Market Close: DASNY Unfazed By Choppy Yields on FOMC Minutes

The Dormitory Authority of the State of New York was the focus of the municipal bond market Wednesday as traders said the $443 million sale was attractively priced, allowing the issuer to accelerate the institutional sale and cut yields.

Bank of America Merrill Lynch moved institutional pricing to Wednesday after retail buyers placed $450 million in orders by mid-morning. The underwriter was also able to lower yields as much as 10 basis points.

In repricing, yields ranged from 0.25% with a 2% coupon in 2014 to 5.07% with a 5% coupon in 2043. Yields were lowered one and three basis points on bonds maturing in 2038 and 2043 from preliminary pricing. From retail pricing, yields on bonds maturing in 2016 and 2017 were lowered 10 basis points and yields on bonds maturing between 2018 and 2024 and in 2043 were lowered five basis points.

The bonds are callable at par in 2023 and are rated Aa3 by Moody's Investors Service and A-plus by Standard & Poor's and Fitch Ratings.

"That deal is very attractive," a New Jersey trader said.

In the secondary, the tone was weaker and choppy. "It's sloppy and down a little," the trader said. "Every time there is a little weakness it seems like people are hiding. We had such a bull market for five years that memories are short."

And while there is limited liquidity, this trader said volume has remained high. "There are still plenty of bids wanted, especially on the customer sell side."

Liquidity issues appeared to dominate the secondary markets throughout the week. "Mutual fund customers are hesitant to sell bonds cheap to evaluations, but bids near evaluations are hard to find," wrote Dan Toboja, vice president at Ziegler Capital Markets "The majority of transactions that are occurring are on the retail-structured bonds near evaluations. As the market cheapening has continued the 5% coupon bonds trading at a discount have marched up in quality and come in on the curve. The result is 12- to 16-year blocks of triple-A to single-A rated paper trading in the retail dollar prices."

A New York trader said plenty of bid lists surfaced Wednesday morning, putting pressure on prices early. While only a few of those bonds traded, it still moved the market a few basis points weaker.

Trades compiled by data provider Markit showed mostly weakening.

Yields on Cambridge, Mass., 3s of 2022 jumped six basis points to 2.86% and New Mexico Finance Authority 4s of 2022 rose four basis points to 3.01%.

Yields on University of California 5s of 2039 increased three basis points to 4.72% and University of Texas 5s of 2025 rose two basis points to 3.43%.

Still, other trades were stronger. Yields on New York's Metropolitan Transportation Authority 5s of 2041 slid three basis points to 5.16% and Ohio's Buckeye Tobacco Settlement Financing Authority 5.75s of 2034 fell two basis points to 9.00%.

Wednesday, yields on the triple-A Municipal Market Data scale ended as much as four basis points higher. The 10-year yield rose three basis points to 2.93% and the 30-year yield increased four basis points to 4.44%. The two-year finished flat at 0.43% for the 26th straight session.

Yields on the Municipal Market Advisors scale ended as much as three basis points higher. The 10-year yield rose two basis point to 3.07% and the 30-year yield increased three basis points to 4.54%. The two-year was flat at 0.55% for the fifth session.

Treasuries finished weaker after a choppy session following the release of the Federal Open Market Committee's minutes from the July meeting. The benchmark 10-year yield increased six basis points to 2.88% and the 30-year yield rose four basis points to 3.90%. The two-year yield rose two basis points to 0.38%.

The FOMC minutes showed all members agreed it was not yet appropriate to make changes to the $85 billion-a-month bond purchasing program. A few members stressed the importance of being patient and evaluating additional economic information before changing the pace of asset purchases. A few other members suggested "it might soon be time to slow somewhat the pace of purchases."

"A range of views were expressed regarding the cumulative improvement in the labor market since last fall," the minutes said. While the unemployment rate had declined and recent gains in payroll employment have been solid, the labor force participation rate and the number of discouraged workers suggested more moderate improvement.

"At this point in the cycle, we know this much: the Fed is setting up to reduce the pace at which it provides stimulus to the economy, and FOMC members certainly discussed the concept of tapering," wrote Guy LeBas, chief fixed income strategist at Janney Capital Markets. "It's coming, and while we can't say with any more accuracy than the next forecaster whether it'll be September, November, or even January, the overall direction of monetary policy has already been clearly established."

LeBas added the market reaction to the minutes was most noticeable in the five- to seven-year spot on the curve with yields rising six and seven basis points. "We still feel that the US rates are cheap, as measured at the 10-year point of the curve, but are cognizant that durationitis will likely last through the coming Jackson Hole conference and into the Labor Day holiday."

Other economists said tapering could most likely happen in December. "The labor market was too uncertain for the Fed to taper in late-July and developments since then haven't settled the matter," wrote Paul Edelstein, director of financial economics at IHS Global Insight. "As such, we don't expect tapering at the September meeting. Yet the committee continues to support tapering later this year so long as its expectations for growth and employment are realized. We therefore expect tapering at the December meeting and a gradual winding down of asset purchases through the first half of 2014."

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