Municipal bonds ended stronger on Wednesday, traders said, as new issuance swept into the market and federal policy makers took no action on interest rates.
Activity was cautious ahead of the Federal Reserve’s monetary policy meeting in Washington. The Federal Open Market Committee keep rates at 0.75% to 1%, with no dissents, while offering no clues as to what the June meeting holds.
The only major difference from the Fed’s previous statement was acknowledgment of slow first-quarter economic growth, which it termed “transitory.” The FOMC statement noted reinvestment of securities will continue “until normalization of the level of the federal funds rate is well under way.”
Some analysts say two more rate hikes are likely this year.
“The Fed is clearly discounting the Q1 consumption slowdown and soft payrolls in March. Alongside the references to the recent decline in the unemployment rate, to inflation now ‘running’ close to the target and to strengthening of business investment, there is nothing in here to change our view of two more rate hikes this year,” said Brian Coulton, Chief Economist at Fitch Ratings.
Secondary market
The yield on the 10-year benchmark muni general obligation fell three basis points to 2.15% from 2.18% on Tuesday, while the 30-year GO yield dropped four basis points to 3.02% from 3.06%, according to the final read of Municipal Market Data's triple-A scale.
U.S. Treasuries were narrowly mixed on Wednesday. The yield on the two-year Treasury rose to 1.29% from 1.26% on Tuesday, while the 10-year Treasury yield gained to 2.31% from 2.29%, and the yield on the 30-year Treasury bond decreased to 2.95% from 2.98%.
The 10-year muni to Treasury ratio was calculated at 93.1% on Wednesday, compared with 95.2% on Tuesday, while the 30-year muni to Treasury ratio stood at 102.2%, versus 102.8%, according to MMD.
Puerto Rico bonds trade mixed on bankruptcy filing
Prices on some actively traded Puerto Rico general obligations were mixed in Wednesday activity after Gov. Ricardo Rossello said he would use Title III, a bankruptcy type process aimed at cutting the commonwealth’s $70 billion debt.
In late trading, the commonwealth Series 2014A general obligation 8s of 2035 were trading at a high price of 67 cents on the dollar in five trades totaling $5.3 million, according to the MSRB’s EMMA website. On Tuesday, the 8s of 2035 were trading at 64.825 cents in four trades totaling $4.86 million.
The commonwealth’s Series 2012A GO refunding improvement 5s of 2041 were trading at a high price of 61 cents on the dollar in 18 trades totaling $2.58 million. On Tuesday, the 5s of 2041 were trading at a high of 61.25 cents in 42 trades totaling $19.86 million.
The commonwealth’s Series 2011 public improvement GO 5 3/4s of 2041 were trading at a high price of 61 cents on the dollar in two trades totaling $235,000. On Tuesday, the 5 3/4s were trading at a high of 60.75 cents in 10 trades totaling $1.06 million.
The Public Buildings Authority’s Series 2012U government facilities revenue refunding 5 1/4s of 2042 were trading at a high price of 60 cents on the dollar in 21 trades totaling $16.41 million. On Tuesday, the 5 1/4s of 2042 traded at a high price of 57.50 cents in 27 trades totaling $1.26 million.
The Government Development Bank for Puerto Rico’s Series 2011H senior note 4 1/2s of 2019 were trading at a high price of 22.032 cents on the dollar in 17 trades totaling $1.65 million. On Tuesday, the 4 1/2s of 2019 were trading at a high of 21.50 cents in 13 trades totaling $1.99 million, according to the EMMA website.
Primary market
Morgan Stanley priced the Trinity River of Texas’ Regional Wastewater System’s $286.61 million of Series 2017 revenue improvement and refunding bonds on Wednesday.
The issue was priced to yield from 1.09% with a 5% coupon in 2019 to 3.18% with a 5% coupon in 2037. The 2017 and 2018 maturities were offered as sealed bids.
The deal is rated AAA by S&P Global Ratings and AA-plus by Fitch Ratings.
In the competitive arena, the city of Mesa, Ariz., sold $171.06 million of bonds in two separate sales on Wednesday.
Bank of America Merrill Lynch won Mesa’s $123.88 million of Series 2017 utility system revenue bonds with a true interest cost of 3.56%.
The issue was priced to yield from 1.39% with a 5% coupon in 2021 to 3.70% with a 3.25% coupon in 2041.
Robert W. Baird won Mesa’s $47.18 million of Series 2017 general obligation bonds with a TIC of 3.06%.
Both deals are rated Aa2 by Moody’s Investors Service and AA-minus by S&P.
Since 2007, the city has sold roughly $1.93 billion of securities, with the most issuance occurring in 2016 when it sold roughly $310 million. The lowest issuance year took place in 2015, when Mesa issued $61.5 million.
New Castle County, Del., competitively sold $107.76 million of Series 2017 GOs on Wednesday.
BAML won the bonds with a true interest cost of 3.17%. The issue was priced to yield from 0.85% with a 5% coupon in 2018 to 3.51% with a 3.25% coupon in 2042; a 2047 term bond was priced as 4s to yield 3.51%.
The deal is rated triple-A by Moody’s, S&P and Fitch.
On Thursday, Jefferies is set to price the Regents of the University of California’s $1.13 billion deal for institutions.
The issue will consist of about $448 million of Series Av bonds, $186 million of Series AW taxables and $500 million of Series AX taxable fixed-rate notes.
The deal is rated Aa2 by Moody’s and AA by S&P and Fitch.
Fitch: Higher rates won’t crunch public finance, transportation
Higher interest rates in the coming years should not exert much downward pressure for U.S. public finance and transportation infrastructure, according to Fitch Ratings in a report released on Wednesday.
Fitch’s economics team expects interest rates to move higher over the next three to four years by approximately 150-300 basis points. This new scenario also calls for real potential U.S. GDP growth and inflation to remain at roughly 2% per year. The U.S. economy’s expected resilience to withstand higher rates represents a significant buffer against negative credit implications.
James Batterman, senior director at Fitch said this outlook should extend into public finance and transportation.
“A growing economy with stable employment implies that retail sales volumes as well as taxes on earned income should not be adversely affected,” said Batterman. “The same growth assumption implies that property values and property tax revenues also may not be greatly impacted. The same limited ripple effect should hold true for infrastructure as revenues and volumes for airports, seaports and toll roads tend to be a function of the general level of economic activity as well as factors specific to the issuer.”
Higher interest rates do increase the hurdle rate for new investments and the cost of financing. As such, Fitch sees this as more of an analytical consideration for issuers carrying higher leverage that need to take on new debt. Nevertheless, most issuers probably would be able to absorb any extra costs stemming from higher interest rates. Further, higher rates imply greater investment returns on cash holdings.
The report also said that downside risk is not out of the realm of possibility, however, and that the most likely culprit would be any increase in interest rates that is too rapid to be absorbed, which would stall the housing market and have much broader implications generally.
Gary Siegel contributed reporting on the Federal Reserve to this article.
