Municipals ended the week and the month quietly as participants prepare for a supply and redemption increase in May, but even with some pressure felt this week, tailwinds remain for the market.
Rates rose this week by as much as six basis points on the 10-year, but on Friday, the benchmark remained below 1%. Given the rally earlier in the month and that participants began digesting federal aid, credit improvements and potential tax hikes, April ended on solid footing.
"Although tax-exempt valuations are clearly far from attractive, we do not expect any substantial muni correction ... . Even if rates sell off further, tax-exempts will likely follow, but should outperform, supported by a combination of low supply, strong inflows, heavy bond redemptions over the course of the summer; large cash cushions of mutual funds; and improving credit quality of municipal bonds," according to Barclays PLC in a Friday report.
"In the current environment ratios and relative valuations versus Treasuries simply matter a lot less, in our view. Any muni dips will likely be bought, thus will likely be short-lived," wrote Barclays strategists Mikhail Foux, Clare Pickering and Mayur Patel.
Municipal to UST ratios closed at 61% in 10 years and 69% in 30 years on Friday, according to Refinitiv MMD, while ICE Data Services had the 10-year at 60% and the 30 at 70%.
Triple-A benchmark yields were unchanged Friday.
Barclays noted that if yields do continue moving up, one part of the tax-exempt space might become more vulnerable:low-coupon bonds, "which are already trading very rich versus their high-coupon counterparts, as investors are looking to add extra yield to their portfolios."
They believe that higher taxes on capital gains for incomes above $1 million would negatively affect bonds trading below par, as their accretion to par will be taxed at a much higher rate. This could lead to issues needing higher coupons, especially out long to make up for the difference.
Tax issues certainly matter, as Kim Olsan, senior vice president at FHN Financial, notes.
"Due to tax filing considerations in play and month-end balancing, rates met some resistance in recent sessions and broad indices will finish out April shy of a 1% return," she said.
"That isn’t to say demand has waned — rather it’s moved from a hectic pace to a more measured one where not only spread matters but also actual rates. What this month has brought is a new paradigm for what constitutes 'spread.' Partly due to improving economics in many muni sectors that were more severely affected during the start of lockdowns and also a function of the absolute rate range, spread now has a new meaning."
That meaning, she said, is shown through looking at a year ago to now.
Following the month-long selloff last March/April, intermediate yields settled around 1.50% and low single-As and BBBs traded above 3% (a BBB-plus Arkansas hospital new issue priced in May 2020 brought 5s due 2030 at 3.02%).
"With a current 10-year back near 1%, BBB bonds have reacted in a more impressive way," she said. A sale of Baa3/BBB New York Dorm/Montefiore Medical Group 5s due 2031 (callable 2028) at 1.53% was a mere spread of +56/AAA.
"Limited availability of down-in-credit names is creating a catch-22 with more inquiry chasing less float," she said. "Returns are showing the demand: the BBB category has more than 200 basis points excess gain against the broad market this year."
Next week's calendar does little in the way of providing yield. New issuance grows to $9.9 billion for the week of May 3-7, up from $3.47 billion this week.
Pennsylvania, Massachusetts and Washington issuers lead the slate with various purpose GOs and Texas brings transportation paper while California provides water bonds.
There are $6.568 billion of negotiated deals versus $2.491 billion this week and competitive loans total $3.348 billion compared with $976.4 million this week.
Secondary trading was light Friday. New York City 5s of 2022 traded at 0.11%; Maryland 5s of 2024 at 0.22%. NYC TFA 5s of 2026 traded at 0.52% versus 0.45%-0.44% on 4/22. Charleston, South Carolina 5s of 2027 traded at 0.67%. Tennessee 5s of 2027 at 0.71%. Washington 5s of 2029 at 0.91%-0.93%. New York Dorm PIT 5s of 2031 at 1.30%. Fairfax County, Virginia 4s of 2031 at 1.03%. Wisconsin 5s of 2033 at 1.19%.
Scales
On Refinitiv MMD’s AAA benchmark scale, yields were steady across the curve. Yields were 0.08% in 2022 and 0.11% in 2023. The yield on the 10-year rose four basis points to 0.99% and the 30-year rose three to 1.60%.
The ICE AAA municipal yield curve showed yields at 0.08% in 2022 and 0.11% in 2023, the 10-year at 0.99%, while the 30-year sat at 1.59%.
The IHS Markit municipal analytics AAA curve showed yields steady at 0.10% in 2022 and 0.13% in 2023, the 10-year at 0.96% and the 30-year at 1.60%.
The Bloomberg BVAL AAA curve showed yields steady at 0.06% in 2022 and 0.08% in 2023, with the 10-year sat at 0.96%, and the 30-year yield at 1.59%.
The three-month Treasury note was yielding 0.02%, the 10-year Treasury was yielding 1.64% and the 30-year Treasury was yielding 2.31% near the close. Equities rebounded from Wednesday with the Dow gaining 231 points, the S&P 500 rising 0.72% and the Nasdaq up 0.36% near the close.
Income report: nothing to see here
The recently distributed $1,400 stimulus checks helped March personal income and spending soar, suggesting it will be months before economists get an accurate read and can determine whether inflation will persist.
Personal income rose 21.1% in March after sliding 7.0% in February, while disposable income climbed 23.6% after falling 7.9%. Spending rose 3.6% after a 1.2% decline.
The PCE price index rose 0.5% in March after a 0.2% gain in February, while the core PCE price index increased 0.4% after a 0.1% rise a month earlier. Compared to a year ago, the PCE price index jumped 2.3%, while the core rose 1.8%.
Economists polled by IFR Markets expected a 20.0% gain in income, a 4.2% rise in consumption, a 0.3% climb in core PCE and 1.8% growth in core PCE on an annual basis.
The year-over-year price indexes “will rise significantly further in April, reflecting their monthly declines of 0.5% and 0.4% in April 2020,” noted Mickey Levy, Berenberg chief economist for the U.S., Americas and Asia. PCE could grow 3% and the core about 2.5%, he said. “Although these sharp spikes will dissipate, we anticipate the robust growth in aggregate demand will support more sustained inflation pressures.”
But the Federal Reserve has basically said it expects these temporary inflation gains and will discount them.
“The personal income and spending data was all about the effects of the stimulus checks,” said Ed Moya, senior market analyst, at OANDA. “Personal income will obviously decline over the next couple of months, so that means we will have to wait until deep into the summer to get an accurate reading.”
Food and oil prices were the largest reason for the increase in prices, he added. “Inflation is picking up but it is still too early to make the argument if it is transitory.”
Levy said next month’s numbers, which will suggest inflation above 2%, “will draw more attention to the issue of whether the rise in inflation is temporary or the beginning of a sustained upward trend.”
And while the Fed will discount these numbers, “there is growing evidence that inflation is heating up now with business and consumer expectations moving higher and supply chain problems persisting amid an expected boom in consumer demand,” write Wells Fargo senior economist Tim Quinlan and economist Shannon Seery. “That said, it's too soon to know if current price pressure is the effects of the reopening that may soon subside or will in fact lead to sustained higher price growth past the sharp bounce in activity.”
Stimulus checks have padded savings accounts, said Diane Swonk, chief economist at Grant Thornton. “Look for more consumers to tap those funds as more vaccinations ramp up and warmer temperatures reopen outdoor venues.”
Separately, the Chicago Business Barometer gained to 72.1 in April — its highest reading since December 1983 — from 66.3 in March.
Economists expected a reading of 65.5.
The new orders index gained to its best level in almost seven years, while the production index climbed to its highest since January 2018, and the orders backlog index soared to levels not seen since December 1973.
Elsewhere, the University of Michigan consumer sentiment index gained to 88.3 in the final April read from 84.9 in March. The index stood at 71.8 in April 2020.
Economists estimated a reading of 87.5.
The current conditions index rose to 97.2 in April from 93.0 in March, while the expectations index climbed to 82.7 from 79.7.
Also released Friday, the employment cost index climbed 0.9% in the first three months of the year after a 0.7% the prior quarter, wages and salaries rose 1.0% after a 0.8% increase a quarter before, and benefits costs gained 0.6% after rising 0.6% in the prior three-month period.
Economists anticipated the index would rise 0.7%.
“Overall compensation growth is essentially flat compared with pre-crisis levels,” Grant Thornton’s Swonk said. “Gains were concentrated in wages and salaries and in one sector of the economy: the financial services sector, where the pace of wage gains more than doubled on a year-over-year basis.”
She added, “That is one of many reasons that the Federal Reserve remains optimistic that any flare in inflation we experience will not become entrenched; we don’t have the wage gains to support a sustained rise in prices.”
Competitive market
On Tuesday, Massachusetts (/AA//) is set to sell $200 million and $400 million general obligation bonds at 11 and 11:30 a.m. eastern.
The Port Authority of New York and New Jersey is set to sell $187 million of consolidated bonds at 10:45 a.m.
On Wednesday, Pennsylvania (Aa3//AA-/) is set to sell $1.04 billion of tax-exempt and taxable general obligation bonds at 11 a.m.
Seattle, Washington (/AAA//) is set to sell $165 million of tax-exempt and taxable general obligation bonds. The first, $144.8 million of exempts at 10:45 a.m. and the second, $21.4 million of taxables, at 11:15 a.m.
On Thursday, Milwaukee, Wisconsin (/A/AA-/) is set to sell $118.9 million of general obligation promissory notes at 11 a.m., $30.9 million of general obligation corporate purpose bonds at 11 a.m., $21.9 million of taxable general obligation promissory notes at 11:30 a.m., and $13.6 million of taxable general obligation corporate purpose bonds at 11:30 a.m.
Negotiated pricings
The Main Street Natural Gas, Inc. (Aa2//AA/) is on the day-to-day calendar with $747.1 million of gas supply revenue bonds, serials 2022-2028, term, 2051, puts due 12/1/2028. RBC Capital Markets Inc. is lead underwriter.
The Washington State Housing Finance Commission (/BBB+//) is set to price $571.961 million of social municipal certificates Series 2021-1 Class X, serial 2035, on Thursday. Citigroup Global Markets Inc. is head underwriter.
The North Texas Tollway Authority (A2/A//) is set to price $448.7 million of system revenue and refunding second tier bonds, Series 2021B. J.P. Morgan Securities LLC will run the books.
The North Texas Tollway Authority is also set to see $402.9 million of system revenue and refunding first tier taxable bonds, Series 2021A, serials 2026-2038, term, 2043, on Wednesday. RBC Capital Markets is head underwriter.
The California Infrastructure and Economic Development Bank (A2///) is set to price $281.4 million of California Academy of Sciences index mode sustainability revenue bonds on Wednesday. Series 2018A, Series 2018B, Series 2018C and Series 2018D remarketing. Wells Fargo Securities is bookrunner.
The State of California Department of Water Resources (Aa1/AAA//) is set to price $264 million of taxable Central Valley Project Water System revenue bonds on Wednesday. Morgan Stanley & Co. LLC is lead underwriter.
The State of California Department of Water Resources (Aa1/AAA//) is also set to price on Wednesday $212.2 million of Central Valley Project Water System Revenue Bonds, Series BD. Morgan Stanley & Co. LLC will also run the books.
The state of Ohio (Aa2/AA/AA/) is set to price on Wednesday $228.6 million of capital facilities lease-appropriation bonds, $150 million of Series MHF, serials 2022-2031 and $78.6 million of Series ABF, serials 2022-2041. Loop Capital Markets will run the books.
The Northside Independent School District, Texas, (Aaa//AAA/) is set to price on Tuesday $212.5 million of Unlimited Tax School Building and Refunding Bonds, Series 2021, Permanent School Fund Guarantee Program. J.P. Morgan Securities LLC is lead underwriter.
The Iowa Finance Authority (Aaa/AAA//) is set to price on Tuesday $209.2 million of state revolving fund revenue green bonds, Series 2021A. Piper Sandler & Co. is head underwriter.
The Maine Health and Higher Educational Facilities Authority (A1/AA/A+/) is set to price on Wednesday $157 million of taxable revenue bonds, Series 2021B, serials 2022-2036, term 2043. Raymond James & Associates, Inc. will run the books.
The Wisconsin Housing and Economic Development Authority (Aa3/AA//) Is set to price $156.3 million of housing refunding revenue bonds, non-AMT, Series 2021 A, $75.5 million of serials 2023-2059, and Series 2021 B, $80.8 million, serials 2045-2051. Wells Fargo Securities is head underwriter.
The L’Anse Creuse Public Schools, Macomb County, Michigan, (/AA//) is set to price $149.7 million of taxable 2021 refunding bonds, insured by the State of Michigan School Building Qualified Loan Program. J.P. Morgan Securities LLC is head underwriter.
The Riverside Community College District of Riverside and San Bernardino Counties, California, (Aa1///) is set to price $140.6 million of 2021 general obligation refunding bonds on Wednesday. Piper Sandler & Co. is bookrunner.
The American Museum of Natural History (Aa3/AA//) is set to price $135 million of taxable sustainability corporate CUSIP bonds, term 2052. Morgan Stanley & Co. LLC is lead underwriter.
El Paso, Texas, (/AA/AA/) is set to price on Thursday $146.5 million of taxable and tax-exempt general obligation bonds, $105.6 taxable, $40.9 exempts. El, Paso will also price $78 million of exempt certificates of participation. J.P. Morgan Securities LLC is bookrunner.
The School Board of Palm Beach County, Florida, (Aa3//AA-/) is set to price $112.9 million of tax-exempt and taxable certificates of participation. J.P. Morgan Securities LLC is lead underwriter.
