The Federal Reserve left its federal funds target range unchanged at zero to 0.25%, while municipal bond prices slipped again yesterday and underwriters priced for retail parts of Citizens Property Insurance Corp.'s $2 billion offering from Florida.
Yields on munis ticked up one or two basis points as the market continued to retreat following a rally some traders say overextended, continuing a sell-off that began last week. Recent softness in the market over the past five trading sessions follows a three-week rally during which yields on the 10-year triple-A plunged 45 basis points, according to Municipal Market Data.
That rally was based on the enthusiastic reception of Build America Bonds, which fueled anticipation the program could transfer supply from the tax-exempt market to the taxable market. That expectation may have been overly optimistic, traders said.
"I do think that was a rally that probably pushed the market a little too far too quickly," a trader in Los Angeles said. "We're not losing every day what we had been gaining, but we certainly don't have enough activity to sustain the prices that we had before."
A trader in New Jersey said dealers stocked up on bonds during the rally, and now are having trouble passing off the paper in their inventory.
"Some accounts and dealers starting getting proud," this trader said. "The guys that should be buying bonds are sellers right now. It's very cautious out there right now. ... If you have to get out, you're going to feel some pain."
The Fed policy statement released in the afternoon did not help. The Federal Open Market Committee maintained the federal funds target range of zero to 0.25%, which was widely expected. Some people in the bond market were hoping for further stimulus and quantitative easing, and the Fed did not deliver that.
The Fed reiterated its plan to buy $300 billion of Treasuries, and not more as some traders hoped.
"The Fed did not step up to the plate here and deliver on market expectations," said Eric Lascelles, chief interest rate strategist at TD Banknorth. "The market has grown a little spoiled and it's being pulled back to Earth."
The Fed statement knocked down Treasuries, with the yield on the benchmark 10-year note up nine basis points to 3.09%. Lascelles said the Fed's action probably dashed some people's hopes that the Fed was committed to a 3% ceiling on the 10-year, given the yield was 3% going into the statement and the Fed did little to push it downward.
The yield on the 30-year bond jumped six basis points to 4.02%. The yield on the two-year note fell one basis point to 0.94%.
In the new-issue market yesterday, Goldman, Sachs & Co. began retail pricing on certain tranches of a $2 billion offering for Citizens Property Insurance Corp. The offering came in a $1.3 billion Series 2009A-1 and $700 million of short-term notes in Series 2009A-2.
Bonds in the $1.3 billion offering mature in 2012, 2014, and 2016, with multiple coupons in each maturity. Assured Guaranty Corp. is insuring two $25 million tranches in 2012, a $35 million and $40 million tranche in 2014, and a $35 million and $40 million tranche in 2016.
Yields range from 4.125% with a 4% coupon on the insured tranche in 2012 to 5.50% with 5.375% and 6% coupons on two uninsured tranches in 2016. Tranches of $200 million in 2012, $250 million in 2014 and $250 million in 2016 were not offered to retail. The bonds have an underlying rating of A2 from Moody's Investors Service and A-plus from Standard & Poor's.
The $700 million of short-term notes mature in June 2010, with a $500 million portion offered to retail. The notes, rated MIG-1 by Moody's and SP-1-plus by Standard & Poor's, were priced to yield 3.5% with a 4.5% coupon.
Elsewhere, JPMorgan priced for retail $391.2 million of bonds for Catholic Healthcare West in two issues. It priced $339.8 million of revenue bonds through the California Health Facilities Financing Authority maturing 2010 through 2019, with term bonds in 2029, 2034, and 2039. Yields ranged from 2.58% with a 4% coupon in 2010 to 6.15% with a 6% coupon in 2034, with bonds in 2039 not offered to retail. The bonds are callable at par in 2019, expect for those maturing 2034, which are callable at par in 2014.
JPMorgan also priced $51.4 million of health facility revenue bonds for CHW through the Maricopa County, Ariz., Industrial Development Authority. The bonds mature 2010 through 2019, with term bonds in 2039. Yields ranged from 2.58% with a 4% coupon in 2010 to 5.04% with a 5% coupon in 2019, with bonds maturing 2039 not offered to retail.
Bonds from both series are rated A2 by Moody's Investors Service, A by Standard & Poor's, and A-plus by Fitch Ratings.
In addition, Merrill Lynch & Co. priced $166 million of revenue bonds for the East Baton Rouge, La., Sewerage Commission. Bonds mature 2016 through 2024, with term bonds in 2029, 2034, and 2039. Yields range from 3.45% with a 3.50% coupon to 5.41% with a 5.25% coupon. The bonds, which are rated A1 by Moody's and AA-minus by Standard & Poor's and Fitch, are callable at par in 2019.
On the competitive side, the Maryland Department of Transportation competitively sold $110 million of consolidated transportation bonds to Barclays Capital at a true interest cost of 3.484276%. Bonds mature 2012 through 2024, with yields ranging from 1.29% with a 3% coupon in 2012 to 3.29% with a 4% coupon in 2020. Bonds maturing 2021 through 2024 were not reoffered.
In economic data released today, real gross domestic product decreased at annual rate of 6.1% during the first quarter, according to estimates released by the Bureau of Economic Analysis, falling short of analysts' expectations. Economists polled by IFR Markets had expected first quarter GDP to fall at a rate of 5%.
Friday, the Institute for Supply Management's will release its manufacturing index, with economists expecting a 38.0 reading.
