It took a day for the Federal Reserve’s announcement that it will keep interest rates pinned to the floor to really sink in for municipal bond investors. But sink in it did.
And on Wednesday, munis saw a reasonably active day of trading in the secondary and moderately strong pricing on new issuance. Yields responded with an impressive rally in the 10-year range.
“People are looking for quality right now, and you’ve got quality paper out there,” a trader in New York said. “And when the Fed said it’s going to keep interest rates near zero through mid-2013, well, heck, that’s a good thing to make a bet on. So, that helped us a lot today.”
Municipal bond yields plunged between five and 12 basis points lower on the day, according to Municipal Market Data. They were strongest between four and 13 years along the curve. Munis in 2012 were steady.
Tax-exempts maturing between 2013 and 2014 were five and seven basis points lower, yields from 2015 to 2024 were 10 to 12 basis points lower, and yields beyond 2024 were eight to 10 basis points lower.
Tuesday’s session ended with the 10-year muni yield down 12 basis points to 2.26%, its lowest yield since Sept. 3. The two-year muni yield dropped five basis points to 0.30%, its lowest yield in more than two years.
The 30-year muni yielded 3.84%, eight basis points lower on the day, and its lowest level since late October.
Treasuries also saw gains. The benchmark 10-year Treasury yield ended the day 19 basis points lower at 2.08%, its low since Dec. 18, 2008. The two-year yield ticked up one basis point from its all-time low to 0.19%. The 30-year yield is 17 basis points lower at 3.48%.
Retail investors, though, didn’t participate in either muni or Treasury gains, traders said.
Muni-Treasury ratios all have been extremely cheap for some time, though they aren’t quite as attractive as they were on Tuesday. Still, they remain favorable at the two-year, 10-year, and 30-year levels, compared to their respective averages for 2011.
The 10-year muni yield, for example, stands at 109% of the equivalent Treasury. And the ratio for two-years sits at an incredible 143%.
Traders earlier in the week said ratios have been meaningless to investors. This is because barrel-scraping nominal rates have thoroughly discouraged retail investors from jumping into the market.
That was true until this morning. Then, traders reported blocks of significant size moving, which shows more activity in the marketplace from ratio-based buyers.
The Fed’s statement Wednesday — announced after the Federal Open Market Committee meeting — certainly paved the way for a boost in investor confidence for bonds.
“After the Fed announcement came out, it seems like a cloud had been lifted from the marketplace,” a trader in Florida said, “so dealers were willing to take risk on again. We saw that follow-through with the move in Treasuries.”
Investors might also have been bolstered in their convictions for munis Wednesday from the rating agencies. A recent report from Moody’s Investors Service, for one, said that the vast majority of muni issuers are safe from market turbulence.
“We continue to view most U.S. municipal entities to be well-insulated from capital markets volatility because they do not depend on market access to meet their most critical funding requirements,” Moody’s wrote. “Municipal debt is generally long-term and amortizing; and typically does not externally finance operating deficits.”
Muni market participants note that extremely light supply has been a significant reason for plunging muni yields. This week, the industry predicts that municipal bonds sold will total $2.25 billion versus a revised $3.24 billion last week.
In the largest deals on the day on the negotiated side, Citi priced for retail $310.1 million of Los Angeles Department of Water and Power water system revenue bonds. The bonds are rated Aa2 by Moody’s, AA by Standard & Poor’s, and AA-plus by Fitch Ratings.
Yields range from 1.55% with a 4.00% coupon in 2017 to 4.25% with a 5.00% coupon in 2036. Debt maturing in 2041 was not offered to retail.
Also, Barclays Capital priced and then repriced $211.5 million of Georgia Private Colleges and Universities Authority Emory University revenue bonds. The bonds were rated Aa2 by Moody’s and AA by Standard & Poor’s.
Yields range from 1.08% with a 3.00% coupon in 2016 to 4.23% with a 5.00% coupon in 2041. Yields firmed by seven basis points after repricing
Ramirez & Co. priced for institutions $308 million of Puerto Rico Public Buildings Authority government facilities revenue bonds. The bonds are rated Baa1 by Moody’s, BBB by Standard & Poor’s, and BBB-plus by Fitch.
Yields range from 4.75% with a 5.75% coupon in 2022 to 6.00% at par in 2041. Since repricing for institutions, the deal was upsized by $80 million and yields have risen by around 10 basis points on medium- and long-term credits.
In competitive sales, Bank of America Merrill Lynch won $60 million of Renton, Wash., School District No. 403 unlimited tax general obligation bonds. The bonds carry underlying ratings of Aa2 by Moody’s, but also boast a credit enhancement of Aa1/AA-plus by a Washington state school district enhancement program.
Yields range from 1.20% with a 5.00% coupon in 2016 to 3.46% with a 5.00% coupon in 2028. Credits maturing in 2021, and 2029 through 2031 were sold but not available.
The stock market indexes all ended down at least 4.09% on the day, reversing Tuesday’s reversals. The Dow Jones Industrial Average shed 4.62%, dropping by almost 520 points.