Prices of top-quality municipal bonds were a bit stronger at mid-session, traders said, with yields on some maturities weakening by as much as two basis points.
The muni market was waiting for the pricing of the biggest deal of the week: the $1 billion pension bond offering from the Kansas Development Finance Authority.
Secondary Trading
Muni and Treasury yields fell as bond prices continued to benefit on Wednesday from a flight to quality move after China devalued its currency on Tuesday. China intervened in the markets again to prop up the falling yuan, a move which caused equities around the world to decline.
The yield on the 10-year benchmark muni general obligation on Wednesday fell as much as two basis points from 2.18% on Tuesday, while the yield on the 30-year GO was off as much as two basis points from 3.06%, according to a read of Municipal Market Data's triple-A scale.
Treasury prices were higher on Wednesday, with the yield on the two-year Treasury note slipping to 0.63% from 0.67% on Tuesday, while the 10-year yield dropped to 2.08% from 2.14% and the 30-year yield decreased to 2.77% from 2.81%.
"The Treasury 10-year and bond had a huge rally overnight but has given back nearly all the gains as the market speculates on the Fed's reaction." MMD Senior Analyst Randy Smolik wrote in a Wednesday market comment. "[N.Y. Federal Reserve Bank President William] Dudley stated today that the Chinese devaluation had huge implications for world trade. Any indication that the Fed may delay rate hikes tended to cause the treasury curve to steepen."
The Fed has held rates near zero since 2008. The Federal Open Market Committee meets on Sept. 16-17 and investors on Wednesday saw a 42% chance it would act then to raise rates for the first time in over nine years, according to Bloomberg. The odds have fallen from 54% on Friday after the geopolitical uncertainty surrounding China's economy.
The Fed isn't drawing hasty conclusions now about China developments, Thomas Costerg, senior economist at Standard Chartered Bank, told Bloomberg. "It seems that the Fed is watching what is happening in China, but they're not panicking."
U.S. stocks were trading sharply lower. The Dow Jones Industrial Average fell about 250 points, while the Nasdaq dropped almost 75 and the S&P 500 nearly 30. Oil prices, however, moved higher, with NYMEX crude for September delivery rising 9 cents a barrel to $43.16.
The 10-year muni to Treasury ratio was calculated on Tuesday at 99.4% versus 99.7% on Monday, while the 30-year muni to Treasury ratio stood at 108.4% compared to 107.2%, according to MMD.
Primary Market
Morgan Stanley priced the state of Michigan's $129.31 million of Series 2015A tax-exempt general obligation environmental program refunding bonds.
The bonds were priced to yield from 0.83% with a 5% coupon in 2017 to 2.78% with a 5% coupon in 2028. The 2016 maturity was offered as a sealed bid. The issue is rated Aa1 by Moody's Investors Service, AA-minus by Standard & Poor's and AA by Fitch Ratings.
Also on Wednesday, Bank of America Merrill Lynch set to price the KDFA's $1 billion of Series 2015H taxable revenue bonds. The issue is rated Aa3 by Moody's and AA-minus by S&P.
Since 1995, the KDFA has issued roughly $9.52 billion of debt, with the highest years of issuance occurring in 2004 and 2010 when the authority issued $929 million and $878 million, respectively. The KDFA saw low years of issuance in 1995 and 1999, when they issued just $58 million and $126 million, respectively.
Late Tuesday, Moody's issued a report skeptical of the benefits of Kansas' sale of pension obligation bonds.
"The bonds, which are rated one notch lower than the state at Aa3/stable outlook, will do little to solve the challenges surrounding Kansas' poorly funded state-administered pension plans," Moody's said in the report. "Even if the state's pension bonds work as designed, contributions must rise in order to address growing unfunded liabilities. Contribution requirements (in dollars) will still rise by 4% annually, if all assumptions hold, due to the increasing payment structure used by the pension plan. The state reduced its pension contributions for the next few years in conjunction with this bond sale, signaling the state is using POBs, and taking on some additional long-term risk, to achieve near-term budgetary relief."
Also on Wednesday, Goldman, Sachs is scheduled to price the Los Angeles County Public Works Authority, Calif.'s $218.155 million of lease revenue refunding bonds. The issue, which consists of Series B tax-exempts and Series C taxables, is rated A1 by Moody's, AA by S&P and A-plus by Fitch.
On Thursday, Wells Fargo Securities is scheduled to price Charlotte, N.C.'s $475 million of water and sewer revenue bonds. The issue is rated triple-A by Moody's, S&P and Fitch.
Since 1995, Charlotte has issued roughly $8.59 billion of debt. The highest years of issuance occurred in 2008 and 2009, as the city issued $602 million and $1.13 billion, respectively. The city saw low years of issuance in 1995 and 1997, when it issued just $162 million and $75 million.
Goldman is set to price the $381.71 million of hospital refunding revenue bonds, Series 2015 for the Children's Hospital Obligated Group in Washington, D.C., on Thursday.
MSRB Previous Session's Activity
The Municipal Securities Rulemaking Board reported 38,637 trades on Tuesday on volume of $7.405 billion.
The most active bond, based on the number of trades, was the Washington HealthCare Facilities Authority Series 2015A revenue bonds for Providence Health and Services 4s of 2045, which traded 155 times at an average price of 99.62, an average yield of 4.019%. The bonds were initially priced at 97.766 to yield 4.13%.
Bond Buyer Visible Supply
The Bond Buyer's 30-day visible supply calendar fell $397 million to $8.39 billion on Wednesday. The total is comprised of $2.68 billion competitive sales and $5.71 billion of negotiated deals.
