Municipals, Treasuries rise as Fed maintains rates; curve may flatten as short rates increase

By Sheri Kasprzak

New York, Sept. 17 – Municipals rounded out a big day on a positive note as the Federal Open Market Committee held short-term rates at 0% to 0.25%, market insiders said.

Yields on top-rated munis fell by 3 basis points to 5 bps. Meanwhile, the 10-year benchmark Treasury note yield fell by 9 bps, and the five-year yield fell by 12 bps.

The market now waits for the Fed’s October meeting, even though many market insiders don’t believe rates will rise precipitously.

“The curve will likely flatten as short rates, reacting to Fed bumps, move higher while long-term rates, more impacted by inflationary expectations, rise moderately if at all,” said Alan Schankel, managing director with Janney Montgomery Scott LLC, in a note Thursday afternoon.

“We’ve also observed that during periods of Fed tightening, tax-free bonds generally outperform taxables.”

Schankel pointed out that during the rate hike periods of the late-80s, the mid-90s and the middle of the last decade, muni ratios declined, meaning that tax-free yields fell relative to Treasuries.

“With ratios currently hovering around 100%, despite high marginal income tax rates, we see more downside bias to M/T ratios than upside likelihood,” he said.

Two major deals ahead

The coming week will offer some significant pricing action, including two deals over $1 billion.

The competitive market will feature a $1.2 billion note deal from the Commonwealth of Massachusetts on Tuesday.

The general obligation revenue anticipation notes (MIG 1/SP-1+/F1+) will be used to finance capital expenditures.

The deal includes $400 million of series 2015A notes due April 27, 2016, $400 million of series 2015B notes due May 25, 2016 and $400 million of series 2015C notes due June 22, 2016.

Also on Tuesday, the New York City Transitional Finance Authority will sell $1 billion of future tax secured subordinate bonds through Goldman Sachs & Co.

The offering includes $750 million of series 2016A-1 bonds due 2017 to 2039, $190 million of series 2016A-2 taxable bonds due 2017 to 2027 and $60 million of series 2016A-3 bonds due 2017 to 2027.

Proceeds will finance capital expenditures.

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