It was Groundhog Day for municipals as triple-A benchmark yields held steady on Tuesday while Treasuries were weaker and equities sold off.
Triple-A yield curves were unchanged on the day and mostly have not budged but a basis point in spots since the end of November.
Most generic benchmark curves have remained static all month — fluctuating between richer or cheaper conditions to USTs which have traded in a much wider range, noted Kim Olsan, senior vice president at FHN Financial.
Ratios were slightly lower with the five-year muni-to-UST ratio at 49% in five years, 72% in 10 and 81% in 30, according to Refinitiv MMD's 3 p.m. read. ICE Data Services had the five at 47%, the 10 at 74% and the 30 at 82%.
The 10-year AAA/UST ratio has been as tight as 69% and as wide as 78% since the end of November, "as munis have been more reactive to the demand side (fund flows and redemptions)," Olsan said. "Due to the lack of volatility, bidding is showing more resolve toward concession-oriented structures, such as short-dated calls, single-A-rated bonds and longer sub-5% coupons. Inside 10 years, an ultra-flat slope between 2028 and 2031 (about 25 basis points) is drawing firmer bidding in optionality and sub-AA names."
Overall, bidding likely becomes inquiry-specific for the balance of the month, "especially with various metrics (stalled prices, elevated bid-list volume and higher inventory carries) pointing toward more thoughtful commitments," Olsan said.
Tuesday was all about the primary as the last of the largest new issues were priced in the last full week of 2021. Thirty-day visible supply sits at $5.68 billion. Net negative supply is at $16.186 billion, per Bloomberg data.
In the primary, Barclays Capital priced and repriced for Connecticut (Aa3/A+/AA-/AA) $800 million of general obligation bonds. The first tranche, $500 million of 2022 Series A, saw bonds maturing in 1/2023 with a 3% coupon yield 0.28%, 4s of 2026 at 0.63%, 4s of 2031 at 1.29% and 4s of 2035 at 1.58%, callable 1/15/2032.
The second tranche, $300 million of social bonds, 2022 Series B, saw bonds maturing in 1/2035 with a 4% coupon yields 1.58%, 4s of 2036 at 1.61%, 3s of 2041 at 2.14%, 3s of 2042 at 2.17% and 5s of 2042 at 1.61% (-1), callable 1/15/2032.
Siebert Williams Shank & Co. priced and repriced to lower yields for New York Liberty Corp. (/A+/A+//) $641 million of liberty revenue refunding bonds, 1WTC-2021, secured by Port Authority Consolidated Bonds. Bonds in 2/2041 with a 2.25% coupon yield 2.48% (-2) and 2.75s of 2044 at 2.7)% (-30, callable 2/15/2030.
Morgan Stanley & Co. priced for the Florida Development Finance Corp. (Aaa///) $500 million of revenue bonds (Brightline Florida Passenger Rail Expansion Project), Series 2021A with bonds maturing in 12/2056 at 0.30% par, mandatory tender 7/1/2022, callable 1/14/2022.
Morgan Stanley & Co. priced and repriced for Broward County, Florida, (Aa3///) $489.82 million of tourist development tax revenue bonds. Bonds in 9/2023 with a 5% coupon yield 0.32% (-2), 5s of 2026 at 0.73% (-2), 5s of 2031 at 1.37%, 4s of 2036 at 1.72%, 3s of 2041 at 2.14%, 4s of 2041 at 1.87%, 4s of 2047 at 2.05% and 4s of 2051 at 2.10% (+2), callable in 9/1/2031.
Siebert Williams Shank & Co. priced for Atlanta (Aa1//AA+/) $193.485 million, consisting of $3.265 million of various purpose general obligation bonds, Series 2021B, with 5s of 12/2022 at 0.18%, 5s of 2026 at 0.70%, 5s of 2031 at 1.21%, noncall; and $190.22 million of taxable general obligation refunding bonds, Series 2021C, priced at par: 0.509% in 12/2022, 1.434% in 2026, 1.988% in 2031 and 2.388% in 2034, callable 12/1/2031.
Secondary trading
Georgia 5s of 2022 at 0.12%. Minnesota 5s of 2022 at 0.11%. New York City 5s of 2022 at 0.12%. Prince George's County 4s of 2022 at 0.10%.
Loudoun County, Virginia, 5s of 2024 at 0.41%. Georgia 5s of 2025 at 0.42%. Washington 5s of 2026 at 0.62%.
Connecticut 5s of 2028 at 0.95%-0.94%. Wisconsin 5s of 2029 at 0.93%. California 5s of 2031 at 1.08%, the same as Monday.
District of Columbia 5s of 2034 at 1.23%-1.21%. Ohio 5s of 2041 at 1.43%-1.42%. New York City 5s of 2044 at 1.70%. Ohio water 5s of 2046 at 1.52%-1.51%.
AAA scales
Refinitiv MMD's scale was unchanged: the one-year at 0.15% and 0.25% in 2023. The 10-year sat at 1.03% and at 1.48% in 30.
The ICE municipal yield curve showed yields were unchanged at 0.17% in 2022, 0.28% in 2023 and 1.05% in 2031. The 30-year yield steady at 1.49%.
The IHS Markit municipal analytics curve was steady: 0.18% in 2022 and at 0.26% in 2023. The 10-year was at 1.02% and the 30-year at 1.49% as of a 3 p.m. read.
Bloomberg BVAL was steady at 0.17% in 2022 and 0.23% in 2023. The 10-year at 1.04% and the 30-year at 1.49%.
Treasuries were weaker and equities were in the red.
The five-year UST was yielding 1.236%, the 10-year yielding 1.440%, the 20-year at 1.865% and the 30-year Treasury was yielding 1.821% at the close. The Dow Jones Industrial Average lost 26 points, or 0.07%, the S&P was down 0.52% while the Nasdaq lost 0.86% near the close.
Inflation
Just before the Federal Open Market Committee meeting began, another read of annual inflation was the highest on record. Still, the FOMC is expected to accelerate its taper plans and will release projections for rates, unemployment and inflation in its Summary of Economic Projections.
Federal Reserve Board Chair Jerome Powell, in recent testimony to Congress, said inflation should no longer be termed transitory and that the panel would look at speeding up its reduction of asset purchases at this meeting.
“It is striking how quickly this reversal took place,” said Peter Cramer, senior managing director, insurance asset management at SLC Management. “After all, it wasn’t that long ago that the biggest question relative to inflation was why it remained so low, and how the twin forces of technology and demographics were creating an insurmountable wall of deflation.”
Indeed, inflation continues to be an issue that many believe the Fed needs to get serious about. The producer price index, released Tuesday, showed prices soared 0.8% in November, resulting in a 12-month gain of 9.6%, the highest since the annual figures were collected beginning in November 2010.
"Today’s PPI release validates our view that run rate inflation currently exceeds 10%," said Jay Hatfield, founder and chief executive at Infrastructure Capital Advisors.
The FOMC is considering accelerating the pace of its taper and these numbers should give them further impetus.
“While the Fed’s policy statement, SEPs and Chair [Jerome] Powell’s remarks at the press conference are expected to convey a ‘hawkish tone,’ monetary policy is far behind the curve and we expect the Fed will need to eventually raise rates more than is currently priced into markets, said Berenberg Capital Markets Chief Economist for the U.S. Americas and Asia Mickey Levy, who is a member of the Shadow Open Market Committee.
The market is pricing in five rate hikes through 2023. But Gene Tannuzzo, global head of fixed income at Columbia Threadneedle Investments, said, “the Fed will ultimately hike faster and higher in 2023 and 2024. This is the first hiking cycle in almost three decades in which the Fed is chasing inflation higher.”
When hiking in previous cycles recently, the Fed has been able to raise rates “preemptively to prevent the possibility of inflation,” he said. “This is different, and inflation pressures are here now. If the curve continues to flatten, we expect the Fed may instead choose to sell assets of its balance sheet rather than continue hiking rates at the front end of the curve.”
And the Fed is under fire because it, until recently, termed inflation transitory. “It’s now common knowledge that the Fed is way behind the curve on inflation and a number of former FOMC participants have been vocal about how high rates might go,” said Jason Brady, president and CEO at Thornburg Investment Management.“The reality of higher inflation and its longer persistence … has hit markets hard.”
With companies having trouble hiring, “employment and salaries should continue to grow next year,” said Scott Colbert, executive vice president and chief economist at Commerce Trust Co., “offsetting waning government stimulus and a more hawkish Federal Reserve that likely starts to raise interest rates over the second half of 2022.”
But the yield curve could be “the most dynamic dashboard” for the market, according to Dec Mullarkey managing director, investment strategic research & initiatives at SLC Management. “Over the last several months, the picture has shifted dramatically. Back in September, the aggregate investor wisdom was that the Fed would wait until late next year to start hiking rates. Now, conviction is growing it may need to get cracking before the summer.”
The curve suggests “quicker action would likely cool the economy sooner and help to avoid overheating,” he said. “The 30-year rate, which provides a seasoned view on growth and inflation, has dipped. For now, the yield curve seems content that the Fed will deliver a soft landing in pulling growth and inflation back to trend.”
Primary to come
Quincy, Massachusetts, (/AA//) is set to price $475 million of taxable general obligation pension bonds, serials 2022-2039. Ramirez & Co.
The Port Authority of New York and New Jersey (Aa3/A+/A+/) is set to price Wednesday $420 million of taxable consolidated bonds. Ramirez & Co.
The California Statewide Communities Development Authority Community Improvement Authority is set to price Wednesday $375.56 million of essential housing revenue bonds, consisting of $111.75 million of Series A-1, serial 2048; $136.305 million of Series A-2A, serial 2058; $50.13 million of Series A-2B, serial 2058 and $77.375 million of Series 2021B, serial 2058. Citigroup Global Markets.
The California Statewide Communities Development Authority Community Improvement Authority is set to price Wednesday $196.495 million of social essential housing revenue bonds (Escondido Portfolio), consisting of $60 million of Series A-1, $97.245 million of Series A-2 and $39.25 million of Series B. Goldman Sachs & Co.
Bexar County, Texas, is set to price Wednesday $328.905 million of unlimited tax taxable refunding bonds, consisting of $7.975 million, Series S21A; $33.62 million, Series S21B and $287.31 million, Series S21C. HilltopSecurities.
The Aurora Highlands Community Authority Board in Aurora, Colorado, is set to price Wednesday $309.8 million of special tax revenue refunding and improvement bonds, Series 2021A. D.A. Davidson & Co.
Colorado Health Facilities Authority is set to price $138.995 of revenue bonds (Aberdeen Ridge), Series 2021, consisting of $88.245 million of Series A, $12 million of Series B-1, $16 million of Series B-2, $20.5 million of Series B-3 and $2.25 million of Series C. Ziegler.
Wisconsin Health and Educational Facilities Authority is set to price Wednesday $116.25 million of revenue bonds, Series 2021 (Oakwood Lutheran Senior Ministries). Ziegler.
The Arizona Industrial Development Authority is on the day-to-day calendar with $177.97 million (NewLife Forest Restoration Project), consisting of $110.045 million of senior federally taxable sustainability-linked revenue bonds, Series 2021A, term 2041 and $67.925 million of subordinate federally taxable sustainability-linked revenue bonds, Series 2021B, term 2046. Goldman Sachs & Co.
