The municipal market was unchanged with a slightly firmer tone yesterday amid light to moderate secondary trading activity, as the University of Texas System Board of Regents came to market with $516.3 million of taxable Build America Bonds, and the Federal Reserve once again held the federal funds rate target unchanged.
"I'd say it's up, a little bit," a trader in New York said. "But there's not much trading going on. It's not very active. We are up in part because the Government market is up. They are dragging us a little. At the end of the day, the market would be up by maybe a basis point."
"Overall, there has been a little bit more of retail investor demand for paper," a trader in Los Angeles said. "Yields were bumped up maybe a basis point or so."
In the new-issue market yesterday, Morgan Stanley priced $516.3 million of taxable BABs for the UT Regents.
The BABs mature from 2011 through 2021, and in 2026, 2030, and 2042. Yields range from 1.09% in 2012, or 0.71% after the 35% federal subsidy, to 5.13% in 2042, or 3.34% after the subsidy. The bonds were priced to yield between 37 and 168 basis points over the comparable Treasury yield. The bonds contain a make-whole call at Treasuries plus 20 basis points, and are rated triple-A by all three major rating agencies.
Morgan Stanley priced $149.1 million of revenue bonds for the Guam Power Authority. The bonds mature in 2030, 2037, and 2040, yielding 5.60% with a 5.5% coupon, 5.22% with a 5% coupon, and 5.73% with a 5.5% coupon.
Bonds maturing in 2037 were backed by Assured Guaranty Municipal Corp. The remaining bonds are uninsured, and are rated Ba1 by Moody's Investors Service, BBB by Standard & Poor's, and BBB-minus by Fitch Ratings. The bonds are callable at par in 2020.
The Federal Open Market Committee yesterday opted to hold the federal funds rate target unchanged in its zero to 0.25% range for the 12th consecutive meeting, a decision that was widely expected by market participants.
In a commentary, Guy LeBas, chief fixed-income strategist at Janney Capital Markets, wrote that "if the statement which accompanied June's monetary policy decision could have a face, it would be that of Seinfeld's George Costanza: intellectual-looking, but stingy and angry at the world for injustices, perceived or real."
"In this case, those injustices are the threats that Eurozone sovereign credit issues posed to the funding markets and the perfectly choreographed path towards rate tightening that, true to the form of the candy bar line up, was bound to go awkwardly amiss," LeBas wrote. "We view the European crisis as forcing the Fed to delay its expected path towards higher rates by an additional three to six months, meaning that the window for potential rate hikes now opens only in March 2011."
In another commentary, Justin Hoogendoorn, managing director at BMO Capital Markets, wrote: "The Federal Reserve held its fed funds rate in the zero to 0.25% range for the twelfth consecutive meeting, while noting that markets were 'less supportive' of economic growth due to European weakness."
"The Fed maintained that rates would need to stay 'exceptionally low' for an 'extended period' in the statement," he wrote. "We argue that the Fed will hold rates near zero well into 2011 (if not 2012), while BMO Economics holds its official Fed funds target, at the moment, for a first quarter 2011 rate hike. Federal fund futures implied probabilities of a rate hike by Jan. 26, 2011, fell to the lowest level of the year. While futures data suggested a nearly 80% probability of a 1% fed funds rate a year out at the beginning of 2010, futures now suggest a better than 65% likelihood of the Fed not moving by January 2011."
In addition to being the 12th straight meeting at which the federal funds rate target was left unchanged, it was also the fourth consecutive meeting at which president of the Federal Reserve Bank of Kansas City's Tom Hoenig dissented.
The Treasury market showed some gains yesterday. The benchmark 10-year note was quoted near the end of the session at 3.14% after opening at 3.16%. The 30-year bond was quoted near the end of the session at 4.08% after opening at 4.10%. The two-year note was quoted near the end of the session at 0.69% after also opening at 0.69%.
The Treasury Department auctioned $38 billion of five-year notes, with a 1 7/8% coupon and a 1.995% high yield, a price of 99.43. The bid-to-cover ratio was 2.58.
The Fed banks bought $1.1 billion for their own account in exchange for maturing securities.
The Municipal Market Data triple-A scale yielded 2.94% in 10 years and 3.76% in 20 years yesterday, following levels of 2.96% and 3.78% Tuesday. The scale yielded 4.05% in 30 years yesterday, following 4.08% Tuesday.
Tuesday's triple-A muni scale in 10 years was at 93.7% of comparable Treasuries and 30-year munis were at 99.5%, according to MMD, while 30-year tax-exempt triple-A general obligation bonds were at 104.9% of the comparable London Interbank Offered Rate.
In economic data released yesterday, new home sales plunged 32.7% in May to a seasonally adjusted annual rate of 300,000, a record low, as the median sales price fell and the months supply increased to the highest level in almost a year.
New home sales in April were revised lower to 446,000 from the 504,000 reported last month. Sales in March were revised to 389,000 from 439,000. Economists expected 420,000 new home sales for the month, according to the median estimate from Thomson Reuters.
