Strategists believe that the Federal Reserve's five-year Treasury auction on Wednesday helped stabilize the municipal market and drive down yields.
The US Treasury sold $35 billion in new five-year notes on Wednesday afternoon at a high yield of 1.72% to strong demand.
"Wednesday's five-year Treasury auction offered the interest rate markets exactly the excuse they needed to start reversing the post-FOMC selling pressures," Guy LeBas, chief-fixed income strategist at Janney Capital Markets, wrote in a report released Thursday.
Muni yields had stabilized on Wednesday morning after a five-day sell-off on the short and intermediate parts of the curve. By market close on Wednesday maturities of 10- to 20- year yields dropped up to five basis points, and maturities of five years or less fell up to two.
Muni yields continued to drop on Thursday morning with intermediate maturities decreasing by up to two basis points, and six- to seven-year maturities and 11- to 20-years dropping by one.
"I think the five-year note sales help stabilize the muni market," a financial advisor on the west coast said. "I think that you are looking at a reasonably stable Treasury market right now, and munis typically follow Treasuries."
On Wednesday, Treasury yields for the two-year note fell one basis point, and the 10-year and 30-year strengthened three and two basis points, respectively. On Thursday the two-year note yield continued sliding, dropping one basis point to 0.47%, and the 10-year benchmark yield dropped one basis point to 2.71%. The 30-year yield gained one basis point to 3.54%, though.
The yield hike began on March 19 when Federal Reserve Chairwoman Janet Yellen gave a press conference where she said that the Fed may increase interest rates in April 2015. Before the conference investors had predicted the Fed would wait until the last half of 2015 to start increasing interest rates.
The short and intermediate parts of the curve began rapidly selling off, with yields on the short-end jumping up as much as 31 basis points before the market stabilized Wednesday.
"Particularly with the auction of five-year treasuries yesterday, the muni market has calmed down," Tom Dalpiaz, a managing director at Granite Springs Asset Management said. "People have digested Yellen's comment."
Following its retail order period Wednesday, Bank of America Merrill Lynch will offer $238.6 million of Orlando, Fla., contract tourist development tax payment revenue bonds.
In the competitive market, Virginia will issue a two-part deal totaling $128.3 million. The deal consists of $63.8 million of general obligation bonds and $64.5 million of refunding bonds. The bonds are rated Aaa by Moody's and AAA by both S&P and Fitch.
