Top-rated municipal bonds ended weaker on Wednesday, according to traders, as the Federal Reserve announced it was holding the line on interest rates – for now.
The Federal Open Market Committee voted at its meeting to keep the fed funds rate target at 0.5% to 0.75% and the panel offered no hints as to when it will next increase the target. The vote was unanimous.
Perhaps the biggest change in the policy statement was that it said inflation "will" rise to 2% over the medium term, whereas previous statements said inflation was "expected to" do so. "Measures of consumer and business sentiment have improved of late," and "near-term risks to the economic outlook appear roughly balanced," the statement said.
Monetary policy "remains accommodative, thereby supporting some further strengthening in labor market conditions and a return to 2% inflation," the FOMC said. It still expects "gradual" rate hikes will be warranted.
The 10-year benchmark muni general obligation yield rose two basis points to 2.34% from 2.32% on Tuesday, while the yield on the 30-year GO increased one basis point to 3.09% from 3.08%, according to the final read of Municipal Market Data's triple-A scale.
"With the labor market continuing to strengthen, the scene is set for a step up in the pace of normalization this year," said Brian Coulton, chief economist at Fitch Ratings. "The Fed has been emphasizing the fact that the U.S. is at full employment more and more in the last couple of months – including in Janet Yellen's recent Stanford speech – making it harder for them to justify keeping rates so low."
Stifel Fixed Income's chief economist Lindsey Piegza said that those "hoping for even a smidgen of additional guidance as to the timing of the next rate hike were sorely disappointed" by the FOMC statement.
"For now, with a number of question marks from a fiscal standpoint, and still a lack of clear direction in the underlying economy, most committee members appear well suited to err on the side of caution, waiting on the sideline for additional information on how the U.S. economy is evolving in the New Year," Piegza said.
U.S. Treasuries were weaker on Wednesday. The yield on the two-year Treasury rose to 1.21% from 1.20% on Monday, while the 10-year Treasury gained to 2.47% from 2.45%, and the yield on the 30-year Treasury bond increased 3.07% from 3.05%.
The 10-year muni to Treasury ratio was calculated at 94.7% compared to 94.7% on Tuesday, while the 30-year muni to Treasury ratio stood at 100.4%, versus 100.9%, according to MMD.
MSRB: Previous Session's Activity
The Municipal Securities Rulemaking Board reported 40,006 trades on Monday on volume of $8.08 billion.
Primary Market
Wells Fargo Securities priced the Oklahoma Turnpike Authority's $480 million of Series 2017A second senior revenue bonds and Series 2017B refunding second senior revenue bonds for institutions on Wednesday after holding a retail order period on Tuesday.
The $456.07 million of Series 2017A bonds were priced to yield from 3.57% with a 3.5% coupon and as 5s with a 3.15% coupon in a split 2032 maturity to 3.81% with a 4% coupon and 3.35% with a 5% coupon in a split 2038 maturity; a split 2042 maturity was priced as 4s to yield 3.88% and as 5s to yield 3.40%; and a 2047 maturity was priced as 4s to yield 3.93%.
The $23.93 million of Series 2017B bonds were priced to yield from 0.93% with a 3% coupon in 2018 to 1.86% with 2% and 3% coupons in a split 2022 maturity.
The deal is rated Aa3 by Moody's Investors Service and AA-minus by S&P Global Ratings and Fitch Ratings.
Since 2007, the Oklahoma Turnpike Authority has issued about $1.31 billion of debt, with the largest issuance occurring in 2011 when it sold roughly $684 million of debt. The system did not come to market at all from 2008 through 2010 and from 2013 through 2016.
Piper Jaffray priced the North Clackamas School District No. 12, Ore.'s $322.64 million of Series 2017A and Series 2017B general obligation bonds.
The $140.29 million of Series 2017A deferred interest bonds were priced to yield 1.42% in 2019 and from 4.21% in 2034 to 4.42% in 2036 and from 4.49% in 2038 to 4.56% in 2042. The $182.35 million of current interest bonds were priced to yield from 1.44% with a 4% coupon in 2020 to 3.14% with a 5% coupon in 2034; a 2037 maturity was priced as 5s to yield 3.26%.
The deal, which is backed by the Oregon school bond guaranty act, is rated Aa1 by Moody's and AA-plus by S&P.
Colby: Trump Dump Creates High Yield Opportunity
"An oddity that has become evident in the weeks following the U.S. presidential election of Donald Trump has been not the rapid response by U.S. Treasury yields to move to higher, but the near inverse move by municipal high yield compared with corporate high yield," Van Eck Senior Municipal Strategist James Colby wrote in his Muni Nation blog.
"With the prospect that interest rates were likely to rise given the expected Trump initiatives, it comes as no surprise to me that portfolio adjustments would lead to selling and repositioning. And a near-term move to higher rates would, for high grade corporates as well as high grade municipals, result in negative performance. In fact, this is what occurred through the second week of December," he wrote. "But what was odd and abnormal, for the muni market at least, was an even more severe negative response by investors to municipal high yield."
But he said that opportunity has returned to the municipal high-yield sector.
"The good news is measurable opportunity has returned to municipal high yield," he said. "Currently yields are well above the long-term average and nominally above corporate high yield, a measure I have often spoken of as a signal for tactical allocation …. municipal high yield is currently offering both outstanding relative value and attractive yields. I believe it's time to hit the 'reset' button and reconsider municipal high yield."
