Prices of top-quality municipal bonds were slightly weaker at the close, traders said, with yields on some maturities up as much as one basis point after Federal Reserve policy makers said they decided to hold rates for now, while hinting they may raise its target range in December.
The bulk of the week's new bond issuance will take place on Thursday, as the market was dead on Wednesday while traders waited for the Federal Open Market Committee's announcement.
Most economists were correct in predicting that the Fed would hold rates on Wednesday, although now it seems as though a December increase is likely.
"I was not surprised by the commentary, but I do think that they can do something in December, if we continue to get decent job reports and that will be the key determiner," said Dan Heckman, senior fixed income strategist at U.S. Bank Wealth Management. "We think there is a better probability of a December hike than most predictions out there."
Heckman also said that he believes the Fed may have lost its credibility and that is not very healthy.
"They told us there would be a 2015 rate hike, and now here we are in November practically with no hike as of yet, with one meeting left," Heckman said. "They are now in a box and that is not where they want to be. We are already at 0 and I really hope we don't see negative interest rates, I think that would be a very bad thing."
Heckman said the jobs report next week will give an indication whether a rate increase is still in the cards for this year. "It's really going to be about the economic reports from here on out and hopefully they are good and can sway the Fed to make a move," Heckman said, adding that Wednesday's announcement may put some "pressure" on the short and intermediate part of the yield curve. "I think the Fed should feel more comfortable if the market builds in a 25 basis points move" he said. "If we get an October jobs report that is decent, along with a revision that is higher, I think the Fed has to strongly consider a December rate increase."
Secondary Market
The yield on the 10-year benchmark muni general obligation was one basis point higher to 2.01% from 2.00% on Tuesday, while the yield on the 30-year GO increased one basis point to 3.04% from 3.03%, according to a final read of Municipal Market Data's triple-A scale.
Treasury prices mostly lower at the close on Wednesday, with the yield on the two-year Treasury increased to 0.71% from 0.63% on Tuesday, while the 10-year yield rose to 2.10% from 2.06% and the 30-year yield increased to 2.87% from 2.89%.
The 10-year muni to Treasury ratio was calculated on Wednesday at 96.1% versus 98.8% on Tuesday, while the 30-year muni to Treasury ratio stood at 106.0% compared to 106.4%, according to MMD.
Primary Market
Morgan Stanley received the official award on the Marin County Healthcare District, Calif.'s $170 million of Election of 2013 general obligation bonds.
The $157.39 million of tax-exempt Series 2015A GOs were priced to yield 0.51% with a 3% coupon in 2017 and to yield from 1.15% in 2020 with a 2% coupon to 3.58% with a 4% coupon in 2035; a 2040 maturity was priced as 4s to yield 3.79% and a 2045 maturity was priced as 4s to yield 3.85%. The $12.62 million of taxable Series 2015B GOs were priced at par to yield 0.40% in 2016.
The bonds were rated Aa2 by Moody's Investors Service.
In the competitive arena on Thursday, the California State Public Works Board will offer $223 million of Series 2015H Department of Corrections and Rehabilitation lease revenue bonds for the Corcoran State Prison.
The issue is rated A1 by Moody's, A-plus by S&P and A by Fitch. The bonds are tentatively structured to mature serially from 2016 to 2035.
Since 2005, the California State Public Works Board has issued about $14.12 billion of debt, with the most issuance occurring in 2009 and 2012 when it sold $2.19 billion and $2.10 billion, respectively. The CPWB sold the least amount of bonds in 2006 and 2008 when it issued $614 million and $365 million, respectively.
In the negotiated sector on Thursday, Raymond James is slated to price the Broward County Airport Authority, Fla.'s $489 million of airport revenue bonds for the Fort Lauderdale International Airport.
The issue will consist of Series A and C bonds subject to the alternative minimum tax and Series B non-AMT bonds. The deal is tentatively structured as serials maturing from 2016 to 2035 with term bonds in 2040 and 2045.
The bonds are rated A1 by Moody's Investors Service and A-plus by Standard & Poor's.
Bank of America Merrill Lynch is expected to price the Washington Township HealthCare District, Calif.'s $146 million of Series 2015B 2012 Election GOs on Thursday.
BAML is also expected to price the California Pollution Control Financing Authority's $126 million of solid waste disposal refunding revenue bonds for Waste Management Inc. on Thursday. The issue is rated A-minus by S&P.
Siebert Brandford Shank is set to price Harris County, Texas' $145 million of Series 2015B toll road senior lien revenue refunding bonds on Thursday.
And Wells Fargo Securities is set to price the Virginia Housing Development Authority's $101 million of taxable mortgage pass-through bonds on Thursday. The deal is rated triple-A by Moody's and S&P.
Also on Thursday, Citigroup and Guggenheim Securities will remarket Posey County, Ind.'s $1.2 billion of Series 2013A revenue refunding bonds for the Midwest Fertilizer Co. The deal has been remarketed several times, the last being on March 27. It has a put date of Aug. 2, 2016. The issue is rated A1-plus by S&P.
The developers of the Indiana fertilizer plant are continuing to trying to finalize project details they have to nail down before they can roll the securities into a long-term structure. It's expected to be one of the largest junk-rated private activity deals ever when the notes are ultimately rolled over into long-term debt, slightly exceeding the $1.2 billion of debt issued for a fertilizer plant in Iowa.
Midwest Fertilizer, owned by Fatima Group, one of Pakistan's largest conglomerates, owns the planned nitrogen fertilizer manufacturing facility.
Moody's: State Budget Delays Hurt Pa. More than Ill.
While state budget delays in Illinois and Pennsylvania are a credit negative for each state, the pain is being felt more in the Keystone state, especially in its schools, Moody's Investors Service said in a report released on Wednesday
"In Illinois, (rated Baa1/negative outlook) most state aid to local governments is flowing without an enacted budget, but in Pennsylvania (rated Aa3/negative outlook) distributions are not being made, which is negatively affecting some local governments' cash flows," Moody's said in the report, adding, "Community colleges and four-year public universities are adversely affected in both states, to varying degrees, while the impact on non-profit health care institutions is limited."
Although Pennsylvania schools received their property tax revenues in September, districts that are more dependent on state aid are now relying on cash reserves and short-term borrowing to keep the doors open and pay fixed obligations.
As of last month, Moody's said that 17 school districts and two intermediate units in Pennsylvania have borrowed more than $346 million and face a combined $11.2 million in interest fees on these loans.
Philadelphia School District (rated Ba3/negative outlook) made up the bulk of the borrowing at $275 million, Moody's said.
