Municipals cheapen along with Treasuries; Fed elects to retain target for short-term rates

By Sheri Kasprzak

New York, June 19 - Municipal yields weakened on Wednesday after the Federal Open Market Committee held its monthly meeting and Treasuries sold off in response, traders said.

"Treasuries are responding to FOMC, and we're following," said one trader reached after the FOMC held its meeting in the afternoon.

"We're off a touch, maybe 1 to 3 basis points. Compared to the way things went last week, we'll take it."

During its June meeting, the committee agreed to keep its target for short-term interest rates unchanged at 0% to 0.25%.

"We believe the Fed is and will be looking to regain some of the flexibility it has lost through its communication strategy and did so in the accompanying policy statement by noting that it believed the downside risks to the economy and labor market have diminished, but also keeping the line in that said it is prepared to increase or reduce the pace of its purchases," wrote Guy LeBas, chief fixed income strategist with Janney Montgomery Scott LLC.

Deal's yields adjusted

Yields were adjusted on the New York City Municipal Water Finance Authority's $347.21 million of series 2013EE water and sewer system second general resolution revenue bonds. Pricing for the bonds finalized on Tuesday.

The bonds (/AA+/AA+) were sold through Citigroup Global Markets Inc.

The bonds are due 2028, 2035 and 2047. The 2028 bonds have a 5% coupon and priced at 113.609. The 2035 bonds have a 4.125% coupon priced at 99.071 and a 5% coupon priced at 109.096. The 2047 bonds have a 4.25% coupon priced at 97.366 and a 5% coupon priced at 106.04.

The yield of the 5% 34-year maturity was adjusted upward by about 7 basis points to 4.25% compared to Monday's retail order period, said Alan Schankel, managing director with Janney. The yield of the 5% 2035 maturity, however, was lowered by 3 bps. The deal was downsized by $20 million.

Proceeds will be used to finance capital improvements to the city's water and sewer system as well as to retire commercial paper notes.

Illinois to bring $1.3 billion

Looking ahead to next week's offerings, the State of Illinois will bring $1.3 billion of series of June 2013 general obligation bonds through Wells Fargo Securities LLC, Siebert Brandford Shank & Co. LLC and Stifel, Nicolaus & Co. Inc.

The offering comes just after all three rating agencies downgraded the state's ratings and assigned negative outlooks, mostly due to the state's poorly funded pension system.

The bonds (A3/A-/A-) are due 2014 to 2038, and proceeds will be used to finance capital development, school construction and transportation projects.

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