The tax-exempt market stalled Thursday afternoon as traders reacted to the Federal Open Market Committee announcement.
While munis were stronger in the morning, one New York trader said munis were "wishy washy" in the afternoon after the FOMC announced additional stimulus and Treasury yields soared.
The FOMC said it will buy $40 billion a month of mortgage-backed securities, with no set end or total. The Fed also extended its low rate guidance to at least mid- 2015.
It will continue with its "Operation Twist" program through the end of the year to extend the average maturity of its holdings, and will maintain its existing policy reinvesting principal payments from its holding of agency debt and agency MBS in agency MBS.
"At the Kansas City Fed's symposium in Jackson Hole, the Fed Chairman laid out his defense of unconventional monetary actions and made the case that these actions had boosted growth and employment by a significant amount," wrote economists at RDQ Economics. "In doing so he left the door open for further action if growth and job creation did not improve and, today, he pushed the Committee further than we thought it would go.
"Bernanke seems to be pushing the Professor Woodford playbook in terms of the less conditionality of the rate promise, buying non-Treasury assets, and leaving the door open for an even faster rate of purchases," the economists added. "Our view is that these actions will do little to stimulate growth but will raise inflation expectations. As for other markets, we think that risk assets will get a short-term sugar rush, which will further support equity prices. Our guess is that to the extent the Fed boosts the demand for risk assets, yields will drift higher. Bernanke is marching U.S. monetary policy even further into totally uncharted territory."
In the muni primary market, Bank of America Merrill Lynch priced $158.4 million of Massachusetts Housing Finance Agency revenue bonds in two series, rated Aa3 by Moody's Investors Service and AA-minus by Standard & Poor's and Fitch Ratings.
Yields on the first series, $107.1 million of taxable bonds, ranged from 0.467% and 0.512% priced at par in a split 2013 maturity to 4.836% priced at par in 2043. Spreads ranged from 30 basis points to 225 basis points above the comparable Treasury yields. The bonds are callable at par in 2022.
Yields on the second series, $51.3 million of taxable bonds, ranged from 0.467% and 0.512% priced at par in a split 2013 maturity to 1.776% priced at par in 2017. Spreads ranged from 30 basis points to 110 basis points above the comparable Treasury yields.
On Wednesday, the 10-year Municipal Market Data yield jumped three basis points to 1.84% while the 30-year yield spiked four basis points to 2.98%. The two-year closed at 0.29% for the 34th consecutive session.
Treasuries plummeted after the Fed announced QE3. After the announcement, the two-year jumped three basis points to 0.26% while the benchmark 10-year yield soared 11 basis points to 1.83%. The 30-year yield spiked nine basis points to 2.98%.