Prices of top-shelf municipal bonds closed weaker on Tuesday, traders said, with yields on some maturities increasing by as much as four basis points.
The state of Ohio competitively sold three bonds deals totaling about $250 million as traders kept a close eye on rates ahead of the Federal Open Market Committee monetary policy meeting.
Secondary Trading
The yield on the 10-year benchmark muni general obligation ended two basis points higher at 2.25% from 2.23% on Monday, while the yield on the 30-year GO rose to 3.24% from 3.20%, according to the final read of Municipal Market Data's triple-A scale.
Treasury prices were lower on Tuesday, with the yield on the two-year Treasury note rising to 0.79% from 0.73% on Monday, while the 10-year yield rose to 2.27% from 2.18% and the 30-year yield increased to 3.06% from 2.95%.
The 10-year muni to Treasury ratio was calculated on Tuesday at 98.9% versus 102.3% on Monday, while the 30-year muni to Treasury ratio stood at 108.5% compared to 106.0%, according to MMD.
Primary Market
In the competitive arena on Tuesday, the state of Ohio came to market with three separate sales totaling around $250 million.
Morgan Stanley won the $150 million of Series 2015B general obligation infrastructure improvement bonds with a true interest cost of 3.30%. The bonds were priced to yield from 0.28% with a 2% coupon in 2016 to 3.01% with a 5% coupon in 2035.
PNC Capital Markets won the $50.49 million of Series 2015C GO infrastructure improvement refunding bonds with a TIC of 2.15%. The bonds were priced as 5s to yield 1.29% in 2019, 1.55% in 2020, 1.82% in 2021, 2.53% in 2026 and 2.71% in 2027.
Morgan Stanley won the $50 million of Series 2015B GO conservation projects bonds with a TIC of 2.86%. The bonds were priced to yield from 0.28% with a 2% coupon in 2016 to 2.75% with a 5% coupon in 2030.
The issues are rated Aa1 by Moody's Investors Service and AA-plus by Standard & Poor's and Fitch Ratings.
Since 1995, the state of Ohio has issued roughly $12.89 billion of GOs, with the biggest years being 2003 and 2004 when it issued $1.45 billion annually. The Buckeye State didn't sell any GO debt in 2011 or 2013.
The bulk of the week's offerings will be priced on Wednesday, one day before the FOMC decision.
Topping the negotiated slate is the Texas Transportation Commission's sale of $750 million Series 2015A general obligation mobility fund refunding bonds. The advance refunding, expected to be priced by JPMorgan Securities on Wednesday, is rated triple-A by Moody's, S&P and Fitch.
Barclays Capital is slated to price the Illinois Finance Authority's $368 million of Series 2015A revenue bonds for OSF Healthcare on Wednesday. The issue is rated A2 by Moody's and A by both S&P and Fitch.
Citigroup is set to price the Los Angeles Department of Water and Power's $271 million of power system revenue bonds on Wednesday. The bonds are rated Aa3 by Moody's and AA-minus by S&P and Fitch.
Citi is also expected to price Philadelphia's $225 million of GOs on Wednesday. The issue is rated A2 by Moody's and A-plus by S&P and Fitch.
And Citi is set to price the Illinois' Metropolitan Pier and Exposition Authority's $222 million of bonds for the McCormick Place expansion project on Wednesday. The issue is comprised of current interest bonds and capital appreciation bonds.
FOMC to Meet: Good to Go?
Even as the latest meeting of the FOMC is set to begin on Wednesday, there is still a significant difference of opinion on what the Federal Reserve will actually do about interest rates when it announces its decision on Thursday.
The FOMC is to be released on Thursday at 2 p.m., New York time, followed by a press conference at 2:30 p.m., by Fed Chair Janet Yellen.
Some see the Fed raising rates by 25 basis points, others believe a 10 to 15 basis point mini-hike will happen, while still others believe the Fed will doing nothing at all now.
"We expect a 'micro-hike' of 10 to 15 basis points, though there are a wide range of potential outcomes available for policymakers," Guy LeBas, Chief Fixed Income Strategist at Janney, wrote in a weekly market comment. That "satisfies several Fed goals and would effectively represent 'easing by tightening' in the markets' eyes."
LaBas said there was by no means only one set of possible decisions.
"There [is] an unusually wide range of potential rate outcomes, each supported by different datasets or different interpretations of the same data sets," he wrote. "We put empirical probabilities of 40% on the micro hike, 35% on no hike, 20% on a 25 basis point hike, and 5% on a +100 basis point '1% and done' hike."
Luke Bartholomew, Fixed Income Investment Manager at Aberdeen Asset Management, said the economy is "not exactly screaming for a hike" and that any "rate rise in September would surprise markets."
In a market comment this week, Bartholomew wrote that "it was only a matter of weeks ago that a September interest rate rise from the Fed seemed more than likely. The balance of probability has now shifted to the Fed pushing back the decision yet again."
He said that the recent stock market selloff, strong dollar, and rising corporate borrowing costs amount to a tightening in financial conditions that will have a similar effect on the economy to raising interest rates.
"If a rate rise did come in September it would now surprise financial markets," he said. "Which is exactly what the Fed wants to avoid."
He added that with low inflation and slow wage growth, the need for a rate hike was not immediate.
"So all things considered there is little need to clip the wings of inflation which is not exactly taking flight," he said. "It seems the Fed may have decided to settle with the devil they know."
Citi analysts Vikram Rai and Jack Muller, writing in a Tuesday comment, said that the FOMC remains undecided about whether or not to raise rates now.
"All eyes are on the Fed this week and while the market is pricing in a lower probability of a hike for this meeting, Citi believes that the chances of the Fed finally embarking on its tightening schedule remain high," they wrote. "Thus, duration players approach this potentially significant event with some trepidation, because most investors still seem to associate a hike in short-term rates with a rising rate environment that is bearish for the long-end of the curve.
"The question facing the markets and the FOMC is how much and what type of additional information would be needed to close the case," they said. "The July survey of Primary Dealers conducted by the N.Y. Federal Reserve Bank's showed that before the market volatility, September had the highest probability of a rate hike at 40%. Citi economists have reduced the probability for a September hike, but it remains the mode."
While the Fed would like to start raising rates, it's still unclear if they can do it at this week's meeting.
"I think [a rate hike] clearly is in the cards," James Colby, Senior Municipal Strategist and Van Eck Global, told The Bond Buyer in a recent interview. "I think the Fed would love to see it -- the numbers that are being produced right now suggest that the economy still is in this upward trajectory and that they can get this rate hike into the market and in place before the end of the year."
He added that whether they really do it or not at this meeting was hard to say.
"It's hard to read those tea leaves," he said. "Why? Because we've had such dislocation coming out of China, the Greek concerns are still present - although behind the headlines, they're still important."
He said that the Fed wanted to move before the end of the year, even if all the some of the economic numbers suggest that the economy may not be firing on all cylinders.
"I think the Fed's intent is to try to get a rate hike in now. The market has been anticipating it for over a year and a half and it's time to move ahead," he said.
CUSIP Request Volume Falls for 4th Straight Month
The volume of requests for new municipal CUSIP identifiers fell for the fourth month in a row, CUSIP Global Services announced on Tuesday. The report tracks issuance of new security identifiers as an early indicator of debt activity and suggests a possible slow-down in new municipal bond issuance over the next several weeks.
Muni requests fell 16% in August, with 1,040 new identifier requests made last month. This follows a drop of 19% in July, a 1% decline in June and a decrease of 3% in May.
On a year-over-year basis, however, muni requests are still up 31%, reflecting the first half's surge in issuance.
"The downward trend in volume we're seeing in the muni space is definitely exacerbated by the fact that we're focused on data from the 'dog days of summer,' but it is also consistent with a downward trend in new security issuance," said Gerard Faulkner, Director of Operations for CUSIP Global Services. "The CUSIP indicator is clearly telling us that new issuance volumes are poised for a dip."
Muni issuers in Texas, New York and California demanded the highest volume of new CUSIP identifiers in August, accounting for 27% of all municipal bond activity during the month.
"Everyone in the financial markets -- including issuers of new debt -- is focused on the prospect of the Fed raising rates in September; we're seeing that reflected in the CUSIP data," said Richard Peterson, Senior Director of Global Markets Intelligence at S&P Capital IQ. "The combination of increased market volatility and uncertainty around interest rates has created a perfect storm for a slowdown in new issuance. The question now is: How long will it last?"
