Tax-exempts continued to weaken Wednesday as other markets rallied then fell after the Federal Open Market Committee announcement. Still, most of the remaining large deals of the week were priced by the afternoon.
Munis briefly took a backseat to the FOMC’s announcement that it plans to keep the federal funds rate target at zero to 0.25%, and will extend its “Operation Twist” program until the end of the year, with the Fed purchasing an additional $267 billion in long-term securities.
“While we expected an extension of Twist, we thought it would be a three-month extension, in part because we did not expect the Fed would want to run its holdings of short-dated paper down to essentially zero,” wrote economists at RDQ Economics. “Instead, the Fed delivered a six-month extension at roughly the same pace and in exactly the same maturities — sell zero- to three-year paper and buy six-year-plus paper.”
The FOMC also released its latest summary of economic projections and most members continue to view 2014 as the most appropriate time for tightening.
Six of the anonymous members chose 2015 as the right time for tightening, while three each selected 2012 and 2013.
After the FOMC announcement, Treasuries rallied on the long end as the yield curve flattened, but then weakened by the end of the day as the brief euphoria wore off.
After dropping to five basis points to 1.63% right after the announcement, the benchmark 10-year yield ended the day at 1.65%. Similarly, the 30-year yield fell seven basis points to 2.72% after the announcement, rose briefly in a choppy session, then closed back down at 2.72%. The two-year yield rose to 0.32%.
The brief rally in Treasuries did not translate over to munis, as the tax-exempt market continued to weaken, according to the Municipal Market Data scale. Yields inside 11 years were steady. Outside 12 years, yields rose between one and three basis points.
On Wednesday, the 10-year tax-exempt yield closed at 1.86% for the fourth consecutive trading session while the two-year yield finished flat at 0.32% for the 14th straight session. The 30-year yield rose two basis points to 3.17%.
In the primary market, Goldman, Sachs & Co. priced $667 million of Detroit Water and Sewerage Department new-money and refunding sewer revenue bonds, after delaying the deal last week when the city said it may not be able to make scheduled debt payments due to a dispute with Michigan.
Bonds insured by Assured Guaranty Municipal Corp. had yields ranging from 1.72% with a 5% coupon in 2014 to 5.30% with a 5.25% coupon in 2039. Yields were lowered 10 basis points in repricing.
Uninsured bonds yielded 2.12% with a 5% coupon in 2015 and 5.30% with a 5.25% coupon in 2039.
Goldman also priced and repriced $624.9 million of Colorado Housing and Finance Authority revenue bonds in taxable and tax-exempt series, rated Aa2 by Moody’s Investors Service and AA by Fitch Ratings.
The first portion of $540 million is taxable bonds, yielded 0.45% price at par in 2013 to 1.638% with a 1.85% coupon in 2017. The bonds had spreads ranging from 55 to 90 basis points over the comparable Treasuries.
The second portion $84.9 million of tax-exempt bonds yielded 0.45% with a 5% coupon in 2014. The yield was lowered five basis points from preliminary pricing.
JPMorgan priced $567.7 million of Louisiana general obligation refunding bonds in taxable and tax-exempt series. The bonds are rated Aa2 by Moody’s and AA by Standard & Poor’s and Fitch.
Yields on the first series, $423.1 million of tax-exempt GO refunding bonds, ranged from 1.92% with 4% and 5% coupons in a split 2020 maturity to 3.20% with a 3% coupon and 2.82% with a 5% coupon in a split 2026 maturity. The bonds are callable at par in 2022.
Yields on the second series, $144.6 million of taxable GO refunding bonds, were priced at par with coupons ranging from 1.304% to 2.269%. The bonds had spreads ranging from 55 to 95 basis points over the comparable Treasuries.
In the competitive market, Morgan Stanley won the bid for $156.6 million of Florida Department of Environment Protection revenue refunding bonds, rated Aa1 by Moody’s, AA-minus by Standard & Poor’s and A by Fitch. Yields ranged from 0.62% with a 5% coupon in 2014 to 2.70% with a 5% coupon in 2023.
JPMorgan won the bid for $137.1 million of triple-A rated Georgia GOs. The bonds had coupons ranging from 5% in 2014 to 5% in 2023. Prices were not available.
In the secondary market, trades compiled by data provider Markit showed weakening.
Yields on New Jersey’s Tobacco Settlement Financing Corp. 4.625s of 2026 jumped six basis points to 5.81%.
Fulton County, Ga., Residential Care Facilities Elderly Authority 5.1s of 2042 spiked five basis points to 5.16%.
Yields on Illinois 5s of 2019 and Port Authority of New York and New Jersey 6.04s of 2029 each rose three basis points to 2.83% and 3.84%.
Tennessee 5s of 2018 rose one basis point to 1.13%.
So far this week, muni-to-Treasury ratios have fallen as munis outperformed Treasuries and became relatively more expensive.
The two-year ratio plunged to 100% on Wednesday from 106.7% on Monday. The 10-year ratio plummeted to 112.7% on Wednesday from 117.7%. And the 30-year yield dropped to 116.5% from 118% at the beginning of the week.
One muni analyst noted that higher-yield deals are being received very well by the market.
“The focus on the new issues Tuesday helped drive up demand for yield paper,” wrote Dan Toboja at Ziegler Capital Markets. “All of the new issues in health care were reportedly well received with bumps on every deal of at least a couple basis points. Despite the choice in deals for customers and dealer desks in yield this week, the secondary held in very well.”
“Trades on the recent new issues remained at up levels and the recent discount structure for retail desks helps create a natural support level for many of the deals,” he added. “The retail bid is being successfully leaned on to place the new issues in the market, especially the long end.”