Muni market strengthens ahead of the Fed

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A few deals trickled into a stronger muncipal bond market ahead of Wednesday’s interest rate announcement.

While the primary market was quiet ahead of years' end, market participants said it should still end the year on a positive note.

“We believe that the municipal bond market is now poised for a positive year-end finish, following a generally difficult 2018,” said Michael Cohick, senior ETF product manager at VanEck. “A look at the fundamentals going into December help make the case for investors to consider both reengaging the tax-exempt bond market and positioning in the intermediate part of the investment-grade yield curve.”

Michael Pietronico, chief executive officer at Miller Tabak Asset Management, said lots of investors ran for the cover of floating rate notes in the past few months.

“This is fine for individual investors but professional money managers are about to get smacked hard in terms of relative performance — the lesson remains true when the Fed raises rates, you need to extend duration,” he said.

The Federal Open Market Committee is expected to increase the fed funds target rate by 25 basis points Wednesday.

Secondary market
Municipal bonds were stronger on Tuesday, according to a late read of the MBIS benchmark scale. Benchmark muni yields dropped as much as three basis points in the one- to 30-year maturities.

High-grade munis were also stronger, with yields calculated on MBIS' AAA scale decreasing no more than four basis points all across the curve.

Municipals were stronger on Municipal Market Data’s AAA benchmark scale, which showed the yield on the 10-year muni general obligation dropping by two basis points, while the 30-year muni maturity decreased four basis points.

On Tuesday, the 10-year muni-to-Treasury ratio was calculated at 84.0% while the 30-year muni-to-Treasury ratio stood at 101.6%, according to MMD. The muni-to-Treasury ratio compares the yield of tax-exempt municipal bonds with the yield of taxable U.S. Treasury with comparable maturities. If the muni/Treasury ratio is above 100%, munis are yielding more than Treasury; if it is below 100%, munis are yielding less.

Primary market
Raymond James & Associates priced the San Juan Unified School District, Sacramento County, Calif.’s $230 million of general obligation bonds on Tuesday. The deal is rated Aa2 by Moody’s Investors Service and AAA by Fitch Ratings.

Citigroup priced the Allentown Neighborhood Improvement Zone Development Authority, Pa.’s $149 million of Series 2018 subordinate tax revenue bonds for the City Center project. The deal is unrated.

Tuesday’s bond sales
San Juan USD

Allentown Neighborhood Improvement Zone

Previous session's activity
The Municipal Securities Rulemaking Board reported 45,378 trades on Monday on volume of $11.487 billion.

California, New York and Texas were the municipalities with the most trades, with the Golden State taking 17.061% of the market, the Empire State taking 10.999% and the Lone Star State taking 10.695%.

Treasury to sell $40B 4-week bills
The Treasury Department said it will sell $40 billion of four-week discount bills Thursday. There are currently $30.001 billion of four-week bills outstanding.

Treasury also said it will sell $30 billion of eight-week bills Thursday.

Gary E. Siegel contributed to this report.

Data appearing in this article from Municipal Bond Information Services, including the MBIS municipal bond index, is available on The Bond Buyer Data Workstation. Click here for a brief tour of the Workstation, or contact Ziad Saba at 212-803-6079 for more information.

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