Secondary activity in the tax-exempt market was subdued Wednesday despite big movements among Treasuries before and after the Federal Open Market Committee’s afternoon monetary policy statement.
“There were a lot of people looking for muni bonds and not a lot of people looking to sell them and take losses on any of their positions,” a trader in Florida said.
He described the trading mood as tension-filled before the FOMC statement came out with few surprises.
“People were holding their breath,” the trader said. “Once they heard what they knew they were going to hear, everything kind of quieted down.”
The triple-A rated two-year and 10-year yields were unchanged near historical lows at 0.46% and 2.51%, respectively, according Municipal Market Data. The triple-A-rated 30-year yield weakened by two basis points to 3.90%. However, that softening was mild compared with the impact to long-term Treasuries, which “got slammed,” according to one trader.
The 30-year Treasury yield began the day at 3.93%, moved to 3.87% ahead of the FOMC announcement, and then fell back to 4.10%. It closed the day at 4.06%, 17 basis points weaker than Tuesday’s close.
The benchmark 10-year yield closed the day at 2.63%, or four basis points weaker than Tuesday’s close, and the two-year note ended at 0.34%, equivalent to Tuesday’s close.
The key event of the day was the FOMC’s release of details of its second round of quantitative easing. The Fed said it intends to purchase a further $600 billion of Treasuries by mid-year 2011 — a pace of about $75 billion per month.
The Fed’s policy-making body left the total amount of planned purchases open-ended in the second round — unlike the first round. The Fed statement indicated they would continue to review the pace and overall size of the asset-purchase program this time “in light of incoming information” regarding employment and inflation.
The amount was less than the $80 billion to $100 billion of assets per month economists expected in a Thomson Reuters poll from Tuesday.
But Guy Lebas, chief fixed-income strategist at Janney Capital Markets, said he believes the second dose of quantitative easing, or QE, will extend through the third-quarter and “measure around $1 trillion when all is said and done.”
The FOMC also said it would continue to reinvest principal payments from agency debt and agency mortgage-backed securities into longer-term Treasuries.
The Fed’s Open Market Trading Desk in New York, which conducts the program, said it expects to make nearly $900 billion in total purchases by the end of the second quarter of 2011, or roughly $110 billion per month.
The Fed concentrated its purchases of Treasury bonds in the two-to-10-year maturity range during the first round of its QE program. With investors expecting the Fed to double-down on that effort, Treasury yields at that portion of the curve have come down. In the three months leading up to the announcement, yields on two-year, 10-year, and 30-year Treasuries fell by 22 basis points, 43 basis points, and 19 basis points, respectively.
Brian Bethune, chief U.S. economist at IHS Global Insight, said the Federal Reserve achieved further monetary stimulus simply by speaking about renewed quantitative easing over the past three months.
“The important point to keep in mind is that markets have already discounted the FOMC’s action,” Bethune wrote Wednesday morning. “Bond and equity prices have moved up, while long-term yields have moved down in the past three months in anticipation of these moves by the Fed.”
Long-term Treasuries ran up Wednesday in anticipation of the FOMC statement but quickly shed those gains once it became clear the Fed would not be buying much long-term product.
Just 4% of Fed purchases will be in the 17-30 year range, according to the Open Market Trading Desk, which said 63% of purchases will be in the 2.5 to 7-year range.
The Fed currently owns roughly 12.5% of all outstanding Treasury bonds and notes, according to Thomson Reuters, which said if the Fed were to buy $1 trillion more in this expanded program, its holdings of outstanding Treasuries could jump to 27%.
Michael Zezas, municipal strategist at Morgan Stanley, said that kind of additional support for Treasuries should reinforce existing trends in the municipal market, by keeping credit spreads tight.
“This should prolong technical support for munis by keeping the ratio of real muni to real Treasury rates high, which is a positive indicator for muni fund flows,” Zezas wrote Monday. He added that technical factors are masking what he sees as elevated credit risks for state and local governments.
In the new-issue market Wednesday, Goldman, Sachs & Co. priced $310 million of special revenue tax-exempts for the Love Field Facilities Modernization Corp. in Dallas. The bonds are rated Baa3 by Moody’s Investors Service and BBB by Standard & Poor’s. The entire deal matures in 2040 with a 5.375% yield.
Elsewhere, Goldman priced $124.5 million of taxable refunding and improvement bonds for the Atlanta and Fulton County Recreation Authority.
The bonds are enhanced by Assured Guaranty Municipal and are rated Aa3 by Moody’s and AA-plus by Standard & Poor’s. Underlying ratings are Aa2 and A. Both agencies have a negative outlook on the bonds.
Bonds maturing in 2011 and 2012 offer respective yields of 1.005% and 1.147% — an 80 basis point spread over comparable Treasuries. A bigger portion of the deal, totaling $116.4 million, matures in 2028 and offers a 6.5% yield.