Municipals saw losses Friday but outperformed by mostly sitting out a larger sell-off in U.S. Treasuries after jobs data showed higher-than-expected gains, forcing another recalibration for participants on rate-cut timing.
The January employment report came in stronger than expected, with wages rising at the highest rate since March 2022, leading analysts to suggest Federal Reserve cuts may come later than anticipated.
"A very strong NFP print at plus 353,000 makes it easier for the Fed to hold on to higher rates," noted Giuseppe Sette, president of Toggle AI. "With employment at 3.7% close to historic lows, the cycle is healthy and in full swing. Until and unless the economy manifests signs of weakness, rates might remain higher for longer than the market expects."
Calling the report "stunning," Bryce Doty, senior portfolio manager and vice president at Sit Investment Associates, said it "certainly delays the timing on Fed cuts."
"Bond yields will rise as investors recalibrate Fed expectations," he added.
Indeed, the news sent UST yields spiking up to 19 basis points, with the 10-year topping 4.00%. Triple-A muni curves saw yields rise three to five basis points.
Municipals often lag large moves in USTs, and the new-issue calendar, which grows to more than $7 billion with at least 18 deals over $100 million, greets investors for the first full week of February, perhaps adding impetus for investors to demand more yield. Bond Buyer 30-day visible supply sits at $10.34 billion.
The calendar is led by the New York City Transitional Finance Authority (Aa1/AAA/AAA/) with $1 billion of tax-exempt future tax-secured subordinate bonds and a $250 million tranche of taxable future tax-secured subordinate bonds in the competitive market Wednesday. Massachusetts will bring $540 million of GO refunding bonds and several Texas school district deals are on tap.
In the competitive market, high-grade Wisconsin is set to sell $254.450 million of GOs Tuesday and $150 million of green Environmental Improvement Fund revenue bonds Wednesday.
Gilt-edged Washington Suburban Sanitary District, Maryland, is set to sell $329.240 million of consolidated public improvement bonds Thursday in the competitive market, which should provide triple-A scales some direction.
While municipals followed and outperformed USTs Wednesday and Thursday, the surprising jobs numbers snapped the rally as participants reconsidered Fed timing on rate cuts and whether the higher-for-longer status is more likely to remain.
Prior to the jobs numbers release, Barclays PLC noted, in general, munis have been "acting similarly" to how they did at the start of 2023.
In late 2022 there was also a year-end rally that continued until mid-February 2023, "and only after that did the market start to show signs of fatigue, continuing to underperform through early May," Barclays strategists said in a weekly report.
"For high-grade tax-exempts, 2024 has been evolving in a similar fashion: the year-end muni rally continued through mid-January, and then MMD-UST ratios started drifting higher, even though they outperformed slightly this week, which came as a bit of a surprise," they said.
The two-year muni-to-Treasury ratio Friday was at 60%, the three-year at 60%, the five-year at 58%, the 10-year at 58% and the 30-year at 82%, according to Refinitiv Municipal Market Data's 3 p.m. EST read. ICE Data Services had the two-year at 63%, the three-year at 63%, the five-year at 62%, the 10-year at 62% and the 30-year at 84% at 3:30 p.m.
Ahead of Friday's moves, Barclays noted, "munis might very well move in lockstep with Treasuries near term, but it is hard to get excited about tax-exempts at current levels."
"Until supply picks up meaningfully, or rate volatility increases, muni ratios might continue to move sideways," Barclays said. "Moreover, fund flows have finally started to show signs of life, which should also provide support."
Secondary trading
Los Angeles Department of Water and Power 5s of 2025 at 2.69%. New York City TFA 5s of 2027 at 2.39%.
Florida Board of Ed PECO 5s of 2030 at 2.31%. Maryland 5s of 2030 at 2.37%.
New York City 5s of 2036 at 2.66%.
Washington 5s of 2040 at 3.02%. California 5s of 2042 at 3.00%. Washington 5s of 2042 at 3.17%.
California 5s of 2045 at 3.07%.
Massachusetts 5s of 2053 at 3.75%.
AAA scales
Refinitiv MMD's scale was cut by five basis points across the curve: The one-year was at 2.89% (+5) and 2.61% (+5) in two years. The five-year was at 2.31% (+5), the 10-year at 2.33% (+5) and the 30-year at 3.47% (+5) at 3 p.m.
The ICE AAA yield curve was cut three to five basis points: 2.87% (+3) in 2025 and 2.66% (+5) in 2026. The five-year was at 2.37% (+4), the 10-year was at 2.37% (+4) and the 30-year was at 3.45% (+5) at 3:45 p.m.
The S&P Global Market Intelligence municipal curve was cut five to seven basis points: The one-year was at 2.87% (+7) in 2025 and 2.65% (+7) in 2026. The five-year was at 2.33% (+6), the 10-year was at 2.33% (+5) and the 30-year yield was at 3.45% (+5), according to a 3 p.m. read.
Bloomberg BVAL was cut two to four basis points: 2.81% (+3) in 2025 and 2.66% (+2) in 2026. The five-year at 2.32% (+3), the 10-year at 2.39% (+3) and the 30-year at 3.50% (+4) at 3:30 p.m.
Treasuries sold off.
The two-year UST was yielding 4.371% (+17), the three-year was at 4.149% (+18), the five-year at 3.990% (+19), the 10-year at 4.025% (+16), the 20-year at 4.328% (+13) and the 30-year Treasury was yielding 4.218% (+12) at 3:45 p.m.
Employment report changes expectations for cuts again
"A single data point should not change the direction of policy," Mortgage Bankers Association SVP and Chief Economist Mike Fratantoni cautioned. But, he added, "we expect that the balance of incoming data will keep the Federal Reserve from cutting rates in March, and still anticipate that they will wait until the May meeting for a first cut."
Of course, he added, it depends on inflation continuing to cool.
The report is not "consistent with a further cooling of the labor market," said Brian Coulton, Fitch Ratings chief economist. "This elevates the risk that nominal wage growth will not fall back to levels consistent with reaching the inflation target on a sustained basis, particularly as the labor force participation rate refuses to rise any further."
Average hourly earnings climbing 4.5% on an annualized basis in January in a tight labor market, he said, "is a problem for the Fed."
If inflation was in check, the "unexpectedly strong jobs numbers would be welcome news," according to University of Central Florida economist Sean Snaith. "Instead, the jobs report is complicating policy."
Rate cuts may have to wait for the second half of the year, he said, as "the current the Fed is swimming against just got stronger, and it's going to be harder to get upstream."
The report "should raise fresh concerns about the potential for a reacceleration of inflation," said Jeff Schulze, head of Economic and Market Strategy at ClearBridge Investments. A March cut is "off the table."
Don't expect rate cuts before the second quarter, he said. "Higher Treasury yields should put near term pressure on equity valuations."
Primary to come:
The New York City Transitional Finance Authority (Aa1/AAA/AAA/) is set to price Wednesday $1 billion of tax-exempt future tax-secured subordinate bonds, Fiscal 2024 Series F, Subseries F-1, serials 2036-2049, term 2054. Siebert Williams Shank & Co.
Massachusetts (Aa1/AA+/AA+/) is set to price Wednesday $540 million of GO refunding bonds, 2024 Series B. Jefferies.
The East Bay Municipal Utility District, California, (Aaa/AAA//) is set to price Wednesday $432.355 million of water sewer revenue bonds, consisting of $248.250 million of green bonds, Series 2024A, and $184.105 million of refunding bonds, Series 2024B. J.P. Morgan.
The Aldine Independent School District, Texas, (Aaa/AAA//) is set to price Tuesday $339.395 million of PSF-insured unlimited tax school building bonds, Series 2024, serials 2025-2044, terms 2049, 2054. RBC Capital Markets.
The University of Washington (Aaa/AA+//) is set to price Thursday $304.515 million of general revenue bonds, consisting of $222.190 million of new-issue bonds, Series 2024A, serials 2025-2044; and $82.325 million of refunding bonds, Series 2024B, serials 2024-2041. BofA Securities.
The Fort Worth Independent School District, Texas, (Aaa///) is set to price Tuesday $299.905 million of PSF-insured unlimited tax school building bonds, Series 2024, serials 2025-2049. Stifel, Nicolaus & Co.
The Clifton Higher Education Finance Corp., Texas, (Aaa///) is set to price Thursday $293.710 million of PSF-insured International Leadership of Texas education revenue and refunding bonds, consisting of $209.810 million of Series 2024A and $83.900 million of Series 2024B. RBC Capital Markets.
The Houston Higher Education Finance Corp. (Aaa/AAA//) is set to price Tuesday $290 million of Rice University Project higher education revenue bonds, Series 2024, serial 2034. Jefferies.
The Oklahoma County Finance Authority (A1/A+//) is set to price Thursday $240.825 million of Midwest City-Del City Public Schools Project educational facilities lease revenue bonds, Series 2024. D.A. Davidson.
The Wisconsin Housing and Economic Development Authority (Aa2/AA+//) is set to price Tuesday $190 million of non-AMT social home ownership revenue bonds, 2024 Series A, serials 2025-2036, terms 2039, 2044, 2050, 2054. RBC Capital Markets
The Illinois Housing Development Authority (Aaa///) is set to price Thursday $145 million of non-AMT social revenue bonds, 2024 Series A, serials 2025-2036, terms 2039, 2044, 2049, 2054. RBC Capital Markets.
The Nassau County Interim Finance Authority, New York, (/AAA//) is set to price Tuesday $127.830 million of sales tax secured bonds, Series 2024A, serials 2024-2030. BofA Securities
The San Diego Community College District (Aa1/AAA//) is set to price Wednesday $100 million of 2024 dedicated unlimited ad valorem property tax GO refunding bonds. RBC Capital Markets.
Competitive
The University of Kentucky (Aa2/AA+//) is set to sell $40.740 million of taxable general receipt bonds, 2024 Series C, at 10:30 a.m. eastern Tuesday, and $162.955 million of tax-exempt general receipt bonds, 2024 Series B, at 11 a.m. Tuesday.
The Osseo Independent School District No. 279, Minnesota, is set to sell $238.350 million of GO school building and facilities maintenance bonds, Series 2024A, at 10:30 Tuesday.
Wisconsin is set to sell $254.450 million of GOs, Series 2024A, at 10:45 a.m. Tuesday, and $150 million of green Environmental Improvement Fund revenue bonds, Series 2024A, at 10:45 a.m. Wednesday.
The New York City Transitional Finance Authority is set to sell $250 million of taxable future tax-secured subordinate bonds, Fiscal 2024 Series F, Subseries F-2, at 11:15 a.m. Wednesday.
The Washington Suburban Sanitary District, Maryland, is set to sell $329.240 million of consolidated public improvement bonds of 2024 at 10:15 a.m. Thursday.
Gary Siegel and Jessica Lerner contributed to this article.
