The tax-exempt market ended Monday on a quiet note as traders waited for the majority of primary issuance to price and the Federal Open Market Committee meeting to provide direction.
Outside one major deal to price Monday, the rest of the primary was quiet. Traders were hesitant to make significant moves until the Fed announces whether it will launch Quantitative Easing 3, or not.
“It’s definitely quiet out there,” a New York trader said. “I’m sure between a couple of state general obligation benchmark deals this week and FOMC on Thursday everyone is patiently waiting to see some action. We need more guidance from the primary before anything serious takes place elsewhere and I think we will get the first touch of that this week.”
The morning trading session started out on a similar note. “Listen carefully,” a Chicago trader said. “Listen to this. What do you hear? Nothing.”
The trader said the market was very quiet in morning trading. “I think people are testing the market,” he said. “Some guys bought some things at the end of last week that are flexible and they are seeing where the bid side is today. It’s a testing day.”
He added most of the direction will come from the secondary market with the primary market providing no direction. “There is nothing significant in the primary. It seems like we have peripheral stuff and nothing epic or market changing. Again, we don’t have a lot of leadership in underwriting yet so we have to be led by secondary trading.”
The primary kicked off pricing on Monday. Ramirez & Co. priced for retail and institutions $238.3 million Dormitory Authority of the State of New York lease revenue bonds for state university dormitory facilities, rated Aa2 by Moody’s Investors Service and AA-minus by Standard & Poor’s. Institutional pricing was expected Tuesday but was moved up a day due to demand.
Yields ranged from 0.39% with a 3% coupon in 2014 to 3.40% with a 5% coupon in 2042. Credits maturing in 2013 were offered via sealed bid. The bonds are callable at par in 2022. Yields were lowered as much as seven basis points from retail pricing.
One New York trader said the deal “looks a bit tight for our liking,” adding the 10-year came in a 46 basis points above the benchmark Municipal Market Data scale in the retail order period.
On Monday, the 10-year MMD yield and the 30-year yield rose one basis each to 1.79% and 2.93%, respectively. The two-year closed at 0.29% for the 32nd consecutive session.
Treasuries were mostly flat. The two-year was steady at 0.26% while the 30-year was flat at 2.83%. The benchmark 10-year yield increased one basis point to 1.68%.
In the secondary market, trades compiled by data provider Markit showed a mix of stronger and weaker trades.
Yields on Connecticut Health and Educational Facilities Authority 5s of 2042 dropped three basis points to 1.89% while DASNY 5s of 2041 fell two basis points to 2.98%. Yields on Harris County, Texas, Cultural Education Facilities Finance Corp. 3.75s of 2027 fell one basis point to 3.92%.
Other traders were weaker. Yields on Los Angeles Department of Water and Power 5s of 2043 jumped four basis points to 3.19% while Nebraska Public Power District 5s of 2031 rose two basis points to 2.88%.
All eyes in the fixed income markets have their attention on Thursday’s FOMC meeting. Sherry Cooper, chief economist at BMO Financial Group noted that the minutes of the last Fed meeting suggested quantitative easing was much closer than originally expected with the key passage saying, “Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery.”
Cooper noted the recovery has been neither sufficiently substantial nor sustainable to dissuade the Fed from easing further, and the Fed’s words of “fairly soon” means Sept. 13th. “This week’s easing step will likely be extending the period of policy rate guidance from exceptionally low levels at least through late 2014 to at least well into 2015,” Cooper wrote.
To be sure, Cooper added QE3 may not happen. “One reason is that both previous rounds of QE came against a backdrop of falling inflation expectations, and right now, 5-year forward expectations are around 2.6%, and actually picking up a bit in recent months.”
Analysts at Interactive Data disagreed, noting the chances of QE3 are increasing although the timing is uncertain. “The upcoming election could present an obstacle to central bankers trying not to be perceived as politically-influenced,” the analysts wrote. “Therefore, some now believe that action will be delayed until the December meeting, which would also allow Chairman Bernanke to ensure his firepower is utilized closest to year end, when liquidity has historically been thinner.”