The benchmark 10-year yield dropped seven basis points to 1.99%.
Munis followed suit. Yields were steady inside two years but fell two basis points on the three-year and four-year spot, according to the Municipal Market Data scale. Yields dropped four basis points on the five-year to seven-year maturities and plunged five and six basis points outside eight years.
On Wednesday, the two-year muni yield closed steady at 0.35% for its ninth consecutive session. The 10-year yield fell five basis points to 1.82% and the 30-year yield dropped six basis points to 3.60%.
Throughout the day, traders noted deals were expected to price well. A trader in Connecticut said he was pricing a small triple-A rated refunding deal. “Spreads to the MMD are tight because of the strong credit,” he said. “Supply looks moderate, so we’re looking for excellent results.”
“With rates at 45-year lows, the refunding issues have been extremely successful in reducing overall debt-service costs,” he added. “The timing of these deals is of the essence. The quicker you can get your deal into the market and take advantage of the rate trough we’re in, the better.”
By Wednesday morning, munis were already showing signs of strength. There were “a bit better bids,” a New York trader noted.
“Munis were doing well in the morning,” wrote MMD’s Randy Smolik. “The successful reception of Tuesday’s deals contradicted concerns at the start of the week that large concessions were necessary to distribute this week’s new-issue supply.”
In the primary market, George K. Baum & Co. priced $129.5 million of Denver Public School District general obligation refunding bonds, rated Aa2 by Moody’s Investors Service and AA-minus by Standard & Poor’s.
Yields ranged from 0.25% with a 2% coupon in 2012 to 3.23% and 3.06% with 3% and 4% coupons in 2028. The bonds are callable at par in 2021.
Goldman, Sachs & Co. priced $122 million of Dormitory Authority of the State of New York bonds for the Memorial Sloan-Kettering Cancer Center. The credit is rated Aa2 by Moody’s, AA-minus by Standard & Poor’s and AA by Fitch Ratings. Yields ranged from 2.37% with 4% and 5% coupons in 2020 to 2.99% with a 5% coupon in 2024. The bonds are callable at par in 2022.
In the secondary market, trades reported by the Municipal Securities Rulemaking Board showed firming in just the last trading session.
A dealer sold to a customer Hesperia, Calif., Public Financing Authority 5s of 2037 at 6.91%, 13 basis points lower than where they traded Tuesday.
Bonds from an interdealer trade of Puerto Rico Public Finance Corp. 5.5s of 2031 yielded 4.70%, 11 basis points lower than where they traded Tuesday.
Bonds from another interdealer trade of Municipal Electric Authority of Georgia 4.43s of 2022 yielded 4.36%, eight basis points lower than where they traded Tuesday.
A dealer bought from a customer Kentucky Economic Development Finance Authority 5s of 2042 at 4.67%, two basis points lower than where they traded Tuesday.
The 10-year to 30-year muni slope has been flattening since the beginning of the year. On Wednesday, the slope closed down at 148 basis points from 151 basis points last Thursday and Friday when munis weakened. “We have witnessed a flattening as this slope began the year at plus 169 basis points,” said MMD’s Daniel Berger. “With the long dollar bond sector in a position to improve, we think further flattening is in the cards.”
Muni-to-Treasury ratios have also dropped significantly since the beginning of the year as munis have outperformed Treasuries. As of Tuesday’s close, the five-year muni-to-Treasury ratio was 92.2% from 98.9% at the beginning the year. The 10-year ratio fell to 90.8% from 96.4% on the first day of trading in 2012. The 30-year ratio dropped the most, falling to 106.7% from 119.4%.
“With the strong muni rally, munis now appear somewhat rich on a ratio basis,” wrote John Hallacy, municipal research strategist at Bank of America Merrill Lynch, adding that muni spread-tightening has far outpaced corporate spread-tightening. Because of this, he said he’s looking to take some of the muni profits ahead of March and April when municipals could weaken due to increased supply and less reinvestment money available to put to work.
“We have begun to see some resistance from retail investors at these levels and some profit-taking developing,” Hallacy wrote.