Municipal bonds staged a mighty rally yesterday in belated response to the Federal Reserve’s announcement it will buy Treasury bonds to support credit markets.
Traders said yields plunged about 15 basis points following a five-point dip yesterday.
“Everything’s up, obviously,” said a trader in New York. “It’s a total new world.”
The rally was triggered by a Fed statement released after its policy-setting meeting Wednesday afternoon.
The Fed announced it will buy $300 billion of long-term Treasuries as part of a strategy “to help improve conditions in private credit markets.” At the same time, the Fed said it would purchase an additional $750 billion of agency mortgage-backed securities.
Treasuries rose slightly yesterday in the aftermath of their sharp decline in yields Wednesday.
The yield on the 10-year Treasury plummeted 46 basis points Wednesday and ticked up five basis points yesterday, to 2.59%. The two-year Treasury yield sank 20 basis points Wednesday and climbed three basis points yesterday, yielding 0.86%. The 30-year Treasury yield plunged 22 basis points Wednesday and rose two basis points yesterday, yielding 3.61%.
“They’re trying to lower the benchmark rate,” said John Derrick, who manages Treasury and muni money market funds at U.S. Global Investors. “They’re trying to drop the cost of credit.”
The idea is that if benchmark interest rates such as the Treasury yield sink, many other types of rates based off those benchmarks will follow.
The rally in munis yesterday was muted compared with the Treasury rally Wednesday afternoon.
The yield on triple-A munis in 10 years slipped five basis points to 3.4%, according to Municipal Market Data.
The yield on 30-year bonds fell five basis points to 4.93%. The yield on two-year munis was unchanged at 1.24%.
Yesterday, the rally in tax-exempts picked up steam.
“People slept on it,” Derrick said, referring to the muni market’s delayed response to the Fed’s statement. “It came late in the day. ... We’ve had what looks like a pretty significant adjustment this morning.”
Trades reported through the Municipal Securities Rulemaking Board bore significantly lower yields.
A customer bought from a dealer a King County, Wash., limited-tax general obligation sewer bond maturing in 2030 at a yield of 4.9%. Before the Fed statement yesterday, a customer bought the same issue at a yield of 5.09%.
A customer sold to a dealer a New Jersey Transportation Trust Fund Authority bond maturing in 2021 at a yield of 1.17%. The day before the Fed statement, a customer sold the same issue at a yield of 1.53%.
“What we’re seeing on MSRB is real. ... It’s all trading significantly better than it was even [Wednesday],” another trader in New York said. “The buying is up and down. ... We’re seeing some customers bring out new offerings or continuing to offer bonds they couldn’t sell [Wednesday] morning and now they can.”
In the new-issue market, Wisconsin priced and repriced $1.54 billion of general fund annual appropriation bonds for institutions, setting a top yield of 5.87% in 2037, having received $293 million in orders during a retail order period held Tuesday and Wednesday.
“With the market improvement and the Fed buying back governments, that put a strong bid-side in the market, so the deal is catching the market at a positive time,” said Tom Howard, director and underwriter at B.C. Ziegler & Co. in Milwaukee. His firm is a member of the selling group for the deal.
“The timing of the deal was impeccable, after the Fed meeting yesterday and given the recent dislocation in the market,” said Robert Miller, a senior portfolio manager at Wells Capital Management in Menomonee Falls, Wis.
Miller said he purchased short-, intermediate-, and long-term bonds from the deal for two national mutual funds and several separately-managed accounts for high net worth investors.
At the repricing, yields were lowered three basis points in 2021, 2022, 2026 through 2028, and in 2036 and 2037. Yields were also lowered five basis points from 2011 through 2016, 2023 through 2025, and in 2033 and lowered seven basis points in 2017 through 2020.
The repricing scale comprised serials priced to yield from 2.14% in 2011 to 5.82% in 2029. A 2029 term bond containing $60.5 million priced as 5.75s to yield 5.82%.
One part of a 2033 split maturity comprised $100 million priced to yield 6% at par while the second part comprised $304.5 million priced as 5.75s to yield 5.95%.
A 2036 maturity containing $395 million was priced as 6s to yield 6.02%. A 2037 maturity comprising $154 million was priced as 6.25s to yield 5.87%.
A 2010 maturity was subject to a sealed-bid.
The issue carries underlying ratings of A1 from Moody’s Investors Services, AA-minus from Standard & Poor’s, and A-plus from Fitch Ratings.
Elsewhere, JPMorgan priced $168 million of GO public improvement bonds for Loudon County, Va.
The first maturity in July was subject to a sealed bid. The bonds thereafter ranged from pricing at 4s at a 0.75% on a 2010 maturity through 5s at a 4.47% yield in 2028.