Municipal bond prices rose yesterday despite heavy new-issue supply, as the market responded to a relief rally in Treasuries following Tuesday’s decision by the Federal Open Market Committee to raise the federal funds rate for the 13th consecutive time while acknowledging that monetary policy was closer to a neutral level.
Market participants interpreted the changes in the wording of a policy statement that accompanied the interest rate decision as a sign that the Fed will hike rates only a few more times next year and Treasuries rallied. Municipals followed suit and traders said yields fell three to five basis points, while prices rose. The yield to par call on The Bond Buyer 40 fell seven basis points to 4.75%. Traders said good demand helped clean up unsold balances on some of last week’s issues, such as a $1.02 billion California general obligation loan, while both arbitrage and retail investors showed some buying interest.
“The market is strong, people are starting to kick the tires and they are buying some things. I wouldn’t say they are going crazy, but there is definitely some interest. We are following the government bond market and we are probably up [in price and down in yield] anywhere from three to five basis points,” a trader in New York said.
Municipal bond prices moved higher even though the market was inundated with supply. Leading the primary, Chicago was in the market with $1.2 billion of third-lien general airport revenue bonds on behalf of O’Hare International Airport. Citigroup Global Markets Inc. priced a $964 million series to yield from 4.33% in 2019 to 4.69% in 2033 and priced a $236 million series to yield from 3.99% in 2014 to 4.20% in 2018. The bonds were insured.
Fitch Ratings assigns an underlying rating of A to the third-lien debt, while Standard & Poor’s rates it A-minus and Moody’s Investors Service pegs the credit A2. The bonds are being sold as part of a plan that will expand the runways at O’Hare and is expected to increase flights by approximately 20% annually to 1.2 million. Chicago is scheduled to sell $300 million of variable-rate debt for the airport next week.
In a smaller deal from the Second City, the Chicago Park District sold $180 million of bonds. Meanwhile, Lehman Brothers priced $850 million of New York City refunding GOs, lowering the yields on several maturities by one to three basis points at a repricing. Bonds were priced to yield from 3.20% in 2007 to 4.70% in 2032. Bonds are callable in 2016 at par. New York is currently rated A1 by Moody’s, and A-plus by Standard & Poor’s and Fitch, which are the highest ratings in the city’s history.
And Goldman, Sachs & Co. priced $619 million of Los Angeles Department of Water and Power power system revenue bonds to yield from 3.30% in 2008 to 4.61% in 2040. The largest block of bonds matures in 2035 and offers a 5% coupon with a yield of 4.54%. Financial Security Assurance Inc. insured all bonds except those maturing in 2008 and 2009. The credit has underlying ratings of Aa3 from Moody’s, and AA-minus from Standard & Poor’s and Fitch.
In the competitive market, Morgan Stanley bought $116 million of Florida Board of Education public education capital outlay bonds and reoffered them with a top yield of 4.65% in 2030, while Merrill Lynch & Co. bought $139 million of Seattle water system revenue refunding bonds and reoffered them with a top yield of 4.64% in 2029.
Although a flurry of new issues was priced yesterday, it was probably one of the last few active days in the primary this year. Tax-exempts tend to benefit from the typical year-end supply-demand imbalance that pushes prices up in the secondary.
“We’re stronger, there are few two-sided markets and trading seems to be getting off to good start,” another trader in New York said. “The numbers today came out a little better and people are trying to get it going. The calendar is winding down, and there’s a better feel to the market.”
The Treasury market built on early gains when economic data showed benign import prices in November and a record $68.9 billion U.S. trade deficit in October. Large trade deficits can spur buying in Treasuries because the imbalances whittle away at gross domestic product growth. Meanwhile, import prices dropped 1.7% in November, compared to a revised 0.3% rise in October and a consensus forecast of a 0.5% decline.
John Canavan, debt strategist at Stone & McCarthy Research in Princeton, N.J., attributed the gains in Treasuries and a flattening yield curve to the data and follow-through from the FOMC meeting Tuesday. Policy-makers at that meeting raised the fed funds rate by 25 basis points to 4.25%.
“A much larger than expected trade deficit combined with a much larger than expected decline in import prices is helping to feed the flattening and offering better support to the market as a whole,” he said. “I think the flattening to a large degree is the aftermath of the FOMC. The initial curve reaction was one of a little bit of steepening as people focused on the removal from the statement of the term ‘accommodative,’ suggesting that we’re somewhere in the range of neutral. But today, we’ve seen much better curve flattening because, while they removed accommodative, they also continued to say there would be further rate hikes needed. Given that, the broad consensus seems to be they’re unlikely to stop in January at 4.5%.”
Christopher S. Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi, said he expects one to three additional interest rate increases as the FOMC works to stem the tide of inflation.
“Essentially, they have set the stage in 2006 to raise rates above neutral to slow the economy, and ‘keep the risks to the attainment of both sustainable economic growth and price stability’ in balance,” Rupkey said. “They mentioned sustainable growth, but the emphasis is clearly on inflation.”
