Municipal yields firmed by a basis point Tuesday amid light activity in the secondary market. The strengthening was attributed to municipals following the Treasury market, which saw broad gains following the Federal Reserve’s afternoon monetary policy statement.
“Our move up was all based on the Treasury market moving up, which was rather considerable,” a trader in New York said, noting the yield on the benchmark 10-year Treasury shed 13 basis points.
Municipal traders spent the day focusing on the primary market, which saw firm demand, and anticipating the Fed’s statement, he added.
“Typically, we don’t see all that quick a reaction to the Fed,” a trader in Philadelphia said. “Yields are down a couple of basis points, particularly in intermediate maturities, but the reaction hasn’t been particularly aggressive.”
In the new-issue market Tuesday, Morgan Stanley priced $486.1 million of Build America Bonds for the University of California. The taxable bonds are rated Aa2 by Moody’s Investors Service and AA-minus by Standard & Poor’s. Maturities ranged from 2021 to 2025, with coupons from 4.45% to 5.05%. Those yields offered a spread of 185 to 250 basis points against comparable Treasuries.
Rice Financial priced $210 million of tax-exempt water and sewer revenue bonds for the New York City Municipal Water Finance Authority. The deal was rated Aa2 by Moody’s and AA-plus by Standard & Poor’s and Fitch Ratings. Maturities offered were from 2011 to 2031, with yields ranging from 0.32% to 3.80%
The Municipal Market Data triple-A scale yielded 2.39% in 10 years and 3.33% in 20 years Tuesday, each a basis point lower than Monday’s levels. The scale for 30-year debt shed two basis points to 3.74%.
The strengthening marks a reversal from the trend over the past three weeks, in which muni yields have been rising after a series of record lows in late August.
Yields on the 10-year and 30-year triple-A scale bottomed out at 2.17% and 3.67%, respectively, on Aug. 25. The 20-year low of 3.28% was set Aug. 31.
Craig Brandon, a portfolio manager at Eaton Vance, expects a flurry of BAB issuance toward the end of the year to siphon more supply from the tax-exempt market and bolster prices.
“There will be an increase in Build America Bonds for the rest of the year because regardless of what the extender looks like, this will be your last chance to get the 35% reimbursement,” he said. “That will probably drive BAB issuance, which will support tax-exempts.”
Treasuries rallied across the board Tuesday morning and the gains accelerated in the afternoon after the Fed said inflation expectations were “subdued.”
The benchmark 10-year Treasury note closed the day at 2.58%, 13 basis points lower than Monday’s close at 2.71%. At the start of the month, it yielded 2.47%, a calendar-year low.
The 30-year bond finished the day at 3.79%, or eight basis points lower than Monday’s close at 3.87%.
The two-year yield closed the session at 0.43%, four basis points lower than Monday’s closing yield. Earlier in the session it yielded as little as 0.416% — a record low.
“One reason we’re seeing that strength has been transactions in foreign exchange markets,” the Philadelphia trader said. “Right now, the dollar has just been pummeled versus the yen, and that’s encouraging flows into the Treasury markets.”
Elsewhere in the new-issue market, Barclays Capital priced $119.5 million of revenue bonds for the Pennsylvania Higher Educational Facilities Authority.
The deal, rated A-minus by Standard & Poor’s and A by Fitch, offers maturities between 2011 and 2040, with yields ranging from 0.85% to 4.63%.
In new economic data, the Commerce Department reported that housing starts rose by 10.5% in August to an annualized pace of 598,000, beating market expectations for a smaller increase to 550,000. Single-family housing starts, the key component of the report, rose 4.3% to an annualized pace of 438,000.
Housing starts are now at a four-month high and 2.2% above their level one year ago. However, the index remains “a stunning 73.7% below their January 2006 peak,” according to Steven Wood, chief economist at Insight Economics.
Ellen Zentner, senior macro economist at the Bank of Tokyo-Mitsubishi, said the housing market is unlikely to race forward but noted “it does appear that we have survived the withdrawal of government stimulus and the housing market is standing on its own, albeit wobbly, feet.”
In the afternoon, the Federal Open Market Committee elected to hold the federal funds rate unchanged at zero to 0.25% for the 21st consecutive month. The Fed stated that the outlook for economic recovery was “modest” and inflation expectations were “subdued,” warranting extremely low interest rates for the foreseeable future.
Joseph LaVorgna, chief U.S. economist at Deutsche Bank, said the most significant development in the statement was the message that the Fed is prepared to provide more quantitative easing if conditions warrant it.
“There were no changes to the Fed’s asset purchase programs, although policymakers kept their options open to expand current QE measures if conditions warrant,” he noted. “If the pace of hiring stalls or the general tone of the production surveys falters in the meantime, further QE expansion is possible.”
