Top-quality municipal bonds were stronger at mid-session, according to traders, with yields on some maturities weakening by as much as five basis points on the long end.
The primary was having another quiet day on Thursday after the Federal Reserve raised its target for the federal funds rate by 25 basis points the day before.
Secondary Market
The yield on the 10-year benchmark muni general obligation was one to three basis points weaker from 1.98% on Wednesday, while the 30-year yield was three to five basis points weaker from 2.89%, according to an early read of Municipal Market Data's triple-A scale.
U.S. Treasury bonds were narrowly mixed on Thursday as the yield on the two-year yield slipped to 0.99% from 1.00% on Wednesday, while the 10-year Treasury rose to 2.26% from 2.25% and the 30-year Treasury yield decreased to 2.95% from 2.96%.
The 10-year muni to Treasury ratio was calculated on Wednesday at 86.5% compared to 87.5% on Tuesday, while the 30-year muni to Treasury ratio stood at 96.2% compared to 96.8%, according to MMD.
Primary Market
RBC Capital Markets priced the Ohio Water Development Authority's $105.13 million of Series 2015B water pollution control loan fund revenue refunding bonds.
The issue was priced as 5s to yield from 2.03% and 2.08% in a split 2025 maturity to 2.50% in 2030.
The bonds were rated triple-A by Moody's Investors Service and Standard & Poor's.
Barclays Capital is slated to price the Utah Housing Corp.'s $100 million of Series 2015D single-family mortgage bonds.
The deal was rated Aa3 by Moody's.
Fast or Slow, Stay or Go?
To hike or not to hike? That is not the question.
The real question for those watching the Fed in 2016 will be What's the Frequency, Kenneth?
The Fed is seen raising its target for the funds rate from two to four times in the coming year, according to most muni market participants.
"We expect policymakers will take it slowly next year, raising rates four times, with the fed funds rate finishing 2016 in a range around 1.25%," Beth Ann Bovino, Chief Economist at Standard & Poor's, said in a statement.
According to the BofA Merrill Lynch Fund Manager Survey for December, 58% of global investors expect the Fed to raise rates three times or more in the coming 12 months.
But is that a realistic expectation?
"As we look upon the coming year, there were some similarities to December 2014 when the Fed was expected to hike rates three times in 2015," MMD Senior Market Analyst Randy Smolik wrote in a Thursday market comment. "We now know they were only able to muster one rate hike. So how confident are the markets that the Fed will be able to hike rates four times this coming year? The answer today, they are not confident at all."
Some analysts tended to the more conservative side.
"The FOMC summary of economic projections released [on Wednesday] indicates that the majority of Fed voters see the federal funds rate near 1.4% by the end of 2016. Wells Fargo Investment Institute continues to anticipate a slower path of rate increases -- as we expect just two rate increases in 2016," Wells Fargo said in a research note released on Thursday.
"Looking ahead, the FOMC will go slowly in raising the funds rate, not a series of rapid-fire rate increases at every meeting," PNC Bank said in a Thursday economic report. "That is exactly what happened in 2004-06 when the FOMC raised the funds rate by 25 basis points at 17 consecutive meetings, starting at 1.00% and ending at 5.25%. We don't think that is the blueprint for what the FOMC is going to do this time. PNC's December 2015 baseline rate forecast includes a 1/4 percentage point Fed funds rate increase at three FOMC meetings each in 2016, 2017 and 2018, with the next one coming in March of 2016. This would be a much slower, more deliberate pace, eventually bringing the funds rate up to a 'normal' level of 2.75% in early 2019."
So what will be the effect for munis of a slow, careful interest rate regime change?
"A gradual increase in interest rates will generally not have an impact on public finance, but may affect refundings going forwarded," said Jessalynn Moro, head of Fitch U.S. public finance.
Others tended to agree.
"We see issuance going down," Krishna Memani, Chief Investment Officer at Oppenheimer Funds, said in a conference call. "Municipals -- minus Puerto Rico -- have been one of the best asset performing classes of this year. And the market dynamic remains quite solid."
Gail Sussman, Managing Director at Moody's Investors Service, said she expects that "rates on municipal variable-rate demand bonds (VRDBs) and similar instruments will likely stay below past averages, encouraging a modest increase in the issuance of VRDBs as long-term rates rise. Bank credit support required for increased VRDB supply will remain accessible."
Tax-Exempt Money Market Funds Post Inflows
Tax-exempt money market funds experienced inflows of $1.27 billion, bringing total net assets to $250.79 billion in the period ended Dec. 14, according to The Money Fund Report, a service of iMoneyNet.com. This followed an inflow of $3.22 million to $249.52 billion in the previous week.
The average, seven-day simple yield for the 362 weekly reporting tax-exempt funds remained at 0.01% for the 137th straight week.
The total net assets of the 945 weekly reporting taxable money funds fell $17.84 billion to $2.501 trillion in the period ended Dec. 15, after an inflow of $15.57 billion to $2.519 trillion the previous week.
The average, seven-day simple yield for the taxable money funds increased to 0.03%, ending a run of 47 consecutive weeks at 0.02%.
Overall, the combined total net assets of the 1,307 weekly reporting money funds decreased $16.57 billion to $2.752 trillion in the period ended Dec. 15, which followed an inflow of $18.79 billion to $2.769 trillion the week before.
MSRB Previous Session's Activity
The Municipal Securities Rulemaking Board reported 33,532 trades on Wednesday on volume of $6.89 billion.
Bond Buyer Visible Supply
The Bond Buyer's 30-day visible supply calendar fell $342.9 million to $2.99 billion on Thursday. The total is comprised of $893.8 million competitive sales and $2.10 billion of negotiated deals.
