Spotlight is on FOMC as muni issuance winds down

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The Federal Open Market Committee takes center stage this week, as its meeting this week is expected to produce a 25 basis point increase in its benchmark interest rate.

Market participants, with few deals to consider, were gearing up to read the tea leaves of the FOMC's statement Wednesday.

“It would be a shock if they didn’t raise this week, but we will see what clues they offer in terms of their 2019 plans," said one New York trader. "The number of hikes could impact municipals; we will have to see,”

The latest employment report and the consumer price index cemented the December rate hike, according to Luke Tilley, chief economist at Wilmington Trust.

“However, … we think the Fed is set to slow the path of rate hikes in 2019," Tilley said. "As of today, the median FOMC participant expectation is for three hikes in 2019, and we think it will only be two hikes, based on our current outlook. We would not be surprised if the new projections reflect the same downward adjustment.”

Tilley pointed to the continued flattening of the yield curve and the drop in “longer-term inflation expectations as measured by TIPS breakevens in the Treasury market” as the major reasons the Fed will need to slow down. The yield curve “will give more pause to this FOMC and this Chairman than committees of the past, in our view,” he said.

“The Fed as an institution gets very nervous when long-term inflation expectations appear to be getting either too high or too low,” Tilley said. “That is much more worrisome to them than reports of current inflation or any market movements.”

Secondary market
Municipal bonds were firm on Monday, according to a late read of the MBIS benchmark scale. Benchmark muni yields dropped less than one basis point in the three- to 29-year maturities. The three remaining maturities were either unchanged or rose less than a basis point.

High-grade munis were also steady, with yields calculated on MBIS' AAA scale decreasing less than one basis point in the two- to 30-year maturities. The lone remaining maturity saw its yield higher by no more than one basis point.

Municipals were stronger on Municipal Market Data’s AAA benchmark scale, which showed the yield on both the 10-year muni general obligation and the 30-year muni maturity dipped by one basis point.

On Monday, the 10-year muni-to-Treasury ratio was calculated at 83.6% while the 30-year muni-to-Treasury ratio stood at 101.4%, according to MMD. The muni-to-Treasury ratio compares the yield of tax-exempt municipal bonds with the yield of taxable U.S. Treasury with comparable maturities. If the muni/Treasury ratio is above 100%, munis are yielding more than Treasury; if it is below 100%, munis are yielding less.

Robust demand, positive flows
Strong investor interest followed this week’s new issue calendar of $1 billion as recent sell offs in the municipal and Treasury markets were driven by technical factors, according to a report Monday from Nuveen Advisors.

“The market is still digesting the new paper,” wrote John Miller, head of municipal and William Martin, chief investment officer of taxable fixed income.

The average Wall Street firm is positive on fixed income for 2019, but generally likes to end the year with light inventory, the analysts reported.

“Dealers who were sellers this week will likely become buyers on January 1, when reinvestment money for municipals should total $38 billion,” Miller and Martin wrote.

Meanwhile, high yield municipal bond credit spreads contracted last week — excluding Puerto Rico — despite an increase in supply. High yield municipal net inflows totaled $160 million, after 11 straight weeks of net outflows, the analysts said.

Flows in 2018 remain positive year to date as primary market activity has increased, offering investors options to demonstrate credit selectivity and relative value pricing, they said.

Robust demand has existed recently and even weaker deals have been oversubscribed, according to the analysts.

They said tobacco and Puerto Rico bonds are underperforming heading into 2019, after showing strong returns for much of 2018, they said.

Primary market
There are only three negotiated deals on the calendar $100 million or larger.

Raymond James & Associates is expected to price the San Juan Unified School District, Sacramento County, Calif.’s $230 million of general obligation bonds on Tuesday. The deal is rated Aa2 by Moody’s Investors Service and AAA by Fitch Ratings.

Citigroup is expected to price on Tuesday the Allentown Neighborhood Improvement Zone Development Authority, Pa.’s $149 million of Series 2018 subordinate tax revenue bonds for the City Center project. The deal is unrated.

On Wednesday, Piper Jaffray is expected to price the Colorado Health Facilities Authority’s $136 million of improvement and refunding revenue bonds consisting of Series 2018A-1 for the Bethesda project, Series 2018A-2 taxable bonds and Series 2018B second tier bonds. The deal is rated A-minus by S&P Global Ratings.

There are no competitive deals on the calendar larger than $100 million. The biggest competitive sale of the week will be Stratford, Conn.’s offering on Wednesday of $70 million GOs, issue of 2018.

Previous session's activity
The Municipal Securities Rulemaking Board reported 40,674 trades on Friday on volume of $12.792 billion.

California, New York and Texas were the municipalities with the most trades, with the Golden State taking 18.156% of the market, the Empire State taking 12.168% and the Lone Star State taking 9.157%.

Treasury auctions discount rate bills
Tender rates for the Treasury Department's latest 91-day and 182-day discount bills were mixed, as the $39 billion of three-months incurred a 2.375% high rate, unchanged from 2.375% the prior week, and the $36 billion of six-months incurred a 2.485% high rate, up from 2.480% the week before.

Coupon equivalents were 2.423% and 2.552%, respectively. The price for the 91s was 99.399653 and that for the 182s was 98.743694.

The median bid on the 91s was 2.360%. The low bid was 2.340%.

Tenders at the high rate were allotted 83.49%. The bid-to-cover ratio was 3.52.

The median bid for the 182s was 2.460%. The low bid was 2.435%.

Tenders at the high rate were allotted 41.78%. The bid-to-cover ratio was 3.13.

Data appearing in this article from Municipal Bond Information Services, including the MBIS municipal bond index, is available on The Bond Buyer Data Workstation. Click here for a brief tour of the Workstation, or contact Ziad Saba at 212-803-6079 for more information.

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