After a full seven trading sessions of volatility in U.S. Treasuries and equities, municipals ended Friday quiet, little changed, and again ignored the moves in other markets.
Treasuries saw yields fall and equities sold off on lower-than-expected employment figures while triple-A municipal benchmark yields were steady to firmer by a basis point in spots.
This led to ratios rising with the five-year muni to UST ratio at 52%, the 10 at 79% and the 30 at 88%, according to ICE Data Services. Refinitiv MMD's 3 p.m. read had them at 53% in five years, 76% in 10 and 88% in 30.
Investors will be greeted by a $17 billion-plus new-issue calendar on Monday, with $13.748 billion of negotiated sales and competitive deals at $3.864 billion.
The calendar is led by large California issues including $4.287 billion of taxable and exempts from the Golden State Tobacco Securitization Corp., $1.185 billion of taxable toll road refunding bonds from the San Joaquin Hills Transportation Corridor Agency, $476.715 million of San Francisco Bay Area Toll Bridge revenue bonds from the Bay Area Toll Authority and $524.97 million of taxable general obligation refunding bonds from the San Diego Community College District, among others.
The Dormitory Authority of the State of New York added a $2.469 billion of personal income tax revenue bonds consisting of $2.141 billion of tax-exempts and $328.08 million of taxables on Friday afternoon.
Illinois' Sales Tax Securitization Corp. is coming with $1.067 billion of taxable and exempt second lien sales tax securitization bonds while the Massachusetts Water Resources Authority will bring $694.09 million of taxable general revenue refunding green bonds.
What's to come in 2022
While the year is not over yet, 2021 seems to be turning out largely as expected for municipals, according to Barclays PLC.
Barclays strategists Mikhail Foux, Clare Pickering and Mayur Patel said munis are having a very robust year — at least when compared to other fixed-income asset classes — as the U.S. economy recovers.
The market has performed well, but its total return performance has been hindered by higher rates, they said. Given this, even 1% to -1.5% total returns for high-grade munis “does not look too bad” and are in line with Barclays' year-end projections.
“In the first half, the market was overly optimistic about much higher corporate and individual tax rates, driving MMD-UST ratios to their all-time lows, but once it came to the realization that such rates might not come to fruition, muni valuations relative to Treasuries eased up a bit,” they said.
While their high-grade outlook was slow at the start of the year, they were more optimistic about municipal high yields. The high-yield sector has outperformed forecasts this year, making it the top-performing fixed-income asset class in the U.S., the report said.
“We think, however, that it will be very difficult to match this year's performance in 2022, and all signs point to a much harder year ahead for munis and most other fixed-income asset classes,” they said.
On one hand, the market will be confronted with rising inflation, tapering and possibly even rate hikes in the second half of the year. But on the other, the U.S. economy will continue to recover, with gross domestic product nearing 4% and inflation slowing in the second half of the year, while Treasury yields are unlikely to fall much further from present levels, the report said. More rate volatility is forecast, particularly in the first half of 2022, although the market will likely settle as the year proceeds, according to strategists.
“Even though market technicals should remain largely supportive, and municipal credit, at least for now, is in very good shape, we do not see much potential upside. Munis are still rich to Treasuries, and we expect ratios and credit spreads to move somewhat higher next year,” they said.
As a result, they anticipate lower municipal returns next year. At present values, the asset class will have a tougher time cushioning any rate volatility, thus portfolio positioning will be crucial.
Secondary trading
Anne Arundel County, Maryland, 5s of 2022 at 0.16%. Minnesota 5s of 2023 at 0.26%. Georgia 5s of 2023 at 0.21%.
Montgomery County, Maryland, 4s of 2024 at 0.36%. Washington Suburban Sanitation District 5s of 2024 at 0.29%. Washington 5s of 2025 at 0.48%. Louisiana 5s of 2026 at 0.60%.
California 5s of 2027 at 0.81%. Wisconsin 5s of 2028 at 0.83%. Alexandria, Virginia, 5s of 2029 at 0.96%. Alexandria 5s of 2031 at 1.04%-1.03% (1.04% original).
Los Angeles DWP 5s of 2036 at 1.22%. New York UDC 5s of 2036 at 1.38%.
Ohio water green 5s of 2046 at 1.46%. LA DWP 5s of 2048 at 1.55%. Oklahoma water 5s of 2051 at 1.61% (original).
AAA scales
Refinitiv MMD's scale was unchanged: the one-year at 0.15% and 0.24% in 2023. The 10-year sat at 1.03% and at 1.48% in 30.
The ICE municipal yield curve showed yields unchanged at 0.17% in 2022 and up one to 0.28% in 2023. The 10-year maturity fell one basis point to 1.04% and the 30-year yield fell one basis point to 1.49%.
The IHS Markit municipal analytics curve was steady: 0.17% in 2022 and at 0.25% in 2023. The 10-year was at 1.02% and the 30-year at 1.49% as of a 3 p.m. read.
The Bloomberg BVAL curve was steady at 0.17% in 2022 and 0.22% in 2023. The 10-year yield fell one basis point to 1.04% and the 30-year yield fell one to 1.48%.
Treasuries rallied and equities sold off.
The five-year UST was yielding 1.128%, the 10-year at yielding 1.352%, the 20-year at 1.771% and the 30-year Treasury was yielding 1.685% at 3:30 p.m. The Dow Jones Industrial Average lost 208 points or 0.58%, the S&P was down 1.30% while the Nasdaq lost 2.43% at 3:30 p.m. eastern.
Refinitiv Lipper reports $36M inflow
In the week ended Dec. 1, weekly reporting tax-exempt mutual funds saw $36.005 million of inflows, Refinitiv Lipper reported Thursday. It followed an inflow of $719.772 million in the previous week.
Exchange-traded muni funds reported inflows of $37.124 million, after outflows of $13.56 million in the previous week. Ex-ETFs, muni funds saw outflows of $1.1 million of following $719.772 million of inflows in the prior week.
The four-week moving average remained positive at $1.013 billion, after being in the green at $1.155 billion in the previous week.
Long-term muni bond funds had inflows of $120.353 million in the latest week after inflows of $745.065 million in the previous week. Intermediate-term funds had outflows of $14 million after inflows of $244.302 million in the prior week.
National funds had inflows of $112.065 million after inflows of $679.134 million while high-yield muni funds reported inflows of $53.75 million in the latest week, after inflows of $407.652 million the previous week.
Mixed views of a mixed employment report
There’s not total agreement about Friday’s employment report or what it will mean to the Federal Open Market Committee when they meet on December 14 and 15.
While most have called the report weak based on the addition of 210,000 nonfarm payrolls jobs in November (economists polled by IFR Markets expected 653,000), others point to the drop in the unemployment rate to 4.2% and the rise in the participation rate as factors that offset the lower-than-expected headline number.
“Payroll gains in November were disappointing, missing expectations by a significant margin,” said Veneta Dimitrova, senior U.S. economist at NDR. “Even adjusting for the upward revisions in the previous two months, the employment report was a miss.”
“But the details paint a more positive picture,” said James Knightley, ING chief international economist.
“The jobs report was a mixed bag, which likely raises more questions than provides answers,” said Marvin Loh, senior global macro strategist for State Street.
The report “should be taken with a grain of salt,” said Grant Thornton Chief Economist Diane Swonk. “The establishment data has not only consistently been revised up in recent months as more data became available, but it is increasingly hard to seasonally adjust the data given the distortions created by the pandemic. The number swings are too large to capture with the old rules of thumb used to make those adjustments.”
Scott Ruesterholz, a portfolio manager at Insight Investment, agreed. “The deeper one digs into today’s report, the stronger it looks.” He pointed to household employment and the participation rate. “Without seasonal adjustments, jobs growth was nearly 800k with adjustments weighing heavily on sectors like retail,” he said. “Given the unique nature of an economic reopening amid a pandemic, past seasonal trends could be somewhat distorted.”
Despite the headline figure’s “significant miss,” David Kelly, chief global strategist at J.P. Morgan Asset Management, said, “the overall narrative does not change — economic momentum remains strong in spite of the economy rapidly running out of labor resources.”
So how will the Fed see it?
“The Fed may view this as a positive employment report as minority unemployment improved significantly and the participation rate is now only 1.5 percentage points lower than in February 2020,” said Edward Moya, senior market analyst at OANDA. “Fed rate hike expectations are settling around two rate hikes next year.”
And while labor participation increased in November, it remains below pre-pandemic levels. The “report showed some improvement in prime-age participation, but not enough to ease tight labor market conditions,” said NDR’s Dimitrova. While Omicron poses “a near-term downside risk,” she expects taper to be accelerated, with liftoff possible next summer.”
The report will likely give the Fed confidence in a strong labor market recovery, Insight’s Ruesterholz said. “Over this past week, there has been building consensus from Fed officials that tapering should be accelerated in December. We do not expect this jobs report to derail that.”
Without a major COVID issue from Omicron “or a surprisingly poor CPI report next week, a doubling of the taper pace to $30 billion in December is our base case,” Ruesterholz said. “This would mean taper ends in March 2022, which would position the Fed to lift off in the summer of 2022, though the exact timing of liftoff will depend on how employment and inflation develop over the next six months.”
ING’s Knightley also noted the Fed’s “clear appetite to normalize policy more quickly.” Inflation figures could “push close to 7% next week,” he said, so expect the Fed to taper $30 billion a month starting in “January and the realistic prospect of three rate hikes in 2022 — Omicron permitting.”
The acceleration of taper will be approved by the FOMC this month, Grant Thornton’s Swonk predicted, with taper complete by May. “That will leave the door open for a liftoff in rates in June.”
While Fed Chair Jerome Powell made it clear the Fed will discuss accelerating taper at its coming meeting, the employment numbers “gives the Committee an out to perhaps punt to its January meeting,” said Wells Fargo Securities Senior Economist Sarah House and Economist Michael Pugliese. The report, they said, “leaves the FOMC in a bit of a gray zone,” since several Fed leaders have talked about speeding up the taper and this “was a clear disappointment in that nonfarm payrolls were well-below consensus expectations.”
Further, they note, slower wage growth could “slightly ease some concerns about a wage-price inflation spiral,” House and Pugliese said. “That said, Fed officials have stressed the importance of labor supply growth, and labor force growth finally showed some signs of a pickup in November.”
The pandemic may have changed the structure of the labor market, said J.P. Morgan’s Kelly, and “pre-pandemic levels of employment may be inappropriate when thinking about the Fed’s full employment objective.”
Looking past the headline, he said, “the pace of recovery remains very rapid and today’s report may well strengthen the Fed’s resolve to consider a faster tapering of bond purchases when they meet on December 14 and 15.”
Besides the headline, State Street’s Loh said, “especially disappointing was the loss of retail jobs and significantly slower hiring from leisure categories, sending signals that structural employment changes are starting to emerge in retailers, while the resurgent virus continues to impact mobility.”
Those trends may continue depending on the severity of Omicron, he added. But there were positives to the report too. “The gain in wages also takes a bit of pressure off the Fed, with average hourly earnings rising a smaller than expected 0.3%, at least temporarily relieving some of the concern that strong wage gains would contribute to the inflation discussion,” Loh said.
Of course, the caveat that this is only one read “that may yet be reversed,” he said, “the Fed’s concern over inflation has likely not worsened.”
Expect an accelerated taper, ending in spring, Loh said, but “the rate hike discussion will remain in flux however, particularly if future jobs reports continue to send mixed signals.”
It remains unclear how COVID “has structurally altered the employment landscape, and Omicron may further obfuscate that understanding,” he said. “Rate hikes are still firmly priced to begin by mid-year 2022, with a flattening of the curve the prevalent response from the rate market, which hints at policy mistake concerns that inflation is forcing their hand at a time when jobs and demand may be challenged.”
The household survey showed 1.1 million jobs added combined with a 600,000 rise in the labor force is “particularly interesting,” according to Steven L. Skancke, chief economic adviser at Keel Point and former White House and Treasury Department staff member.
“With record tightness in labor markets — 0.7 unemployed persons for every job opening — labor force growth is important,” he said. “While the discrepancy between jobs growth in the payroll survey and the household survey raises some questions, positive movement in labor force growth is especially encouraging.”
Despite fewer workers GDP has surpassed February 2020 levels, Skancke said. “This gap in payroll employment is important to the Fed in achieving full employment, but the new 4.2% unemployment rate is very close to the Fed’s 3.8% ‘natural rate of unemployment’ as a goal of full employment. So, it will be easy for the FOMC in accelerate its taper of bond-buying at its December 2021 meeting.”
Primary to come
The Golden State Tobacco Securitization Corp. is set to price Tuesday $2.747 billion of senior taxable current interest bonds, consisting of $2.235 billion of Series 2021A-1, serials 2022-2032, terms 2036, 2041 and 2050 and $512.5 million of subordinate taxable Series 2021B-1, terms 2031 and 2050. Jefferies.
The Golden State Tobacco Securitization Corp. is also set to price Tuesday $1.445 billion of tobacco settlement asset-backed bonds, Series 2021B-2 subordinate capital appreciation bonds, term 2066. Jefferies.
The San Joaquin Hills Transportation Corridor Agency (/A/BBB/) is set to price Wednesday $1.185 billion of taxable senior lien tolls road refunding revenue bonds, Series 2021A and Series 2021B. Goldman Sachs & Co.
The Sales Tax Securitization Corp., Illinois, (/AA/AA-/AA+/) is set to price Wednesday $791.070 million of taxable second lien sales tax securitization bonds, Series 2021B. Loop Capital Markets.
The Sales Tax Securitization Corp. (/AA/AA-/AA+/) is also set to price Wednesday $276.335 million of second lien sales tax securitization bonds, Series 2021A. Loop Capital Markets.
The Massachusetts Water Resources Authority (Aa1/AA+/AA+//) is set to price Thursday $694.09 million of taxable general revenue refunding green bonds, 2021 Series C, serials 2022-2036, terms 2041 and 2044. Citigroup Global Markets.
The Bay Area Toll Authority, California (Aa3/AA/AA//) is set to price Monday $300 million of San Francisco Bay Area Toll Bridge revenue bonds, 2021 Series F-2. Citigroup Global Markets.
The Bay Area Toll Authority (Aa3/AA/AA//) is also set to price Tuesday $276.715 million of San Francisco Bay Area Toll Bridge revenue bonds, consisting of $100 million of 2021 Series D (term rate) and $176.715 million of 2021 Series E (index rate). J.P. Morgan Securities.
San Diego Community College District (Aaa/AAA//) is set to price Tuesday $524.97 million of taxable general obligation refunding bonds, serials 2022-2037, term 2041. RBC Capital Markets.
The Metropolitan Atlanta Rapid Transit Authority (Aa2/AA+//) is set to price Wednesday $381.805 million of taxable sales tax revenue refunding bonds, Series 2021D (green bonds). Goldman Sachs & Co.
The Indiana Finance Authority (Aaa////) is set to price Tuesday $375 million of environmental improvement revenue bonds, Series 2021 (Fulcrum Centerpoint LLC Project), serial 2045. Morgan Stanley & Co.
Oregon Health and Science University (Aa3/AA-/AA-//) is set to price Thursday $334.115 million of revenue green bonds, Series 2021A. J.P. Morgan Securities.
The New York City Housing Development Corp. (Aa2/AA+///) is set to price Wednesday $319.725 million of corporation multi-family housing revenue bonds, consisting of $137.25 million, 2021 Series K-1 (sustainable development bonds), serials 2026-2033, terms 2036, 2041, 2046 and 2051 and $182.475 million of 2021 Series K-2 (sustainable development bonds), term 2060. Jefferies.
The New York City Housing Development Corp. (Aa2/AA+//) is set to price Wednesday $100 million of taxable index floating rate sustainable development multi-family housing revenue bonds, 2021 Series L. Wells Fargo Corporate & Investment Banking.
The California Municipal Finance Authority (A3/A-//) is set to price Tuesday $395.855 million of Community Health System revenue bonds, consisting of $261.845 million of Series 2021A, serials 2025-2041, terms 2046 and 2051 and $134.01 million of Series 2021B, serials 2022-2036, term 2046. Citigroup Global Markets.
Vernon, California, (Baa2/BBB+//) is set to price Tuesday $237,765 million of electric system revenue bonds, consisting of $184.875 million of 2021 Series A and $52.89 million of forward delivery 2022 Series A . Goldman Sachs & Co.
The National Finance Authority (Baa3///) is set to price Tuesday $184.9 million of taxable federal lease revenue bonds (SSA Birmingham Project), serial 2028. Oppenheimer & Co.
Chicago (/BBB+/BBB-/A/) is set to price Tuesday $183.015 million of general obligation bonds, Series 2021A. Loop Capital Markets.
California Municipal Finance Authority Special Finance Agency is set to price Monday $166.925 million of essential housing revenue bonds, consisting of $97.5 million of Series 2021A-1 senior bonds, term 2061 and $69.425 million of Series 2021A-2 junior bonds, term 2052 (Skycrest Apartments). Jefferies.
Andover, Massachusetts, (/AAA//) is set to price Tuesday $165 million of taxable pension obligation bonds, serials 2022-2036, term 2039. Stifel, Nicolaus & Company.
Minnesota Housing Finance Agency (Aa1/AA+//) is set to price Tuesday $150 million of residential housing finance bonds, consisting of $22.69 million social bonds, 2021 Series G, serials 2022-2034 and $127.31 million, 2021 Series H social bonds, serials 2022-2023 and 2026-2027, terms 2036, 2041, 2046 and 2052. RBC Capital Markets.
Omaha, Nebraska, is set to price Wednesday $146,195 million, consisting of $92.82 million of various purpose and refunding bonds, Series 2021A and $55.375 million of taxable general obligation refunding bonds, Series 2021B. D.A. Davidson & Co.
Pompano Beach, Florida, (//BBB/) is set to price $139.885 million of revenue bonds (John Knox Village Project), Series 2021, consisting of $89.885 million of Series 2021A, $25.43 million of Series B-1 and $24.57 million of Series B-2. HJ Sims & Co.
Lakeland, Florida, (/AA/AA/) is set to price Tuesday $131.81 million of energy system revenue bonds, Series 2021, serials 2022-2041, term 2048. Citigroup Global Markets.
The New Hope Cultural Education Facilities Finance Corp., Texas, is set to price Thursday $125 million of Jubilee Academic Center education revenue bonds. D.A. Davidson & Co.
Santa Maria Joint Union High School District (Santa Barbara and San Luis Obispo Counties, California) (Aa2///) is set to price Wednesday $114.43 million, consisting of $67 million of Series 2021, serials 2023-2026 and 2030-2042 and $47.43 million of taxables, serials 2022-2037. Raymond James & Associates.
The Massachusetts Housing Finance Agency (Aa1///) is set to price Wednesday $100 million of non-AMT single family housing notes, Series 2021, serial 2022. Citigroup Global Markets.
Competitive
Little Rock, South Dakota, (Aa2///) is set to sell Tuesday $315.94 million of refunding and construction bonds, Series A at 11 a.m. eastern Tuesday.
The Florida Board of Education (Aaa/AAA/AAA) is set to sell $124.155 million of forward delivery public education capital outlay refunding bonds 2022 Series A at 1 p.m. eastern Monday.
The San Francisco Public Utilities Commission is set to sell $51.145 million of power revenue green bonds, 2021 Series A at 11 a.m. Tuesday and $73.855 million of power revenue bonds, 2021 Series B at 11:30 a.m. Tuesday.
Pulaski County Special School District, Arkansas, is set to sell $108.75 million of refunding and construction bonds, tax exempt, Series 2021B at noon Thursday eastern.
Jessica Lerner contributed to this report.
