Market Post: Munis Follow Treasuries Higher After FOMC Meeting

NEW YORK – The tax-exempt market continued its rally into the afternoon as new deals were priced attractively and the Federal Open Market Committee announcement buoyed safe-haven assets.

A trader in Connecticut said he was pricing a small triple-A rated refunding deal. “Spreads to the MMD are tight because of the strong credit,” he said. “Supply looks moderate so we're looking for excellent results.”

“With rates at 45-year lows, the refunding issues have been extremely successful in reducing overall debt service costs,” he added. “The timing of these deals is of the essence. The quicker you can get your deal into the market and take advantage of the rate trough we're in, the better.”

Munis continued to firm Wednesday afternoon, according to the Municipal Market Data scale. Yields were steady inside four years but fell between one and seven basis points further out.

On Tuesday, the two-year yield closed steady at 0.35% for its eighth consecutive trading session while the 10-year muni yield finished flat at 1.87%. The 30-year yield fell one basis point to 3.36%.

Treasuries saw a big rally after the FOMC announcement. The panel said it plans to keep the fed funds rate target at zero to 0.25% as it anticipates economic conditions to warrant exceptionally low levels for the rate at least through late 2014.

“Fed policymakers extended the expected period for ‘exceptionally low levels’ of the fed funds rate to ‘at least through late 2014’, some 1.5 years longer than the ‘at least through mid-2013’ phrase employed previously,” wrote Michael Gregory, senior economist at BMO Capital Markets. “The rest of the statement, particularly concerning the economic and risk assessments, was little changed.”

In addition, he said “All parts of the yield curve, both the parts the Fed is selling – three years and less – and buying – six years and longer – will benefit from a near-zero anchor for essentially the next three years. The Fed’s game plan appears to be to flatten the yield curve as much as possible… and then some.”

After that, the two-year Treasury yield fell two basis points to 0.23% and the 30-yaer yield fell seven basis points to 3.08%. The benchmark 10-year yield dropped 12 basis points to 1.94%.

In the primary market, George K. Baum & Co. priced $129.5 million of Denver Public School District general obligation refunding bonds, rated Aa2 by Moody’s Investors Service and AA-minus by Standard & Poor’s.

Yields ranged from 0.25% with a 2% coupon in 2012 to 3.23% and 3.06% with 3% and 4% coupons in 2028. The bonds are callable at par in 2021.

Goldman, Sachs & Co. priced $122 million of Dormitory Authority of the State of New York bonds for the Memorial Sloan Kettering Cancer Center. The credit is rated Aa2 by Moody’s, AA-minus by Standard & Poor’s, and AA by Fitch Ratings.

Yields ranged from 2.37% with 4% and 5% coupons in 2020 to 2.99% with a 5% coupon in 2024. The bonds are callable at par in 2022.

In the secondary market, trades reported by the Municipal Securities Rulemaking Board showed firming in just the last trading session.

A dealer sold to a customer Hesperia, Calif., Public Financing Authority 5s of 2037 at 6.91%, 13 basis points lower than where they traded Tuesday.

Bonds from an interdealer trade of Puerto Rico Public Finance Corp. 5.5s of 2031 yielded 4.70%, 11 basis points lower than where they traded Tuesday.

Bonds from another interdealer trade of Municipal Electric Authority of Georgia 4.43s of 2022 yielded 4.36%, eight basis points lower than where they traded Tuesday.

A dealer bought from a customer Kentucky Economic Development Finance Authority 5s of 2042 at 4.67%, two basis points lower than where they traded Tuesday.

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