The municipal bond market ended Wednesday stronger, helped by low supply and indications that the Federal Reserve will continue to slow its quantitative easing program at a measured pace.
Traders said retail pricing of two new bond issues, $400 million of Metropolitan Transportation Authority bonds and $201 million of Louisiana State Highway bonds, drew some attention even as the market remained mostly quiet.
Federal Open Market Committee said a further strengthening in the economy will lead to "measured steps" to reduce the pace of asset purchases, according to the minutes of the panel's January meeting, released Wednesday.
Members of the committee also said that the pace for tapering wasn't on a preset course and would remain contingent on labor market developments and inflation numbers, according to the minutes. In December, the FOMC began tapering by $10 billion a month, and in January reduced purchases by another $10 billion to $65 billion a month.
"As long as the outlook remains solid and does not deviate dramatically from the path we believe it's on, I would expect the tapering of asset purchases to continue over the balance of the year," Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, said in prepared remarks delivered at Mercer University in Georgia. "I expect the asset purchase program to be completely wound down by the fourth quarter of this year."
Monetary policy will stay "highly accommodative" for "some time" and the 6.5% unemployment rate threshold will be breached long before the FOMC increases the federal funds rate, Lockhart said.
GDP will grow at an "optimistic" pace of 2.5% to 3% this year, he predicted, though noting a challenging road ahead.
"Substantial gaps exist between where we are and where we want or ought to be economically," Lockhart said.
The week's two largest deals being priced for retail weren't enough to get the municipal market rallying Wednesday, traders said.
"We're marginally better but nothing crazy," a New York-based trader said in an interview. "Of course anything is going to be received pretty well, you have no issuance."
Yields, according to Municipal Market Data's triple-A scale, were steady on the short end of the curve Wednesday afternoon as yields on bonds maturing from 2017 and out fell as much as two basis points.
"What saved us before was the refundings, and now all those are gone, and historically supply is never that large in January or February," the trader said. "People are hesitant right now. We're not moving the paper like we used to as people see what's happening in Detroit, Chicago and Puerto Rico, they get a little gun-shy."
Morgan Stanley led the retail pricing of $400 million of MTA transportation revenue bonds, rated A2 by Moody's Investors Service, A-plus by Standard & Poor's and A by Fitch Ratings.
Yields on the retail offer for the first series of $268.4 million of bonds ranged from 0.49% with a 2% coupon in 2016 to 4.58% term bonds with a 5% coupon in 2044. Bonds maturing next year were offered in a sealed bid, and all the bonds are callable at par in 2023.
In the second series of $131.6 million of bonds, yields ranged from 1.30% with a 4% coupon maturing in 2018 to 4.15% with a 5% coupon in 2032.
Citigroup Global Markets brought the retail pricing of $201 million Louisiana highway revenue bonds, which carried an Aa3 Moody's rating and AA-minus scores from S&P and Fitch.
Yields on the Louisiana bonds ranged from 0.25% with a 2% coupon maturing in 2015 to 3.95% with a 5% coupon in 2034. The bonds feature an optional call in 2024.
"It looks like the Louisiana deal is being pretty well received, particularly with the 5% coupons maturing in 2034, which are about 52 basis points off the triple-A," the trader said.
Retail investors in the municipal bond market showed some life Wednesday morning as investors looked to get their hands on the little new paper available.
"Retail is staying involved but it does seem a little slower than normal," one trader in New York said in an interview. "We've been starting each day slowly for some reason, but by the time we get to the afternoon business picks up and we end up with respectable days."
Market participants focused Tuesday on an announcement by Puerto Rico that the island will bring at least $2.8 billion of general obligation bonds to the market in March.
"Much has been accomplished by Commonwealth's political and financial leadership in the past 14 months, and it almost seems as if the Commonwealth is within reach of self-sufficiency, with the need for deficit financing receding," Janney Capital Markets said in a note Wednesday.
The benchmark 30-year Treasury yield was up one basis point to 3.70%, while the 10-year climbed the same amount to 2.73%. The two-year yield fell one basis point to 0.31%.
Trades in the secondary market were stronger, according to data provided by Markit.
Yields on Montgomery County, Pennsylvania, Abington Memorial hospital revenue bonds with a 5% coupon maturing in 2031 fell three basis points to 4.38%, while Houston, Texas, Community College System limited tax general obligation bonds with a 5% coupon in 2040 fell two basis points to 3.43%
Yields on California various purpose GO bonds with a 5% coupon maturing in 2043 slid one basis point to 4.34%, while New York Dormitory Authority Mental health Services Facilities Improvement revenue bonds with a 5% coupon maturing in 2027 were steady at 2.44%.
