Muni bonds strengthened Wednesday amid low supply as Federal Reserve chair Janet Yellen spoke publicly for the first time this month.
Trading was lackluster in the tax-exempt market with few sizeable deals, but firmed after Yellen announced to the Congressional Joint Economic Committee that extremely low interest rates remain warranted.
"[W]e anticipate that even after employment and inflation are near mandate-consistent levels, economic and financial conditions may, for some time, warrant keeping the target federal funds rate below levels that the Committee views as normal in the longer run," Yellen said in the text released by the Fed.
She also refused to be pinned down in questioning about the timing of the first interest rate hike as the Fed curtails its economic stimulus.
Yields on bonds maturing beyond 2039 fell as much as two basis points, while those on the intermediate and short-end of the curve were steady for most of the day, according to the Municipal Market Data's triple-A scale.
"Munis in general are not reacting to Yellen's speech," a trader in Florida said. "Munis are more muted and are responding to low supply, rich ratios, and low absolute yields. It's a balance of all three of those things; nothing to do with the speech."
Yellen anticipates an increase in GDP this year, along with an advance toward 2% inflation.
"A faster rate of economic growth this year should be supported by reduced restraint from changes in fiscal policy, gains in household net worth from increases in home prices and equity values, a firming in foreign economic growth, and further improvements in household and business confidence as the economy continues to strengthen," Yellen said.
Market participants weren't surprised by Yellen's words. "There wasn't anything new that was said, but hearing it again helps," a West Coast trader said. "Munis keep going up in price, because of low supply and there being plenty of cash out there to buy them. There's a good Treasury auction going on in the 10-year. Prices are going up."
Treasuries strengthened Wednesday, with the 10-year benchmark falling one basis point to 2.60% and the two-year note slipping two basis points 0.42%. The 30-year was unchanged from Tuesday's market close at 3.40%.
"Where we're going with tapering is what the market is wondering right now," a trader in Chicago said. "Rates aren't going up the way we thought they were earlier this year."
With week's total potential volume falling to $3.9 billion, down from last week's $6.2 billion issuance, back to the light trend from earlier this year, supply is scarce.
"People are scrambling to buy just about anything these days," a trader in New Jersey said.
Citigroup Global Markets brought $450 million of toll highway senior revenue bonds for the Illinois State Toll Highway Authority Wednesday, the largest negotiated deal of the week.
Yields ranged from 3.04% with a 5% coupon in 2026 to 3.97% with a 5% coupon in 2039. The bonds will mature serially from 2025 to 2034 with a term bond in 2039 and are callable at par in 2024. The deal is rated Aa3 by Moody's Investors Service and AA-minus by both Standard and Poor's and Fitch Ratings.
Bank of America Merrill Lynch brought a two-part deal totaling $195 million of New Jersey Higher Education Student Assistance Authority alternative minimum tax student loan revenue bonds to the market on Wednesday.
Yields on $182 million of revenue bonds ranged from 0.52% with a 4% coupon in 2015 to 4.62% with a 4.50% coupon in 2036. The $13 million of subordinate revenue bonds were priced at par with a 5% coupon in 2044. All bonds are callable at par in 2023 and are rated Aa2 by Moody's and AA by S&P.
Goldman Sachs & Co. brought $137.4 million of revenue bonds for the Massachusetts Development Finance Agency Wednesday.
Yields ranged from 3.33% with a 5% coupon in 2031 to 3.81% with a 5% coupon in 2046. The bonds are callable at par in 2024 with a term bond in 2046. The deal is rated Aa2 by Moody's and AA by S&P.
Harris County Flood Control District was scheduled to issue $195 million district improvement refunding bonds in a three-part issuance. The deal was postponed to Thursday as underwriters look into altering the structure. Under the current structure, the $50 million part of the issuance is tax-exempt, and the two other portions of $70 million and $75 million are taxable.
Jefferies is the managing underwriter and the bonds received Aaa from Moody's and AAA from Standard & Poor's.
Secondary market trading showed mostly strengthening, according to data provider Markit.
State of Pennsylvania general obligation bonds with a 5% coupon maturing in 2022 fell one basis point to 2.30% and Pennsylvania State Turnpike revenue bonds with a 5% coupon in 2043 slipped one basis point to 4.33%.
Metropolitan Transportation Authority revenue bonds with a 5% coupon maturing in 2023 slid two basis points to 2.87% and New Jersey State Turnpike Authority revenue bonds with a 5% coupon maturing in 2025 fell one basis point to 2.94%.
