Municipal bond yields rose across the curve as the Federal Open Markets Committee met on Tuesday.
Yields for bonds maturing in four-to 30-years increased by two basis points, according to Municipal Market Data's Triple-A scale.
"The FOMC meeting will have an effect on the municipal market, there's going to be some volatility that will push yields higher," a trader in Chicago said.
The 10-year and the 30-year rose one basis point each to 2.33% and 3.66% respectively, while the two-year held steady at 0.38%, according to Municipal Market Advisor's data.
"Of course, on a forward basis, the FOMC meeting will impact interest rates," a trader in Pennsylvania said. "The Fed is tapering right now, and they will continue to taper," he said, referring to reductions in the Fed's stimulus program of buying bonds.
Market participants don't predict that the Federal Reserve will decide to raise interest rates anytime in the near future. Kevin Horan, director of fixed income indices at Standards & Poor's Dow Jones Indices described the FOMC Rate Decision the "highest priority" of the potential market moving economic data reports scheduled for release this week.
"Tapering and other main policy targets of the Fed are expected to remain unchanged," he said in the report.
The trader in Pennsylvania said his firm has adopted a "long-term oriented" approach towards interest rates.
"The FOMC put a cap on rates," he said. "At some point, eventually, that cap will abate. Interest rates are always going to be bobbing around, but we don't get caught up into the day to day movements."
The FOMC announcement is scheduled for Wednesday at 2 PM New York time.
A second trader in New York said he considers the market's current softening as a positive, because prices have been rising and a sell-off might prompt more buyers to enter the municipal market.
"We need the market to become a lot softer," he said. "We need a sell-off, we need buyers to come back. Right now they're just sitting on cash."
The first trader from Chicago also said there was a lot of cash out there, and investors were looking for an opportunity to enter the market. Investors have said that bonds being priced aggressively when they come to the market are one of the main problems, and listed the $834.5 million Pennsylvania general obligation bonds that were issued Tuesday as an example.
The GO is the largest deal of the week, and Bank of America Merrill Lynch won the bid for the two-part issuance with yields for $545 million section ranging from 0.20% with a 5% coupon maturing in 2015 to 3.43% with a 5% coupon in 2034.
Yields for $289.5 million of GOs ranged from 0.20% with a 5% coupon in 2015 to 2.53% with a 5% coupon in 2024.
"I think it was a little rich relative to what we consider the credit fundamentals of the state to be," a second trader in Pennsylvania said. "It's a tough market this week."
There is a call option for the larger part of the issuance at par in 2024, but the second segment cannot be called. The deal is rated AA2 by Moody's and AA by both S&P and Fitch.
"We did not put in for any of the Pennsylvania issues today," a third trader in Pennsylvania said.
The first trader from Pennsylvania said his firm didn't participate in the deal.
"We thought it was priced a little aggressively," he said. "Considering the fundamentals, we thought it would be a little cheaper."
On Tuesday the House and Senate Democratic Appropriations Committee staff said the state's April tax collections were behind projections, and noted that there are only two days left in the month. On Monday S&P said that it may downgrade the state's rating if Pennsylvania doesn't make significant strides to balance its budget and address long-term pension liabilities, according to the Associated Press.
"The rating agencies are certainly focusing on Pennsylvania," the first trader from Pennsylvania said.
The second trader in Chicago said he thinks no one is looking at deals this week because it is the end of the month. "May 1st is in a couple days, money hits accounts in a couple days," he said. "Money managers are taking meetings and seeing how they will spend that money."
A second trader in New York said that money managers waiting until cash comes in on May 1st is "absolutely" a reason why buyers aren't looking at deals this week. "You've got the perfect storm, at the end of the day you have people waiting for May 1 and people being cautious about the potential rising rate environment," he said. "This week is no fun."
Yields on the general obligation bonds that were part of Puerto Rico's giant $3.5 billion issuance in March are falling as the market prepares for Governor Alejandro Garcia Padilla's speech Tuesday evening.
"In the run-up to this evening's expected budget proposal from PR's governor, pricing of the 8% of the 2035 maturity from the March new general obligation issue (Ba2/BB-plus/BB), have been gradually improving," Janney Capital Markets said in a report. Yields on the bonds have fallen by nine basis points to 9.03% since Friday, dropping one basis point from 9.09% on Monday, according to data provided by Bloomberg.
Treasuries strengthened Tuesday with the 30-year yields falling two basis points to 3.50% and the 10-year benchmark slipping three basis points to 2.70%. Two-year notes were unchanged at 0.45%.
