Municipal triple-A yields rose three to four basis points on Friday, losing up to half the gains they made Thursday, as U.S. Treasuries saw losses throughout the day but ended flat. Equities rallied hard after the European Union imposed sanctions on Russia and the U.S. indicated it would follow suit.
Municipals had a hard time keeping up with the volatility in UST, underperforming the moves late in the day after outperforming their taxable counterparts on Thursday.
The municipal to UST ratio five-year ended Friday at 72%, 81% in 10 and 86% in 30, according to Refinitiv MMD's 3 p.m. read. ICE Data Services had the five at 71%, the 10 at 84% and the 30 at 88% at a 4 p.m. read.
Secondary trading was a mixed bag with some trades pointing to a much weaker market while a few firmer trades exchanged hands. Thursday's bids-wanteds hit the highest level at $1.751 billion since March 2020's COVID-19 selloff began.
All this comes as month-end positioning is in full force. The turmoil in Ukraine is compounding inflation concerns and has led to a flatter UST curve with munis along for the ride.
“The muni yield curve has continued flattening, with 10s30s and 10s20s yield differentials already reaching their lowest points in recent history,” they said. “The 5s10s curve was flatter during the peak of the COVID-19 crisis, pointing to the relative cheapness of the ten-year part of the municipal curve, which we continue to favor.”
Barclays strategists said lower yields should help high-quality tax-exempts and put a temporary halt to fund outflows, but they may also encourage issuers to become more active in accessing the primary market, which would provide a counterbalance.
Bond Buyer 30-day visible supply is at $11.14 billion while net negative supply is at $4.735 billion, per Bloomberg data.
The new-issue calendar for the upcoming week is $5.45 billion, with $3.30 billion of negotiated deals and $2.14 billion of competitive loans.
The largest deal of the week comes from the New York City Municipal Water Finance Authority with $793.83 million. Other notable deals include $500 million of taxable corporate CUSIPs from the Massachusetts Institute of Technology, and two deals — $300 million and $270 million of water system revenue bonds — from the Los Angeles Department of Water and Power.
Highly rated Baltimore County, Maryland comes with four competitive loans along with Springdale Public Schools, Arkansas; Omaha Transportation Utilities District, Nebraska; and Virginia Transportation Board.
Credit spreads are now relatively tight since there has been very little decompression, according to Barclays strategists. Nevertheless, they said given the present economic situation, lower-rated high-yield and investment grade yields may face further pressure in the near future.
Until recently, they said the taxable muni market has been performing quite well. The index spread has remained almost steady for the month of February, despite weak secondary liquidity, which contributes to stale values for less liquid bonds, while the corporate index has widened by 16 basis points during the same time period.
The yield differential between the two indices is over four standard deviations above its 12-month average, the biggest since the COVID-19 pandemic began, they said. The taxable muni market began to broaden on Thursday, probably due to increased issuance, although it still has an opportunity to catch up to corporates, they said.
Secondary trading
University of Texas 5s of 2024 at 1.24%. New York City TFA 5s of 2025 at 1.39% versus 1.41% Thursday. Wisconsin trans 5s of 2026 at 1.41%.
Florida PECO 5s of 2028 at 1.52% versus 1.48% Thursday. New York City TFA 5s of 2028 at 1.69%. Washington 5s of 2029 at 1.59%. Charleston, South Carolina 4s of 2030 at 1.58%.
Georgia 5s of 2033 at 1.67%. New York Dorm PITs 5s of 2033 at 1.97%-1.95%.
New York City 5s of 2037 at 2.14%. California 5s of 2037 at 1.83%-1.82% versus 1.86% Thursday. California 5s of 2041 at 1.91%-1.90% versus 1.99% Thursday.
Los Angeles DWP 5s of 2046 at 2.22% versus 2.19%-2.15% Thursday.
Triborough Bridge and Tunnel MTAs 5s of 2051 at 2.33% versus 2.30% Thursday. LA DWP 5s of 2051 at 2.30%, the same as Wednesday.
AAA scales
Refinitiv MMD's scale was cut three to four basis points at the 3 p.m. read: the one-year at 0.81% (+3) and 1.08% (+3) in two years. The five-year at 1.36% (+3), the 10-year at 1.60% (+3) and the 30-year at 1.98% (+4).
The ICE municipal yield curve was cut two to three basis points: 0.83% (+3) in 2023 and 1.12% (+2) in 2024. The five-year at 1.35% (+2), the 10-year was at 1.64% (+2) and the 30-year yield was at 2.02 (+2) in a 3 p.m. read.
The IHS Markit municipal curve was also cut: 0.82% (+4) in 2023 and 1.09% (+4) in 2024. The five-year at 1.36% (+4), the 10-year at 1.59% (+4) and the 30-year at 1.96% (+2) at a 4 p.m. read.
Bloomberg BVAL saw cuts: 0.82% (+2) in 2023 and 1.05% (+2) in 2024. The five-year at 1.37% (+3), the 10-year at 1.61% (+3) and the 30-year at 1.97% (+2) at a 4 p.m. read.
Treasuries ended flat while equities rallied.
The two-year UST was yielding 1.568%, the five-year was yielding 1.864%, the 10-year yielding 1.966%, and the 30-year Treasury was yielding 2.281% at the close. The Dow Jones Industrial Average gained 843 points or 2.51%, the S&P was up 2.24% while the Nasdaq gained 1.64% at the close.
Primary to come:
New York City Municipal Water Finance Authority (Aa1/AA+/AA+/) is set to price Tuesday $792.83 million of water and sewer system second general resolution revenue bonds, Fiscal 2022 Series EE, serials 2028-2031 and 2033-2034, terms 2039 and 2045. Barclays Capital.
Massachusetts Institute of Technology (Aaa/AAA//) is set to price $500 million of taxable corporate CUSIP bonds, Series H. J.P. Morgan Securities.
Los Angeles Department of Water and Power (Aa2//AA/AA+) is set to price $300 million of water system revenue bonds, 2022 Series A, consisting of $100 million of Series A1, serial 2052; $100 million of Series A2, serial 2053; and $100 million of Series A3, serial 2054. Citigroup Global Markets.
Los Angeles Department of Water and Power (Aa2//AA/AA+) is also set to price $270 million of fixed-rate water system revenue bonds, 2022 Series B, serials 2023-2025 and 2035-2043. Wells Fargo Bank.
Arlington Higher Education Finance Corporation, Texas (/AAA//) is set to price $164.27 million of education revenue bonds, Series 2022, serials 2022-2052, insured by Permanent School Fund Guarantee Program. RBC Capital Markets.
The Arizona Sports and Tourism Authority (A1//A/) is set to price Tuesday $146.25 million of senior revenue and revenue refunding bonds, Series 2022, serials 2024-2036. RBC Capital Markets.
Competitive:
Springdale Public Schools, Arkansas (Aa2///) is set to sell $171.345 million of refunding and construction bonds, Series B, at noon eastern Tuesday.
Omaha Metropolitan Utilities District, Nebraska (Aa2//AA+/) is set to sell $118.56 million of gas system revenue bonds, Series 2022, at 10 a.m. Tuesday.
Baltimore County, Maryland is set to sell $100 million of certificates of participation, Series 2022, at 10:45 a.m. eastern Wednesday.
Baltimore County, Maryland is set to sell $225 million of general obligation bonds consolidate public improvement bonds – 2022 Series at 10:15 a.m. Wednesday.
The Virginia Transportation Board (Aa1/AA+/AA+/) is set to sell $263.985 million of transportation capital projects revenue and refunding bonds, Series 2022, at 10:30 a.m. Wednesday.
Baltimore County, Maryland is set to sell $150 million of general obligation bond anticipation notes Metropolitan District anticipation notes, 2022 Series, at 10:15 a.m. eastern Thursday.
The Fed's reaction
"Financial markets will remain on edge as this is just the beginning of the War in Ukraine, so the dip buying that occurred over the past two days will run out of steam," said Edward Moya, senior market analyst at OANDA.
The release of the Fed’s monetary policy report reiterated that interest rate hikes will soon be appropriate, Moya said, adding the report noted that some supply bottleneck issues could remain for some time.
Next week, Fed Chair Powell will deliver his semi-annual testimony to both the House and Senate and after hearing from Powell, "investors will have a better understanding if they can completely write off that half-point rate increase in March."
The Fed’s "favorite inflation gauge" hit the highest levels since 1983, Moya said, noting the core personal consumption expenditure index rose 5.2% in January from a year earlier, inline with expectations and well above the prior 4.9% reading.
"The likely impact from the Russian invasion of Ukraine could deliver another wave of pricing pressures that might make policymakers a little more anxious in tackling inflation," he said.
