The municipal market was slightly weaker yesterday in light trading, ahead of today's interest rate announcement by the Federal Reserve.
"It seems like we're stuck in the mud," a trader in Chicago said. "A lackluster trading day."
The trader added that competitively priced primary deals are putting pressure on the secondary market, but with the July 1 reinvestment period approaching, demand might bounce back.
"Ratios are looking pretty good, so you hope to think at some point we'll get some relief," he said.
Municipal bonds have cheapened significantly compared to Treasuries through June. The ratio between triple-A-rated, 30-year general obligation bonds and 30-year Treasury bonds reached 104.72% yesterday, its highest level since April 10, according to Municipal Market Data. Just last week, the ratio was as low as 97.49%.
And the Treasury market once again showed gains yesterday on weaker consumer confidence data. The yield on the benchmark 10-year Treasury note, which opened at 4.17%, finished at 4.08%. The yield on the two-year note finished at 2.83% after opening at 2.94%. The yield on the 30-year finished at 4.63% after opening at 4.71%.
The consumer confidence index fell to 50.4, its fifth lowest reading ever, from a revised 58.1 in May. Economists polled by IFR Markets expected the index would fall to 56.5.
"Consumer confidence again was surprising on the downside, so I think it's safe to say consumers are being affected by higher oil prices and the housing slump," said Tom di Galoma, head of U.S. government trading at Jefferies & Co. "Those are the two greatest worries in the economy."
Today, the Federal Open Market Committee will conclude its two-day policy-setting meeting. While neither economists nor other market participants expect a rate change, they will closely monitor the language used in the post-meeting policy statement to gauge how the Fed views the threat of a weakening economy versus inflation.
Prices on options on federal funds futures implied the market sees more than a 90% probability the Fed will keep rates steady at 2.0%, according to the federal funds futures traded on the Chicago Board of Trade, a proxy for market expectations, at closing on Monday. The implied probability the Fed keeps rates the same during its August meeting is near 69%. But Fed fund futures rates show about a 79% probability there will be at least a 50 basis point increase in the target rate by the end of the year.
On the economic front today, May durable goods and new home sales data will be released. Economists polled by IFR expect no change in durable goods, a 0.8 dip in durable goods excluding transportation, and 515,000 new home sales. Later this week, the final first-quarter gross domestic product, existing home sales, personal income, personal consumption and University of Michigan's consumer sentiment number will all be released.
In today's new issues, Morgan Keegan & Co. priced $262 million in state revolving fund subordinate-lien revenue bonds for the Texas Water Development Board. Bonds mature from 2010 through 2016, and in 2018, 2020 through 2030, with term bonds in 2033 and 2038. Yields range from 2.84% with a 3% coupon in 2010 to 5.1% with a 5% coupon in 2038. The bonds, which are callable at par in 2017, have underlying credit ratings of triple-A from Moody's Investors Service, Standard & Poor's and Fitch Ratings.
Also, Gilbert, Ariz., competitively sold $188 million GOs to Merrill Lynch & Co. at a true interest cost of 4.2679%. Bonds mature from 2009 through 2023, with yields ranging from 3.1% with a 4% coupon in 2011 to 4.5% with a 4.25% coupon in 2021. Bonds maturing 2009, 2010, from 2017 through 2020, 2022 and 2023 were not reoffered. The bonds, which are callable at par in 2018, have ratings of Aa2 from Moody's and AA from Standard & Poor's.
In addition, Lehman Brothers priced $119.8 million of project revenue bonds for the University of Massachusetts Building Authority. The bonds mature from 2009 through 2029, with term bonds in 2032 and 2038. Yields range from 2.2% with a 4% coupon in 2009 to 5.08% with a 5% coupon in 2038. Bonds maturing 2013 through 2025, 2028, 2029, 2032 and 2038 are insured by Financial Security Assurance Inc. The bonds, which are callable at par in 2018, have underlying ratings of A-plus from Standard & Poor's and Fitch.
Also, Frederick County, Md., competitively priced $79.4 million of GO public facilities bonds to Goldman, Sachs & Co. at a true interest cost of 4.4179%. Bonds mature from 2011 through 2028, with yields ranging from 3.05% with a 5% coupon in 2011 to 4.675% with a 4.5% coupon in 2028. Bonds maturing in 2009 and 2010 were decided via sealed bid. The bonds, which are callable at par in 2018, are rated Aa2 by Moody's and AA-plus by Standard & Poor's and Fitch.
Finally, Morgan Stanley priced $30.1 million in revenue bonds for the Connecticut Health and Educational Facilities Authority for the benefit of William W. Backus Hospital. Bonds mature from 2009 through 2018, with term bonds in 2023, 2025, 2028 and 2035. Yields range from 1.92% with a 4% coupon in 2009 to 5.21% with a 5.125% coupon in 2035. The bonds, which are callable at par in 2018, are insured by FSA, with underlying credit ratings of A-plus from Standard & Poor's and A-plus from Fitch.