Prices of top-rated municipal bonds finished sharply higher on Friday, according to traders, with yields on some maturities weakening by as much as nine basis points. Treasury bonds surged as stocks slumped.
The moves came just a day after the Federal Reserve decided to take no action on interest rates.
Secondary Market
The yield on the 10-year benchmark muni general obligation on Friday weakened by eight basis points to 2.14% from 2.22% on Thursday, while the yield on the 30-year GO was weaker by nine basis points at 3.13% from 3.22%, according to the final read of Municipal Market Data's triple-A scale.
On Friday, Sept. 11, the yield on the 10-year muni stood at 2.23% while the yield on the 30-year muni stood at 3.20%.
Treasury prices were higher on Friday, with the yield on the two-year Treasury note dropping to 0.67% from 0.70% on Thursday, while the 10-year yield declined to 2.13% from 2.22% and the 30-year yield decreased to 2.93% from 3.02%.
In late trading the Dow Jones Industrial Average was down about 250 points as the Nasdaq Composite Index was off around 60 points and the S&P 500 Index dropped about 30 points.
The 10-year muni to Treasury ratio was calculated on Friday at 100.6% versus 100.2% on Thursday, while the 30-year muni to Treasury ratio stood at 106.9% compared to 106.2%, according to MMD.
FOMC Left Target Rates Unchanged
The Federal Open Market Committee wound up its two-day meeting and kept its target for the benchmark federal funds rate at between zero and 0.25%. The Fed citied continued geopolitical and world economic risks and a low U.S. inflation environment.
While the news pushed down municipal bond yields, market speculation quickly turned toward the next big FOMC meetings of December and March of 2016 -- both of which are seen as possible market movers.
Brian Rehling, Co-head of Global Fixed Income Strategy at Wells Fargo Investment Institute, said that worldwide economic uncertainty weighed heavily on the Fed's mindset.
"The China impact was one of the primary factors [in the Fed's decision]," Rehling said in a conference call on Thursday. "Going forward, we feel they will raise in December and if you look, the dot plots indicate that 13 of 17 members think there will be a rise in rates."
Rehling said that since a slow pace is likely to occur, there will be a relatively muted impact on fixed-income classes.
"Of course, the potential continues to exist that we could see further market and deflation disruptions [from now until the next meeting and beyond] that could delay [a rate hike] even more," he said.
Luke Bartholomew, Fixed Income Investment Manager at Aberdeen Asset Management, said it looked more likely that a rate hike was possible for December.
"The wait for Godot goes on. Janet Yellen's caution won out over some of her more trigger-happy colleagues. There's good reason for that caution. Inflation is almost non-existent and wage growth is lackluster," Bartholomew said in a market comment on Thursday. "Of course you can never know that a decision is the right one until it's made and you see the upshot. But there are greater risks around going too early than going too late which makes this delay justified. However, we shouldn't over-exaggerate the ultimate macroeconomic difference between going in September and going in December (which seems likely)."
Janney said in a Thursday research note that there could be a favorable impact for munis on the horizon.
"For municipal investors…there may be positive considerations to the eventual start to a Fed tightening regime," Janney said. "First off, we do not believe longer term rates will rise precipitously when the Fed does begin to ratchet up the Fed Funds rate. The curve will likely flatten as short rates, reacting to Fed bumps, move higher while long term rates, more impacted by inflationary expectations, rise moderately if at all."
Janney also looked the relative value through the muni to Treasury ratio.
"We've also observed that during periods of Fed tightening, tax-free bonds generally outperform taxable," Janney said. "During the rate hike periods of the late 80s, the mid 90s and the middle of the last decade, muni ratios declined meaning that tax-free yields fell (prices rose) relative to Treasuries. With ratios currently hovering around 100%, despite high marginal income tax rates, we see more downside bias to M/T ratios than upside likelihood."
Primary Market
In rare primary action for a Friday, Goldman Sachs priced the New York City Transitional Finance Authority's $750 million of future tax secured tax-exempt subordinate bonds for retail investors. A second day of retail orders will be taken on Monday with the institutional pricing tentatively scheduled for Tuesday.
The issue was priced to yield from 0.92% with a 3% coupon in 2018 to 3.82% with a 3.75% coupon in 2039; a 2017 maturity was offered as a sealed bid while no retail orders were taken in the 2028-2029, 2031-2034, and 2036-2038 maturities.
The bonds were rated Aa1 by Moody's Investors Service and triple-A by Standard & Poor's and Fitch Ratings
Meanwhile, the market was already digesting about $4.38 billion of new deals that came to market during the week.
Revised data from Thomson Reuters show that about $3.35 billion of negotiated deals and $1.04 billion of competitive sales were sold during the week.
The Texas Transportation Commission's $889.6 million of Series 2015A general obligation mobility fund refunding bonds was the biggest deal of the week and was priced by JPMorgan Securities. The advance refunding was rated triple-A by Moody's, S&P and Fitch.
Citigroup priced the Illinois' Metropolitan Pier and Exposition Authority's $219.37 million of bonds for the McCormick Place expansion project. The issue was comprised of current interest bonds and capital appreciation bonds.
Officials said they were pleased with the results of the sale, even though it paid a penalty for the recent loss of its high-grade ratings.
The sale was MPEA's first since the state's budget impasse cost the authority its AAA S&P rating and its AA-minus Fitch rating. Both agencies cut the MPEA to BBB-plus, one notch below the state's general obligation rating, after they said it was subject to appropriation risk. Moody's, which had already classified the credit as subject to appropriation risk and had its rating below the state's, was not asked to rate the new deal.
"The deal was two times oversubscribed, allowing the authority to improve pricing for most maturities from one to 10 basis points," MPEA's CFO Richard Oldshue said in a statement. "The $153 million raised in the transaction completes the funding for our hotel project, allowing MPEA to go forward with two projects important to MPEA, to the city and to the state."
Citi also priced the Los Angeles Department of Water and Power's $269 million of Series 2015B power system revenue bonds. The issue was rated Aa3 by Moody's and AA-minus by S&P and Fitch.
And Citi priced the city of Philadelphia's $192 million of GOs. The issue was rated A2 by Moody's, A-plus by S&P and A-minus by Fitch.
Barclays Capital Markets priced the Illinois Finance Authority's $368 million of Series 2015A revenue bonds for the OSF Healthcare System. The issue was rated A2 by Moody's and A by S&P and Fitch.
Bank of America Merrill Lynch priced the Delaware County Authority, Pa.'s $140.51 million of Series 2015 revenue bonds for Villanova University. The bonds were rated A1 by Moody's and A-plus by S&P.
In the competitive arena, Ohio came to market with three separate general obligation sales totaling over $250 million. Morgan Stanley won the $150 million of Series 2015B infrastructure improvement bonds with a true interest cost of 3.30%. Morgan Stanley also won the $50 million of Series 2015B conservation projects bonds with a TIC of 2.86%. And PNC Capital Markets won the $50.49 million of Series 2015C infrastructure improvement refunding bonds with a TIC of 2.15%. All three issues were rated Aa1 by Moody's and AA-plus by S&P and Fitch.
The Week's Most Actively Quoted Issues
Puerto Rico and Arizona were some of the most actively quoted names in the week ended Sept. 18, according to data released by Markit.
On the bid side, the Puerto Rico commonwealth GO 8s of 2035 were quoted by 11 unique dealers. On the ask side, the Salt River Project, Ariz.'s revenue 5s of 2028 were quoted by 23 dealers. And among two-sided quotes, the Puerto Rico commonwealth GO 8s of 2035 were quoted by nine dealers, Markit said.
The Week's Most Actively Traded Issues
Some of the most actively traded issues in the week ended Sept. 18 were in Oklahoma, Pennsylvania and California, according to Markit.
In the revenue bond sector, the University of Oklahoma 4s of 2045 were traded 104 times. In the GO bond sector, the Philadelphia 4s of 2035 were traded 36 times. And in the taxable bond sector, the California 7.55s of 2039 were traded 11 times, Markit said.
Muni Bond Funds See 4th Week of Outflows
Municipal bond funds reported outflows for the fourth straight week, according to Lipper data released on Thursday.
Weekly reporting funds experienced $411.069 million of outflows in the week ended Sept. 16, after outflows of $95.986 million in the previous week, Lipper reported.
The latest outflow brings to 20 out of 38 weeks this year that the funds have seen redemptions. Inflows for the year to date are still in the green, totaling over $1.5 billion.
The four-week moving average remained negative at $359.525 million after being in the red at $245.843 million in the previous week. The moving average has now been negative for 18 weeks in a row. A moving average is an analytical tool used to smooth out price changes by filtering out fluctuations.
Long-term muni bond funds experienced inflows, gaining $12.897 million in the latest week, on top of inflows of $12.690 million in the previous week. Intermediate-term funds had outflows of $157.937 million after outflows of $9.352 million in the prior week.
Exchange traded funds saw inflows of $65.897 million, after inflows of $28.812 million in the previous week.
And high-yield muni funds reported outflows of $348,000 in the latest reporting week, after an outflow of $6.069 million the previous week. In the past 21 weeks, high-yield funds have had outflows 15 times totaling $1.946 billion and inflows six times totaling $322.011 million.
