Market Close: Munis Soar On Fed News, Limited Supply

The tax-exempt market posted its strongest rally in more than a month Monday as yields fell almost 10 basis points on a small new-issue calendar and news that Larry Summers — who had been the front-runner to replace Ben Bernanke as the chairman of the Federal Reserve — withdrew his name from consideration.

Municipal bond prices followed Treasury prices higher on poor economic data over the past several weeks and the possibility the Fed will taper its bond buying program less than the market expects after the Federal Open Market Committee meeting, which takes place Tuesday and Wednesday.

“Munis are still rallying. It’s slowed down a little since this morning but it’s still rallying,” a New York trader said. “Munis have a mind of their own. I’m getting decent enough bids that it’s up.”

Summers, who was treasury secretary under President Bill Clinton and is a former economics adviser to President Barack Obama, is widely considered more hawkish than Janet Yellen, the next front-runner for the job. She is thought to be more in line with Bernanke’s accomodative views on monetary policy.

“The tone is clearly on the Fed, and Summers’ stepping back is a positive for the market,” a second New York trader said. “The calendar is manageable and refinancings have been scaled back a lot given the recent increase in rates.”

Still, this trader was cautious, given that outflows from municipal bond funds continued for the 16th consecutive week, totaling $26.4 billion in that time for funds that report weekly to Lipper FMI. “Although direct retail buying has picked up, there are bond outflows. People are keeping an eye on that. Muni-to-Treasury ratios have dropped a bit but the concern is about the demand side.”

A light calendar for new issuance this week also supported the muni rally. The market can expect $3.51 billion in new issues this week, according to the Bond Buyer and Ipreo, down from last week’s revised $5.91 billion. The negotiated market can expect $2.10 billion followed by $1.40 billion in competitive auctions.

On Monday, JPMorgan priced for retail $130 million of Colorado Springs, Colo., Utilities System improvement revenue bonds, rated Aa2 by Moody’s Investors Service and AA by Standard & Poor’s and Fitch Ratings. Institutional pricing is expected Tuesday.

Yields on the first series of $59.8 million ranged from 0.64% with a 3% coupon in 2015 to 4.63% with a 4.625% coupon in 2033. Bonds maturing in 2014 were offered via sealed bid. Portions of bonds maturing between 2025 and 2043 were not offered for retail. The bonds are callable at par in 2023.

Yields on the second series of $70.2 million ranged from 0.64% with a 3% coupon in 2015 to 3.50% with a 5% coupon in 2024. Bonds maturing in 2014 were offered via sealed bid. Bonds maturing between 2025 and 2043 were not offered for retail. The bonds are callable at par in 2023.

In another sign of strength on Monday, Genesee County, Mich., came to market with $35 million of water supply system limited tax general obligation bonds, after being delayed following Detroit’s bankruptcy filing.

JPMorgan priced the bonds, rated A2 by Moody’s and A-plus by Standard & Poor’s. The bonds carry a AA rating by Standard & Poor’s with Build America Mutual Assurance Co. insurance.

Yields ranged from 0.58% with a 2% coupon in 2014 to 5.51% with a 5.375% coupon in 2038. The bonds are callable at par in 2023.

In the secondary market, trades compiled by data provider Markit showed firming.

Yields on Hawaii 5s of 2029 slid six basis points to 3.88% and California 5s of 2042 fell five basis points to 4.93%.

Yields on Florida Board of Education 4s of 2026 and Jacksonville, Fla., 5.25s of 2033 fell five basis points each to 3.69% and 4.84%, respectively.

Yields on California’s Golden State Tobacco Securitization Corp. 5.3s of 2037 and Pennsylvania Turnpike Commission 5s of 2040 fell two basis points each to 7.75% and 5.15%, respectively.

On Monday, yields on the triple-A Municipal Market Data scale ended as much as 10 basis points firmer. The 10-year yield slipped nine basis points to 2.74% and the 30-year yield dropped six basis points to 4.33%. The two-year was steady at 0.43% for the 43rd straight session.

Yields on the Municipal Market Advisors scale also ended as much as 10 basis points lower. The 10-year yield dropped nine basis points to 2.91% and the 30-year yield dropped seven basis points to 4.42%. The two-year closed unchanged at 0.55% for the 22nd session.

Treasuries ended the day stronger, though they pared most of the morning gains by the afternoon session. The two-year yield fell four basis points to 0.40% and the benchmark 10-year yield slipped one basis point to 2.88%. The 30-year yield reversed all of the morning gains and rose three basis points in the afternoon to 3.87%.

Ahead of the FOMC meeting announcement Wednesday, some muni strategists are revising their outlooks on the market. While the muni market has posted solid gains for four consecutive trading sessions, the positive momentum may not last long, according to John Dillon, chief municipal bond strategist at Morgan Stanley Wealth Management.

“During the past few months, we have seen the market’s interest rate expectations drift higher, with the 10-year Treasury briefly reaching 3% and resting within Morgan Stanley Wealth Management’s recently revised operating range of 2.50% to 3.25%,” he wrote. “Although some of the largest and most rapid interest rate moves may have already occurred, our operating range has been steadily rising all year.”

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