The municipal market was unchanged to slightly firmer yesterday, while the Federal Open Market Committee opted to hold the federal funds rate target unchanged at a 0% to 0.25% range at its policy-setting meeting.
"I didn't see much of a change in the muni market after the Fed meeting," a trader in San Francisco said. "Treasuries extended their losses a little bit, but nothing overwhelmingly significant, and munis pretty much held right in there. I'd say we were a little bit firmer going into the decision, and we remained a little firmer after. I'd say we were better by a basis point or two overall, maybe flat in spots, maybe even a touch of weakness here and there, but overall, I'm going a little better."
"It's somewhat quiet," a trader in New York said. "On the intermediate range, it's a supply issue we're having once again. I'm trying to find some offerings five years out, and there are only a few out there. That's no good. The market is going in the opposite direction of Treasuries, which is not exactly helping. I would say maybe one or two more expensive on the short end, and maybe slightly cheaper on the long end, so what are you really picking up?"
The Treasury market showed losses yesterday. The yield on the benchmark 10-year Treasury note, which opened at 2.53%, finished at 2.67%. The yield on the two-year note was quoted near the end of the session at 0.88% after opening at 0.86%. The yield on the 30-year bond, which opened at 3.24%, was quoted near the end of the session at 3.44%.
The FOMC opted yesterday to keep its target range for the federal funds rate at 0% to 0.25% after cutting it to that level a month ago from 1.00%.
"The committee continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time," said the FOMC's statement accompanying its decision. "Information received since the committee met in December suggests that the economy has weakened further. Industrial production, housing starts, and employment have continued to decline steeply, as consumers and businesses have cut back spending.
"Furthermore, global demand appears to be slowing significantly," it said. "Conditions in some financial markets have improved, in part reflecting government efforts to provide liquidity and strengthen financial institutions; nevertheless, credit conditions for households and firms remain extremely tight. The committee anticipates that a gradual recovery in economic activity will begin later this year, but the downside risks to that outlook are significant."
Alan Levenson, chief economist at T. Rowe Price Associates Inc. in Baltimore, said he thinks that the Fed is going to be targeting a 0% to 0.25% range for the fed funds rate for the foreseeable future.
"When you look at the environment and how weak the economy is, we're going to print a 5% or 6% annual rate of decline in GDP [tomorrow], and we're going to probably get another very weak employment report next week, there's absolutely no reason for them to start thinking about raising rates or taking away stimulus," Levenson said. "I think they're thinking more about how much they're going to grow their balance sheet, and how much more they're going to do to stimulate markets that need to be stimulated in order to get the economy going.
"I was at the point of sifting the tea leaves and detecting a little more confidence about the economic outlook and a little bit of forward-looking plotting their exit strategy, which I think is premature," he said. "Looking at the Treasury market reaction, I'm guessing there was an expectation on the part of market participants that the Fed was going to commit to buying long-term Treasuries, but I didn't have a strong feeling about that going into the announcement."
In its statement, the FOMC wrote: "The committee also is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets."
"The Federal Reserve will be implementing the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses," the statement read. "The committee will continue to monitor carefully the size and composition of the Federal Reserve's balance sheet in light of evolving financial market developments and to assess whether expansions of or modifications to lending facilities would serve to further support credit markets and economic activity and help to preserve price stability."
The Fed's decision was unanimous with the exception of Jeffrey M. Lacker, president of the Federal Reserve Bank of Richmond, who "preferred to expand the monetary base at this time by purchasing U.S. Treasury securities rather than through targeted credit programs." Lacker was also the lone dissenter in August, September, October, and December 2006. The FOMC decided to keep interest rates steady at 5.25% at those meetings, after a series of 17 consecutive 25 basis point increases. Lacker each time voted for additional tightening.
Meanwhile, in the tax-exempt new-issue market yesterday, the Lancaster County, Neb., School District No. 1 competitively sold $100 million of general obligation school bonds to Merrill Lynch & Co. with a true interest cost of 4.67%. The bonds mature from 2010 through 2033, with term bonds in 2035 and 2039. Yields range from 0.50% with a 3% coupon in 2010 to 3.92% with a 4% coupon in 2022. Bonds maturing in 2011, from 2016 through 2020, and from 2023 through 2039 were not formally re-offered. The bonds, which are callable at 2019, are rated Aa1 by Moody's Investors Service and AAA by Standard & Poor's.
The Washoe County, Nev., School District competitively sold $45 million of GO limited-tax school improvement bonds to Morgan Stanley with a TIC of 4.32%. The bonds mature from 2010 through 2027, with a term bond in 2029. Yields range from 2.00% with a 2.5% coupon in 2013 to 5.15% with a 5% coupon in 2029. Bonds maturing from 2010 through 2012 and in 2023 and 2024 were not formally re-offered. The bonds, which are callable at par in 2019, are rated Aa3 by Moody's, AA by Standard & Poor's, and AA-minus by Fitch Ratings.
The economic calendar was light yesterday. However, a slate of additional economic data will be released during the remainder of the week. Today, initial jobless claims for the week ended Jan. 24, continuing jobless claims for the week ended Jan. 17, the December durable goods report, and December new home sales will be released. Tomorrow, the advance fourth-quarter gross domestic product report is scheduled for release, along with the January Chicago purchasing managers index and the final January University of Michigan consumer sentiment index.
Economists polled by Thomson Reuters are predicting 575,000 initial jobless claims, 4.650 million continuing jobless claims, a 2.0% decline in durable goods, a 2.7% dip in durable goods excluding transportation, 400,000 new home sales, a 5.4% drop in GDP, a 34.0 Chicago PMI reading, and a 61.9 Michigan sentiment index.
