News from the Federal Open Market Committee may make tax-exempts more attractive compared to Treasuries, but by helping to lower muni yields on the long end, it won’t bring in more investors.
The only thing that will is more paper, a trader in New York said.
“We could use some more new issuance; it all depends on that supply factor,” the trader said. “Right now they’re issuing deals, and because no one has any paper, they’re getting soaked up. It’s still rough out there.”
The relative ease with which the market is absorbing the week’s uptick in volume is signaling to investors that yields are about where they should be. If anything, they continue to fall. And on Wednesday, the FOMC poured more fuel on the low-yield bonfire.
The committee said it will extend the average maturity of its holdings of securities. It will achieve this by purchasing $400 billion of Treasuries with six to 30 years remaining to maturity by the end of June and selling an equal amount of maturities three years and shorter, according to an announcement after the FOMC meeting.
The move is expected to apply downward pressure on longer-term interest rates, the FOMC said in a statement, in addition to helping make broader financial conditions more accommodative.
As predicted, intermediate and long-term Treasury yields free-fell immediately following the statement. And while muni yields fell on the day, they did not keep pace, leading to rising ratios to Treasuries along the curve.
Muni-Treasury ratios at the 10-year mark rose to 112%. The 30-year rose to 119%, the cheapest munis have been to Treasuries since April 2009.
Muni yields were firmer across most of the curve on out Wednesday, according to the Municipal Market Data scale. The yield curve is steady from two to six years. Yields fell one basis point for maturities of one, seven, and eight years. Beyond that, yields were two or three basis points lower.
The 10-year muni yield Wednesday fell three basis points to 2.09%, up two basis points from the all-time low recorded early last week. The 30-year yield also dropped three basis points to 3.62%. The two-year yield stayed at 0.32% for a fifth straight session.
Treasury yields weakened on the short end, but firmed noticeably thereafter. The benchmark 10-year Treasury yield dropped eight basis points to 1.86%, its lowest yield in many decades.
The 30-year yield plunged below the 3.00% barrier, before settling just over it at 3.02%, 18 basis points lower on the day. The two-year yield jumped four basis points to 0.21%.
The market expected a substantial increase in volume this week to $8 billion, significantly larger than the $4.6 billion weekly average issued this year. Last week saw a revised $6.2 billion of issuance.
In the competitive market, Bank of America Merrill Lynch won the largest new deal of the week, $500 million of Massachusetts general obligation bonds. The bonds are rated Aa1 by Moody’s Investors Service, and AA-plus by Standard & Poor’s and Fitch Ratings.
Yields ranged from 0.69% with a 5.00% coupon in 2015 to 3.53% with a 4.00% coupon in 2028. Credits maturing from 2012 to 2014, 2017, 2022 to 2024, and 2026 were sold but not available.
The deal was priced aggressively, certainly at the short end of the curve. Yields were 10 basis points above MMD at the four-year mark, and 13 basis points above MMD at the seven-year mark.
“The Massachusetts deal went pretty well,” the New York trader said. “Yields were right on target, and they had good flow.”
The commonwealth’s competitive GO issuance was priced aggressively and has seen decent activity, according to Mike Pietronico, chief executive officer of Miller Tabak Asset Management.
“There’s going to be an investor base that will want to buy Massachusetts, based on the fact that it seems to be outperforming the vast amount of other states, in terms of its fiscal position,” he said.
Also in the competitive arena, JPMorgan won $300 million of Ohio common schools GOs. The bonds are rated Aa1 by Moody’s and AA-plus by Standard & Poor’s and Fitch.
Yields ranged from 0.45% with a 3.00% coupon on 2013 to 4.06% with a 4.00% coupon on 2031. Bonds maturing in 2012 were offered in a sealed bid. Credits maturing from 2020 through 2022 were not formally re-offered.
In the negotiated market, JPMorgan priced $250 million of West Virginia University improvement revenue bonds in two series. The bonds were rated Aa3 by Moody’s and A-plus by Standard & Poor’s.
The deal was upsized from $224 million. At repricing, yields for the first series, $195.6 million of university improvement revenue bonds, ranged from 0.45% with a 3.00% coupon in 2012 to 4.30% with a 5.00% coupon in 2036. Yields were cut five basis points in the two-, five- and 10-year maturities, and cut 10 basis points in the 20-year.
Credits for the second series, $55 million of university improvement variable-rate revenue bonds, were priced to the SIFMA swap index plus 65 basis points in 2041. That’s down from the earlier pricing, at the SIFMA swap index plus 70 basis points in 2041.
B of A Merrill priced $132 million of New York State Energy Research and Development Authority pollution control revenue bonds in three series. The bonds are rated Baa2 by Moody’s, BBB-plus by Standard & Poor’s, and A-minus by Fitch.
Yields on the first series, $60 million, were 2.125% priced at par in 2015. Yields on the second and third series, $30 million and $42 million, respectively, were 2.25% priced at par in 2015.