The municipal bond market was quiet on Tuesday on the last full full-trading day of 2014. The market has an early close on Wednesday and a full close on Thursday. Muni bond prices were stronger in thin trade, according to traders.
LOOKING FORWARD
With the ball set to drop on Wednesday night, people everywhere are looking forward to the New Year. By now, almost everyone in the industry has been thinking about 2015.
One major topic that has been on a lot of people's minds is the potential decision by the Federal Reserve to increase interest rates and how this will impact the market.
Jim Grabovac, a managing director at McDonnell Investment Management, believes that if and when higher rates come, it will most likely be in the second half of 2015.
"A complicating factor in the outlook for Federal Reserve policy is economic divergence. The only way to describe what is happening is that most of the developed world's economies are disappointing. In the U.S. market, the economy is visibly improving and in addition the outlook for inflation is weak or benign with oil being the latest factor to complicate the situation," said Grabovac. "In Europe, declining oil prices complicate things there. The Federal Reserve is telegraphing their intent to look beyond the medium or short term, so I think that it is pretty unlikely that will help keep down the potential rate rises if and when they come."
A big factor is that the dollar has rallied, according to Grabovac.
"When you look at the overall landscape, it's difficult to expect the U.S. could get a significant rise in rates while other countries don't. It will be important to keep an eye on," he said.
He also believes that very low inflation will help keeps bonds in check. "It's easy to understand when you look at the global backdrop for interest rates," he said.
On top of that, he expects a modest increase in issuance and more refunding issuance in 2015. Although he doesn't foresee supply ramping up significantly in 2015. Grabovac also pointed out that from a credit standpoint, there has been a broad improvement, which is an additional positive but added there are some individual issuers facing their own problems.
"One more thing we will be watching is the flows into muni funds and we would expect that to continue in 2015," said Dawn Mangerson, a managing director at McDonnell. "There is still a strong demand for munis."
PRIMARY MARKET
In the primary market on Tuesday, Bank of America Merrill Lynch priced a $233.63 million composite remarketing deal for three issuers. The offering consisted of California Municipal Finance Authority's $127.045 million Non-AMT solid waste refunding revenue bonds, Series 2010; Mission Economic Development Corp. of Texas' $56.2 million Non-AMT solid waste disposal revenue bonds, Allied Waste North America, Inc., project, Series 2008A; and the Pennsylvania Economic Development Financing Authority's $35 million AMT solid waste refunding revenue bonds, Republic Services, Inc., project, Series 2010A and its $15.385 million Non-AMT solid waste refunding revenue bonds, Republic Services, Inc., project Series 2010B. The issue is rated BBB-plus/A-2 by Standard & Poor's.
SECONDARY MARKET
High-grade municipal bond prices were higher again on Tuesday. The yield on the benchmark 10-year general obligation dropped two basis points to 2.06% from 2.08% on Monday, while the yield on 30-year GOs declined five basis points to 2.88% from 2.93%, according to the final read of MMD's triple-A scale.
Treasury prices moved higher, with the two-year note yield falling to 0.69% on Tuesday from 0.71% on Monday. The 10-year yield decreased to 2.19% from 2.22% while the 30-year dropped to 2.76% from 2.78% on Monday.
On Tuesday, the 10-year muni to Treasury ratio was at 94.1% versus 93.4% on Monday, while the 30-year muni to Treasury ratio was at 104.3% compared to 104.9% on Monday.
MSRB REPORTS PREVIOUS SESSION'S ACTIVITY
The Municipal Securities Rulemaking Board reported 23,570 trades on Monday on volume of $3.272 billion. Most active on Monday, based on the number of trades, was the New Jersey Transportation Trust Fund Authority transportation program bonds, Series AA 4 1/4s of 2044, which traded 131 times with an average price of 99.961 and an average yield of 4.224%.
