Municipal bond prices remained strong on Thursday, keeping alive a rally that has taken yields on some top-rated munis down more than 30 basis points since the beginning of the year.
"There are a couple of things here as to why we have seen the yields change so much, both just this week and since the start of the year," says Randy Smolik, Senior Analyst at Municipal Market Data. "Since last Friday with the employment data coming out, I think that puts a prop in front of the Federal Reserve, that tightening rates as soon as mid-year could be a tad aggressive, since there hasn't been real labor pressure out there and the dollar has been strengthening in some junctions."
On Thursday, the yield on the 10-year general obligation fell three basis points to 1.75% from 1.78% on Wednesday, while the yield on 30-year GOS fell two basis points to 2.52%, according to a final read of MMD's triple-A benchmark scale. On Jan. 2, the yield on the 10-year stood at 2.01% and the yield on 30-year was at 2.83%, according to the MMD scale.
Thursday's levels represent a decline for the 10-year and 30-year of 26 basis points and 31 basis points, respectively, from the first trading day of the year. In the past five trading sessions, yields on the 10-year have fallen by 16 basis points and yields on 30-year have fallen by 19 basis points.
"The lower prices in oil, considering that combined with lower prices with copper, do underscore that the weakness is not just supply driven and that there is underlying weakness in the world economy," Smolik says. "There is strong need to generate refunding issues with these historically low yields, which has prohibited munis from showing strong performance versus Treasuries, primarily driven by refunding issuance."
Treasury prices were higher on Thursday, with the two-year note yield falling to 0.44% from 0.49% on Wednesday. The 10-year yield was down to 1.77% from 1.84%, while the 30-year yield dropped to 2.41% from 2.45%.
On Thursday, the 10-year muni to Treasury ratio was at 98.9% compared to 96.7% on Wednesday, while the 30-year muni to Treasury ratio was at 104.7% versus 103.5%.
Primary Market
JPMorgan Securities priced the New York Metropolitan Transportation Authority's $500 million of transportation revenue bonds in two series.
The MTA's $400 million of fixed-rate Subseries 2015A-1 bonds were priced to yield from 0.80% with a 5% coupon in 2017 to 2.93% with a 5% coupon in 2037. A 2040 term bond was priced as 5s to yield 2.98% while a 2045 term was priced as 5s to yield 3.04%. The 2015-2016 maturities were offered as sealed bids.
The MTA's $100 million of SIFMA floating-rate Subseries 2015A-2 tender notes were priced at par to yield 60 basis points over the SIFMA rate in 2039.
The entire issue is rated A2 by Moody's Investors Service AA-minus by Standard & Poor's and A by Fitch Ratings.
MSRB Reports Previous Session's Activity
The Municipal Securities Rulemaking Board reported 39,457 trades on Wednesday on volume of $11.889 billion. Most active on Wednesday, 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 87 times with an average price of 103.352 and an average yield of 3.822%.
Tax-Exempt Money Market Funds See Outflows
Tax-exempt money market funds experienced an outflow of $1.463 billion, bringing their total net assets to $263.194 billion in the week ended Jan. 13, according to The Money Fund Report, a service of iMoneyNet.com. The funds saw $4.371 billion of inflows in the prior week.
The average seven-day yield for the 396 weekly reporting tax-exempt money funds held steady at 0.1%, while the average maturity decreased by one day to 35 days compared to the previous week.
Taxable money fund assets increased $4.07 billion to $2.471 trillion. The average seven-day yield for the 993 weekly reporting tax-exempt money funds held steady at 0.1% while the average maturity decreased by one day to 37 days compared to the previous week.
Meanwhile, assets of all money-market funds rose $2.61 billion for the week ending Jan. 13, bringing total assets to $2.734 trillion.
Bellows Sees No Fed Rate Hikes Until Late in '15
The Federal Reserve "will raise rates only when it is 'reasonably confident' in its forecast for U.S. inflation," according to John L. Bellows, portfolio manager at Western Asset Management, an affiliate of Legg Mason. "That may mean the Fed is unlikely to raise rates in mid-2015 -- contrary to many published estimates."
Bellows believes it will be a case of later, rather than sooner for the Fed to act.
"We think the risks to the inflation outlook are material and will likely cause the Fed to delay rate hikes while it works to develop 'reasonable confidence,' " Bellows wrote in a recent report.
"As a result, we think the Fed's first rate hike is unlikely to happen in June, and is more likely to happen sometime toward the end of the year," he says. "Fed policy, and the front-end of the U.S. yield curve, will be counter-cyclical in 2015."
Bellows bases his analysis on four factors: falling oil prices, dollar appreciation, additional easing from the European Central Bank and the Bank of Japan, and falling global inflation.
