Municipals had a firmer tone, but not enough to move benchmark yields, as the final new issues of the week priced with bumps in repricings amid a stronger U.S. Treasury market.
Refinitiv Lipper reported another week of $2 billion-plus inflows, with high-yield making up $654 million, buttressing the sector's strength. It marks the 19th consecutive week of inflows and the fifth over $2 billion.
U.S. Treasuries have been on a wild ride for the past five sessions, selling off, pushing the 30-year above 2% and then back down to 1.92% Thursday, near the yields from a week ago and the lows last hit in February. The 10-year also bounced from 1.42% Tuesday to 1.29% Thursday, the same as a week ago.
As triple-A benchmarks barely budged Thursday, municipal-to-UST ratios rose with the 10-year at 65% and the 30-year at 70%, according to Refinitiv MMD. ICE Data Services had the 10-year muni-to-Treasury ratio at 66% and the 30-year at 70%.
"Ratios at this point feel about right" for investors, a New York trader said. "As a lot of folks have said, the low-50s, 60s were likely an outlier. I'm not suggesting that we won't see fluctuation with them by a percentage point or three, but they feel appropriate for the market we're in now. I'm not sure how we can expect anything else given Treasuries and muni credit fundamentals. What's the alternative right now?"
Barring an unforeseen event, Oppenheimer Inc. expects the 10-year benchmark muni yield to "largely trade below 1% through much of the second half of the year with a year-end target range of 0.80%-1.00%."
"A weaker technical position and/or an accelerated tapering could move this range higher, while renewed momentum for higher taxes could generate a lower forecast," according to Jeff Lipton, managing director of credit research. "We expect ratios to stay within their current range through the balance of the year."
In the primary, Goldman, Sachs & Co. priced $811 million of forward delivery bonds for the Metropolitan Pier & Exposition Authority, Illinois, (/BBB+/BB+/AA-/). Bonds in 2024 with a 3% coupon yield 0.61% (callable 12/15/2023), 3s of 2025 at 0.77% (callable 12/15/2024), 4s of 2042 at 2.16%, 4s of 2047 at 2.29% and 4s of 2052 at 2.33% (callable 12/15/2031).
RBC Capital Markets priced and repriced for the Central Florida Expressway Authority (A1/A+/A+/) $200.9 million of senior-lien revenue bonds with bumps of three to nine basis points. Bonds in 2026 with a 5% coupon yield 0.47%, 5s of 2031 at 1.06%, 5s of 2035 at 1.23%. Bonds in 2033 to 2035 carry Assured Guaranty insurance.
Morgan Stanley & Co. LLC priced for the City of Clarksville, Tennessee, (Aa2//AA/) $187.725 million of water, sewer & gas revenue bonds. Bonds in 2026 with a 5% coupon yield 0.38%, 5s of 2031 at 0.93%, 5s of 2036 at 1.19%, 4s of 2041 at 1.48%, 5s of 2045 at 1.46% and 4s of 2051 at 1.73%.
Memphis, Tennessee, (Aa2///) sold $170 million of general improvement refunding bonds to BofA Securities. Bonds in 2023 with a 5% coupon yield 0.15%, 5s of 2026 at 0.44%, 5s of 2031 at 0.92%, 4s of 2036 at 1.38%, 4s of 2041 at 1.55% and 4s of 2046 at 1.70%. Callable 5/1/2031.
The Florida Department of Management Services (Aa1/AA+/AA+/) sold $131.1 million of certificates of participation to Citigroup Global Markets Inc. with 5s of 2022 at 0.12%, 5s of 2026 at 0.51%, 5s of 2031 at 1.01%, 3s of 2036 at 1.51% and 2s of 2040 at 2.10%.
Refinitiv Lipper reports $2.2B inflow
In the week ended July 14, weekly reporting tax-exempt mutual funds saw $2.238 billion of inflows, according to Refinitiv Lipper. It followed an inflow of $2.292 billion in the previous week.
Exchange-traded muni funds reported inflows of $484.952 million, after inflows of $330.746 million in the previous week. Ex-ETFs, muni funds saw inflows of $1.753 billion after inflows of $1.961 billion in the prior week.
The four-week moving average remained positive at $1.818 billion, after being in the green at $1.722 billion in the previous week.
Long-term muni bond funds had inflows of $1.570 billion in the latest week after inflows of $1.534 billion in the previous week. Intermediate-term funds had inflows of $263.452 million after inflows of $347.064 million in the prior week.
National funds had inflows of $2.100 billion after inflows of $2.091 billion while high-yield muni funds reported inflows of $654.351 million in the latest week, after inflows of $682.690 million the previous week.
NYC TFA BARBs saw good demand
The New York City Transitional Finance Authority said its issuance of about $583 million of tax-exempt fixed-rate building aid revenue bonds saw almost $469 million of orders from retail investors.
Institutions placed around $1.2 billion of priority orders, making the deal around 4.1 times oversubscribed.
Given the strong demand, yields were cut three to four basis points from 2034 through 2041, by three basis points in 2022, by two basis points in 2031 and 2032 and by one basis point in 2030. Final yields ranged from 0.10% in 2022 to 1.80% in 2041.
The tax-exempts were underwritten by book-running lead manager Loop Capital Markets with co-managers Jefferies and Siebert Williams Shank.
The TFA also competitively sold $230 million of taxables in a deal that attracted 11 bidders. JPMorgan Securities won with a true interest cost of 1.135%.
Proceeds from the sale will be used to refund certain outstanding bonds for savings.
Secondary trading and scales
Trading showed firmer prints. Maryland Department of Transportation 5s of 2022 at 0.07%-0.06%. New York Dormitory Authority 5s of 2022 at 0.08%. Charleston, South Carolina, 5s of 2023 at 0.14%.
New York UDC 5s of 2026 at 0.39%-0.38%. Georgia 5s of 2026 at 0.39%. Wisconsin 5s of 2027 at 0.52%.
Georgia 5s of 2029 at 0.65%. NYC water 5s of 2031 at 0.89%-0.88%.
Connecticut 5s of 2034 at 1.17%. Massachusetts water 5s of 2038 at 1.15%. Washington 5s of 2038 at 1.17%-1.16% versus 1.18%-1.15% Thursday. NYC Transitional Finance Authority 4s of 2038 at 1.43%. Los Angeles Department of Water and Power 5s of 2041 at 1.19% versus 1.22%-1.20% Wednesday.
Washington 5s of 2043 at 1.32%-1.31%. LA DWP 5s of 2046 at 1.33%-1.32%.
According to Refinitiv MMD, short yields were steady at 0.07% in 2022 and 0.11% in 2023. The yield on the 10-year sat at 0.84% while the yield on the 30-year stayed at 1.35%.
The ICE municipal yield curve showed bonds steady at 0.07% in 2022 and 0.11% in 2023. The 10-year maturity held at 0.86% and the 30-year yield at 1.35%.
The IHS Markit municipal analytics curve showed short yields at 0.07% and 0.10% in 2022 and 2023, respectively, with the 10-year steady at 0.84%, and the 30-year yield also unmoved at 1.35%.
Bloomberg BVAL was the only scale to see bumps, at 0.09% in 2022 (down one) and 0.11% while the 10-year fell two basis points to 0.84% and the 30-year fell one to 1.35%.
Treasuries made gains and equities were mixed after earlier losses in the day. The 10-year Treasury was yielding 1.295% and the 30-year Treasury was yielding 1.920% near the close. The Dow Jones Industrial Average gained 29 points or 0.08%, the S&P 500 lost 0.33% while the Nasdaq was up 0.24%.
Powell maintains his stance
Asserting he’s “not comfortable” with inflation where it is, Federal Reserve Board Chair Jerome Powell told the Senate Banking Committee the Federal Open Market Committee will continue to “reevaluate risks” if price pressures remain high.
Answering a question, Powell said when setting the 2% average inflation target rate “we didn’t tie ourselves to a formula.” The goal, he said, was to “anchor inflation expectations at 2%.”
“The challenge we’re confronting is how to react to this inflation which is larger than we had expected or that anybody had expected.” If it proves to be transitory, “it wouldn’t be appropriate to react, but as months go on and price pressures remain, “we have to reevaluate the risks it poses to inflation expectations.”
Given Powell’s testimony, “Concerns about a hawkish shift in tenor at the June FOMC meeting are overblown,” said Andrew Schneider, US Economist at BNP Paribas. “While the Fed has begun ‘thinking about’ tapering, we believe its bias remains for a prudent and patient policy approach, with the Fed largely welcoming signs of more sustained inflation and labor market recovery.
Powell “stood his ground” as could be expected, said Jason England, global bonds portfolio manager at Janus Henderson Investors. He expects the Fed will “continue to be patient” and ignore “noisy data” on inflation as long as employment remain depressed.
Economic indicators
New York state manufacturing activity “grew at a record-setting pace” in July, according to the Empire State Manufacturing Survey. The general business conditions index jumped to a record 43.0 from 17.4 in June.
Economists polled by IFR Markets anticipated a reading of 18.5.
Price indexes were “at or near recording highs, indicating that price increases remain significant.” Prices paid decreased to 76.8 from 79.8 and prices received gained to 39.4 from 33.3.
Manufacturing in the Philadelphia region expanded at a slightly slower rate in July, while prices gained at a slower rate, the Federal Reserve Bank of Philadelphia’s manufacturing report on business showed.
The general activity index fell to 21.9 in July from 30.7 in June.
Economists expected a 28.3 read.
The prices paid index declined to 69.7 in July from 80.7 in June. The prices received index dropped to 46.8 from 49.7.
Separately, initial jobless claims fell to 360,000 in the week ended July 10 from an upwardly revised 386,000 the week before, first reported as 373,000 claims.
Economists expected 360,000 claims in the week.
Continuing claims fell to 3.241 million in the week ended July 3, from an upwardly revised 3.367 million in the prior week, initially reported at 3.339 million.
Economists estimated 3.313 million continuing claims.
“Claims are now at the lowest in the pandemic era, suggesting layoffs are moderating as firms try and keep up with consumer demand,” said Scott Anderson, chief economist, Bank of the West Economics.
Also released Thursday, industrial production rose 0.4% in June, after a downwardly revised increase of 0.7% in May, first reported as a 0.8% gain.
Economists expected a 0.7% increase.
Capacity utilization inched up to 75.4% in June from a downwardly revised 75.1% in May, first reported as 75.2%.
Economists predicted a 75.6% level.
“Demand is there, but the problem continues to be sourcing the input components and the skilled workers that remain in short supply, though there is some evidence of incremental improvement in other data released this morning,” said Tim Quinlan and Sarah House, senior economists at Wells Fargo Securities.
Also released, import prices gained 1.0% in June after an upwardly revised 1.4% climb in May, originally reported as a 1.1% increase, while exports rose 1.2% in June after an unrevised 2.2% jump a month prior.
Economists anticipated import and export prices to each rise 1.2%.
Chip Barnett contributed to this report.
