The municipal market was largely mixed yesterday after the Federal Open Market Committee opted to lower its federal funds rate target by 50 basis points to 1.00%.
Traders said tax-exempt yields ended slightly lower on the short end and slightly higher on the long end, after being higher across the board by about two or three basis points prior to the Fed's decision.
"The decision had a little bit of impact in that yields on the shorter end came down a little bit, but not much beyond that," a trader in Los Angeles said. "The market had pretty much priced in this cut already."
The FOMC unanimously voted to slash interest rates to 1.00%, and along with it, cut the primary discount credit rate 50 basis points to 1.25%.
In the accompanying statement, the Fed wrote that "the pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures."
"In light of the declines of the prices in energy and other commodities and the weaker prospects for economic activity, the committee expects inflation to moderate in coming quarters to levels consistent with price stability," the statement read. "Recent policy actions, including today's rate reduction, coordinated interest rate cuts by central banks, extraordinary liquidity measures, and official steps to strengthen financial systems, should help over time to improve credit conditions and promote a return to moderate economic growth. Nevertheless, downside risks to growth remain."
However, Bob MacIntosh, chief economist and co-director of municipal investments for Eaton Vance, believed the rate cut "won't do any good."
"They could cut rates to negative 1.00% and pay everybody to borrow and it wouldn't do any good," he said. "That's not the issue. This is the proverbial pushing on a string. If there's a psychological aspect to it, maybe there's a tertiary impact to the positive, but I don't see how this does any good."
"The level of the fed funds rate is not the problem," MacIntosh added. "The problem is getting prudent, intelligent people to take prudent, intelligent risks, and they're just simply not doing it."
Federal funds futures trading yesterday afternoon also priced in a 100% possibility of an additional 25 basis point cut to the funds rate at the FOMC's next scheduled meeting, on Dec. 16.
In a post-fed meeting comment, Tony Crescenzi, chairman of Miller Tabak Asset Management, wrote that "these days, it goes without saying that what the Fed does is abundantly more important than what it says." He added that the Fed's "purchase of commercial paper this week was far more important than" the rate cut.
"Nevertheless, the Federal Reserve delivered a policy action and statement that met squarely with expectations, with the modest exception of the way in which the statement indicated that the Fed would likely keep rates low for an extended period of time," Crescenzi wrote.
"The most glaring evidence of this is the Fed's use of jargon it typically uses when wanting to signal the potential for further cuts in interest rates, or at least the bias toward such. This is of course accomplished whenever the Fed says about the economy as it did today that 'downside risks remain,'" he wrote. "The inclusion of that key jargon more than neutralized the Fed's references to its previous actions, which is a tactic the Fed often uses to say, essentially, that 'hey, look at all we've done here, we're going to sit back and wait and be watchful.' "
The Treasury market was mixed yesterday. The yield on the benchmark 10-year note, which opened at 3.83%, finished at 3.85%. The yield on the two-year note was quoted near the end of the session at 1.54% after opening at 1.64%. And the yield on the 30-year bond, which opened at 4.19%, was quoted near the end of the session at 4.23%.
In the new-issue market yesterday, the New Jersey Environmental Infrastructure Trust competitively sold $134.6 million of environmental infrastructure bonds to JPMorgan with a true interest cost of 4.79%. The bonds mature from 2010 through 2028, with yields ranging from 3.53% with a 5% coupon in 2013 to 5.15% with a 5% coupon in 2028. Bonds maturing from 2010 through 2012 and from 2019 through 2023 were not formally re-offered. The bonds, which are callable at par in 2018, are rated triple-A by all three major ratings agencies.
Citi priced $105 million of electric system revenue bonds for the Omaha Public Power District. The bonds mature from 2018 through 2028, with term bonds in 2033, 2035, and 2039. Yields range from 4.71% with a 4.6% coupon in 2018 to 5.80% with a 5.5% coupon in 2039. The bonds, which are callable at par in 2018, are rated Aa1 by Moody's Investors Service and AA by Standard & Poor's.
Bergen County, N.J., competitively sold $68.1 million of general obligation bonds to UBS Financial Services Inc. with a net interest cost of 4.44%. The bonds mature from 2009 through 2023, with coupons ranging from 4% in 2009 to 4.75% in 2023. None of the bonds were formally re-offered. The bonds, which are callable at par in 2018, are rated Aaa by Moody's.
In economic data released yesterday, durable goods orders climbed 0.8% in September after a revised 5.5% drop the previous month. Economists polled by Thomson Reuters had predicted a 1.2% decline.
Meanwhile, excluding transportation, durable goods dropped 1.1% in September after a revised 4.1% decrease the prior month. Economists polled by Thomson had predicted a 1.5% dip.
