The municipal bond market stabilized as investors said the short-term sell-off after Federal Reserve chairwoman Janet Yellen's comments on interest rates was overdone.
After rising for five-straight days, yields on bonds maturing in five to 20-years declined as much as five basis points Wednesday, according to the Municipal Market Data triple-A scale.
Yields on the long end experienced the most significant drop, with 2034 maturities falling five basis points to 3.67%, according to the Municipal Market Advisors scale. Yields on bonds maturing in 10 years or less only decreased up to three basis points with yields for the 2024 maturities falling to 2.56%.
"It might have been a bit of an overreaction last week at the front end of the curve," a Chicago trader said. "Now people are taking a closer look and thinking things might have moved too far too quick."
The short end of the curve began selling off on March 19 after Federal Reserve chairwoman Janet Yellen said at a press conference that the Fed may end its quantitative easing program in October, and might raise interest rates in April 2015. Strategists had previously forecast the central bank wouldn't raise rates until the third or fourth quarter of 2015.
Prices for short-term bonds jumped up as much as 31 basis points, until they reversed course Wednesday morning.
Wells Fargo Advisors in a report released Tuesday described the sell-off as a "knee-jerk" reaction and said when the Fed does finally begin raising interest rates, the change won't be as severe investors are predicting.
"In our view, the new Fed language, and in particular the answers Yellen gave the press during questioning, suggests that the Fed is likely to be quite dovish far longer than many in the market previously
anticipated," Wells Fargo said in the report. "This is a view that we do not think the market has properly interpreted. We continue to believe that interest rates will only move gradually."
Well Fargo added that when the Fed does begin tightening, rates will take a "shallow glide path" higher.
"Between the FOMC meeting and Monday's close, the spread between the five- year and 30-year points on the yield curve compressed by a whopping 25 basis points — and it feels, at this juncture, the move is overdone," Janney Capital Markets said in a report released on Tuesday.
The market didn't react when the durable goods report, issued by the Commerce Department, revealed economic strengthening. "Positive economic data typically has a negative effect on Treasuries, and munis typically follow Treasuries," a trader in New York said.
There was a 2.2% surge in durable goods orders in February, beating estimates of a 1.0% increase by economists polled by Thomson Reuters. Treasury yields fell from Wednesday afternoon with the two-year note falling one basis point to 0.45%, the 10-year falling three basis points to 2.7% and the 30-year strengthening two basis points to 3.55%
"There's been some positive economic numbers out, but to the extent that these economic numbers are what's driving the market, that's not our view," the Chicago- based trader said.
Investors said supply-demand patterns and fund flows are affecting the market more than the recent economic reports. There's been low issuance this year with $33.66 billion in bond sales for January and February 2014 compared with $51.68 billion for the same period in 2013, according to The Bond Buyer.
There have also been six straight weeks of positive flows into muni mutual funds as of the week ended March 19. Inflows totaled $107.3 million for that week and $223.8 million for the week ended March 12, according to Lipper FMI.
"The technical side of things is driving the muni market, technical meaning supply-and-demand and fund flows," the Chicago trader said. "It's been a pretty light supply week and it's been six or seven weeks of positive fund flows."
The largest deal of the week, $791 million of California State's Public Works bonds, was slated to price Wednesday. The size of the sale was reduced by $2 million, after opening to retail orders Tuesday.
"Based on how deals have done this week — the New York deal increased in size yesterday following its retail period — the State of California deal is expected to be well-received since it has more yield," a trader based in Atlanta said.
Citigroup Global brought $221.2 million of Oklahoma Capitol Improvement Authority state facilities revenue refunding bonds to market. Yields ranged from 0.28% with a 2% coupon in 2015, to 3.55% with a 5% coupon in 2030. The bonds are rated AA by Standard & Poor's and Fitch Ratings.
The Pennsylvania Turnpike Commission priced $236.1 million of revenue bonds, increasing the size of the deal by $525,000 following a retail order period held on Tuesday. Yields ranged from 2.01% with a 5% coupon maturing 2019 to 4.46% with a 5% coupon maturing in 2044. Bonds are callable at par in 2024 with a sinking fund term bond in both 2038 and 2044.
Citigroup won the bid for $265.03 million of lease revenue bonds issued by the Anaheim Public Financing Authority. Yields on the $257.55 million series ranged from 0.2% with a 2% coupon maturing in 2015 to 4.45% with a 5% coupon in 2046. The bonds are callable at par in 2024.
The other $7.48 million are federally taxable and priced at par with coupons of 0.50% in 2015 and 0.85% in 2016 and have no call option. The bonds are rated AA-negative by Standard & Poor's and Fitch Ratings.
The Connecticut Housing Finance Authority's Housing Mortgage Finance Program's $100 million issuance is also entering its institutional sale period on Wednesday, after the bonds were available to retail investors Tuesday. It's a two-part issuance with the first series totaling $54.39 million and the second $45.61 million. Bank of America Merrill Lynch was the managing underwriter. The bonds are rated Aaa by Moody's and AAA by S&P. The deal had not yet been priced.
Bank of America Merrill Lynch is also holding a retail order period for $238.59 of Orlando, Fla., contract tourist development tax payment revenue bonds on Wednesday. The bonds' institutional sale begins on Thursday. The bonds are rated Aa2 by Moody's and AA-plus by S&P. The issuance also had not been priced.
