Munis weaken, lagging stronger Treasuries on Fed’s 50BP cut

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The Federal Open Market Committee cut the fed funds rate target 50 basis points to a range between 1% and 1.25%, it announced Tuesday. The decision to cut rates was unanimous.

After the emergency move, stocks were briefly in the black before taking a big dip, while Treasuries rallied and munis turned weaker, not following USTs.

“I can’t think of many days when we get muni cuts when Treasuries are up two points and that doesn’t even figure in a surprise 50 basis point Fed cut,” a trader said. “Strange times indeed. At the very least ratios of 10s and 30s are closing in on 100% of Treasuries, so at least we will have that talking point next week.”

Munis usually following Treasuries to some degree but that was not the case today.

"I feel as though because of how low absolute levels are and all the redemptions two days ago, that's probably why munis are not trailing USTs," said one New York trader. "I think the 50 basis point cut instead of 25 means the Fed thinks this virus thing is worse than they thought."

"Our market is all about real yields but that will change, as we're seeing some turnover this afternoon. Relative values are ridiculously cheap against govies right now and that should draw in the laggards," a trader said.

"With the virus info/bad info, embedded political posturing, fake news, and Fed cut assessment, there is way too much uncertainty," said another New York trader. "With The Fed move, do they know something we don't? Or were they politically pressured? There are too many crosscurrents, people go to the sidelines."

While economic fundamentals “remain strong,” the FOMC said in a statement, “the coronavirus poses evolving risks to economic activity.”

As a result, and “in support of achieving its maximum employment and price stability goals,” the panel took the action two weeks before its next scheduled meeting.

“The Committee is closely monitoring developments and their implications for the economic outlook and will use its tools and act as appropriate to support the economy,” the statement said.

It was rare that that Fed moved between meetings, in fact the last time there was an emergency cut outside of the meeting was in October of 2008 amid the financial crisis.

In his press conference, chair Powell said the Fed is “prepared to use all tools and act appropriately” and that the “cut will provide meaningful boost to economy.”

Secondary market
“Munis aren’t participating in the massive, Fed rate cut-inspired Treasury rally,” ICE Data Services said in a market comment. “Yields are generally two to three basis points higher so far today, for both high-yield and investment grade. Taxables are doing better; the front end has improved by as much as 10 basis points.”

Munis were slightly weaker on Tuesday on the MBIS benchmark scale, with yields rising three basis points in the 10-year and one basis point in the 30-year maturity. High-grades were also weaker, with yields on MBIS' AAA scale increasing by three basis points in the 10-year maturity and one basis point in the 30-year maturity.

Munis were weaker on Refinitiv Municipal Market Data’s AAA benchmark scale, as the yield on the 10-year muni was three basis points higher to 0.96%, off of the record low of 0.93%. The 30-year GO was up four basis points to 1.56%, off of the record low of 1.52%.

The 10-year muni-to-Treasury ratio was calculated at 96.3% while the 30-year muni-to-Treasury ratio stood at 96.7%, according to MMD.

Stocks were close to down in excess of 2% and are on pace for the eighth negative session out of the past nine, with the exception being Feb. 28. Treasury yields were all lower and the 10-year paved a new record low, as it fell below 1% for the first time and going as low as 0.968% but ticking back up to over 1%.

The Dow Jones Industrial Average was down about 2.55%, the S&P 500 index was lower by 2.33% and the Nasdaq lost roughly 2.48% late in the session Tuesday.

The three-month Treasury was yielding 0.935%, the Treasury two-year was yielding 0.717%, the five-year was yielding 0.768%, the 10-year was yielding 1.016% and the 30-year was yielding 1.636%.

Primary market
Bank of America Securities priced the Hospital Authority of Hall County and the city of Gainesville, Georgia’s (A/ /A/ ) $337.035 million revenue anticipation certificates for the Northeast Georgia Health System Inc.

The deal was priced and repriced to higher yields. The preliminary pricing was priced as 5s to yield 1.28% in the 2030 maturity and as 3s to yield 2.44% in the 2047 maturity.

It was repriced as 5s to yield 1.35% in the 10-year and as 3s to yield 2.54% in the long-bond.

Albuquerque, New Mexico sold $136.470 million of general obligation storm sewer and GO refunding bonds on Tuesday. The bonds were won by Mesirow Financial with a true interest cost of 1.2278%. The 4s of 2030 yielded 1.05%.

Wells Fargo priced Midlothian Independent School District, Texas’ (Aaa/AAA/NR/NR) $104.870 million of unlimited tax school building bonds. The deal is backed by the Permanent School Fund Guarantee Program.

RBC Capital Markets priced New York City’s (Aa1/AA/AA/NR) $858.035 million of fiscal 2020 general obligation bonds for the second and last day of the retail order period. The bonds will price for institutions on Wednesday. The city on Tuesday added a paragraph about COVID-19 to its preliminary official statement on the GO deal.

“While the potential impact on the city cannot be predicted at this time, the continued spread of the outbreak could have a material adverse effect on the city, its economy and the financial plan,” the city said under the heading "recent financial developments."

The Big Apple is also selling $500 million of taxable GOs in the competitive market Wednesday.

Staying in the competitive arena, Maryland (Aaa/AAA/AAA/ ) and its top-tier ratings is scheduled to sell a total of $779.27 million of GO and taxable GO bonds in four separate sales on Wednesday.

BB&T Capital Markets is slated to price New Hope Cultural Education Facilities Finance Corp., Texas’ (NR/NR/NR/ ) $668.95 million of senior living revenue tax-exempt and taxable bonds on Wednesday.

NYC Water to sell $400M
The New York City Municipal Water Finance Authority said Tuesday that it will issue about $400 million tax-exempt fixed-rate bonds next week.

Book-running lead manager Barclays is expected to price the bonds for institutions on March 10 after a one-day retail order period on Monday. Co-senior managers are Raymond James and Siebert Williams Shank & Co. Proceeds will be used to refund certain outstanding bonds for savings.

Previous session's activity
The MSRB reported 38,803 trades Monday on volume of $14.276 billion. The 30-day average trade summary showed on a par amount basis of $12.63 million that customers bought $6.41 million, customers sold $4.13 million and interdealer trades totaled $2.08 million.

California, Texas and New York were most traded, with the Golden State taking 13.851% of the market, the Lone Star State taking 12.952% and the Empire State taking 10.111%.

The most actively traded security was the Buckeye Tobacco Settlement Financing Authority’s senior refunding bonds 2020 B-2 CL 2, 5s of 2055, which traded 26 times on volume of $77.950 million.

Chip Barnett 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.

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