Municipals ended Wednesday where they began the week — unchanged — as traders’ minds were on a meal rather than munis.
While the market reopens on Friday, shops will only have a skeleton staff on duty during the abbreviated post-Thanksgiving trading session with the next real test of benchmark levels taking place on Monday.
Economic indicators released Wednesday included preliminary third quarter GDP, jobless claims and durable goods orders.
IHS Ipreo estimates supply for the upcoming week at $6.5 billion, up sharply from the holiday-shortened week’s slate of under $1 billion. The week’s calendar is composed of $4.5 billion of negotiated deals and $2 billion of competitive sales.
On Wednesday, the Investment Company Institute reported $1.430 billion of inflows into municipal bond mutual funds in the week ending Nov. 17, down from $1.608 billion in the previous week.
It marked the 37th straight week of positive flows into the long-term funds and brought the total inflows for this year past $80 billion.
In an abrupt reversal, exchange-traded funds saw $22 million of outflows in contrast to the $751 million of inflows seen in the prior week.
Informa: Money market muni funds fall
Tax-exempt municipal money market fund assets fell $200 million, bringing their total down to $87.47 billion for the week ending Nov. 22, according to the Money Fund Report, a publication of Informa Financial Intelligence.
The average seven-day simple yield for the 150 tax-free and municipal money-market funds remained at 0.01% from the previous week.
Taxable money-fund assets rose $22.83 billion, bringing total net assets to $4.456 trillion in the week ended Nov. 23. The average seven-day simple yield for the 782 taxable reporting funds was unchanged from the prior week at 0.02%.
FOMC minutes
Federal Open Market Committee members expressed increased uncertainty about the path of inflation and whether it would be persistent, and as a result, suggested flexibility.
“Participants stressed that maintaining flexibility to implement appropriate policy adjustments on the basis of risk-management considerations should be a guiding principle in conducting policy in the current highly uncertain environment,” the minutes said.
Some members wanted to taper faster “so that the Committee would be in a better position to make adjustments to the target range for the federal funds rate, particularly in light of inflation pressures.”
Some said the panel “should be prepared to adjust the pace of asset purchases and raise the target range for the federal funds rate sooner than participants currently anticipated if inflation continued to run higher than levels consistent with the Committee’s objectives.”
Indeed, inflation remains an issue. While most of the economic data released Wednesday were positive, the inflation numbers from the personal income and spending report, the Fed’s favorite read, showed price pressures continuing to rise in October.
Consumption rose 1.3% in October and 12% year-over-year, “supported by rising employment, wages, and disposable incomes,” said Mickey Levy, Berenberg's chief economist for the U.S., Americas and Asia. “Strong demand amid supply bottlenecks and disruptions have led to soaring prices: the headline and core PCE price indexes rose substantially in October.”
The core personal consumption expenditures index, the Fed’s preferred inflation indicator, rose 0.4% in the month after a 0.2% gain in September, and for the year, the index was up 4.1%, more than the 3.7% climb pasted in the year ending in September, the highest increase since November 1990.
Economists polled by IFR Markets expected the 0.4% month-over-month gain but expected the year-over-year rise to settle at 4.1%.
The advance GDP read for the third quarter ticked up to 2.1% from the initial 2.0% growth read, as expected, “but remained less than a third of the pace we saw in the second quarter,” Grant Thornton Chief Economist Diane Swonk and Economist Yelena Maleyev noted.
Initial jobless claims dropped to 199,000 in the week ended Nov. 20 from 270,000 a week earlier. The Labor Department said this was the lowest level for claims since Nov. 15, 1969, when 197,000 claims were made.
Economists expected 264,000 claims in the week.
“That was most likely impacted by the volatility around the holidays,” said Edward Moya, senior market analyst for the Americas at OANDA. “Optimism is growing that the Fed will have to acknowledge mission accomplished in the labor market a lot sooner than they expected.”
That could, of course, mean faster taper and earlier price hikes.
But Berenberg’s Levy sees it more as a factor of inflation. “November’s CPI print may prompt the Fed to announce an acceleration of the pace of asset purchases at its December or January meeting,” he said.
Consumer sentiment rebounded from decade lows to 67.4 in the final read after 66.8 mid-month and 71.7 in October. Current conditions ended the month at 73.6 and the expectations index was at 63.5.
A taxing problem for year end
Completing municipal bond swaps at the appropriate time for effective portfolio management is extremely important, according to Oppenheimer & Co. Inc.
“Municipal bond tax loss swapping is certainly not a new concept, but it never hurts to remind those investors who have not yet taken advantage of this useful strategy that swaps need to be done by year-end,” Jeffrey Lipton, managing director at Oppenheimer, said in report released Tuesday.
A muni bond swap is done by selling some bonds and reinvesting the proceeds in similar — but not identical — munis. This is done for a variety of reasons, such as reducing tax liability, enhancing returns, adjusting to interest rate changes, credit quality, maturity or duration or call protection, and portfolio diversification.
“We also think that today’s specific market factors, such as the Fed’s move to a gradual tightening sequence that has lifted interest rates and created portfolio losses as well as volatility in the equity markets, make for ample and compelling portfolio opportunity to transact a tax loss swap,” he said.
Lipton noted one of the most often used types of swap transactions is the tax loss swap but cautioned investors should consult with a tax advisor before entering into such a deal.
He said a tax loss swap strategy lets investors partially or fully offset present or future capital gains in other areas of their investment portfolio. The goal is to lower overall tax liability.
“The process begins by identifying a bond that is presently worth less than the purchase price (below adjusted cost basis) perhaps due to higher interest rates or declining credit quality,” he said. “Sell that bond and simultaneously buy a bond having similar, but not identical, characteristics at approximately the same price.”
Lipton said investors typically prefer to maintain overall portfolio credit quality, par value and annual tax-exempt income.
“However, tax loss swaps can be used to enhance yield and/or reallocate among sectors,” he said. “It is generally recommended that investors consider tax loss swaps before liquidity tightens at year-end as transactional costs tend to be somewhat heavier given liquidity constraints.”
Secondary bond trading
ICE Data Services reported the following muni trades Wednesday:
The Alabama State Public School and College Authority tax-exempt capital improvement and refunding social bond 5s of Nov. 1, 2031, [010609FK6] traded in a block of $5 million-plus at a price of 131.539, a yield of 1.253%. The 5s were originally priced on Nov. 4, 2020, at 134.23, a yield of 1.330%.
The Indiana State Finance Authority state revolving fund program green bond 5s of Feb. 1, 2041, [45506EEC3] traded in a block of $5 million at a price of 130.084, a yield of 1.48%. The 5s were originally priced on Nov. 16 at 128.31, a yield of 1.67%.
The Indiana State Finance Authority bond 5s of Feb. 1, 2034, [45506EDV2] traded in a block of $3 million at a price of 132.300, a yield of 1.26%. The 5s were originally priced on Nov. 16 at 130.596, a yield of 1.44%.
Muni benchmarks
The triple-A benchmark scales were mostly unchanged in light pre-holiday trading.
According to Refinitiv MMD, short yields were steady at 0.15% and at 0.25% in 2022 and 2023. The yield on the 10-year stayed at 1.09% while the yield on the 30-year sat at 1.54%.
The 10-year muni-to-Treasury ratio was calculated at 66.3% while the 30-year muni-to-Treasury ratio stood at 78.1%, according to MMD.
The ICE municipal yield curve showed bonds unchanged in 2022 at 0.18% and at 0.29% in 2023. The 10-year maturity remained at 1.11% and the 30-year yield was steady at 1.58%.
The 10-year muni-to-Treasury ratio was calculated at 69% while the 30-year muni-to-Treasury ratio stood at 80%, according to ICE.
The IHS Markit municipal analytics curve showed short yields steady at 0.17% and 0.25% in 2022 and 2023, respectively, with the 10-year at 1.07%, and the 30-year yield sat at 1.54%.
In late trading, Treasuries and equities were mixed.
The 10-year Treasury was yielding 1.65% and the 30-year Treasury was yielding 1.97%. The Dow Jones Industrial Average fell 0.10%, the S&P 500 increased 0.10% while the Nasdaq gained 0.20% in late trading.
Upcoming negotiated deals
The Illinois State Toll Highway Authority (Aa3/AA-/AA-/) is set to price $600 million of toll highway senior revenue bonds, serials 2039-2046, on Thursday. Loop Capital Markets.
The New York State Housing Finance Agency (Aa2///) is set to price $454.03 million of affordable housing revenue climate bond certified and sustainability bonds on Wednesday. Citigroup Global Markets Inc.
The Black Belt Energy Gas District (A2///) is set to price $423.875 million of gas project revenue bonds (Project No. 7). Goldman Sachs & Co. LLC.
The CSCDA Community Improvement Authority (nonrated) is set to price on Thursday $335.805 million of essential housing revenue refunding social bonds (Westgate Phase 1-Pasadena). Goldman Sachs & Co. LLC.
The Anaheim Public Financing Authority (A2/AA//AA+) is set to price on Wednesday $250.330 million of taxable convention center lease revenue refunding bonds, insured by Assured Guaranty Municipal Corp. Goldman Sachs & Co. LLC.
The New Mexico Educational Assistance Foundation (Aaa///) is set to price on Wednesday $208 million of AMT and taxable education loan bonds. RBC Capital Markets.
The Board of Supervisors of Louisiana (/AA//) is set to price on Wednesday $155.68 million of State University and Agricultural and Mechanical College taxable auxiliary revenue refunding bonds, insured by Build America Mutual, serials 2022-2043. Raymond James & Associates, Inc.
The Delaware River and Bay Authority (A1/A//) is set to price on Wednesday $151.92 million of revenue and revenue refunding forward delivery bonds. J.P. Morgan Securities LLC
Harris County, Texas, (Aaa//AAA/) is set to price $120 million of permanent improvement refunding bonds on Thursday. Wells Fargo Corporate & Investment Banking.
Freddie Mac (/AA+//) is set to price on Wednesday $110.82 million of multifamily M certificates series M-067, serial 2037. KeyBanc Capital Markets.
The Massachusetts Development Finance Authority (/BBB//) is set to price on Thursday $106.365 million of revenue green bonds, Springfield College Issue. HilltopSecurities.
Competitive slate
Tampa, Florida, (Aa2/AAA/AA/) is set to sell $102.62 million of non-ad valorem refunding and improvement sustainable revenue bonds at 11 a.m. eastern on Tuesday. The issuer will also sell $26.94 non-ad valorem refunding and improvement bonds at 10:30 a.m. eastern.
Illinois (Baa2/BBB/BBB-/) is set to sell $200 million of general obligation bonds at 10:15 a.m. eastern and $200 million of GOs at 10:45 a.m. eastern on Wednesday.
Westchester County, New York, is set to sell $135.115 million of general obligation bonds at 11 a.m. eastern on Wednesday.
Day-to-day calendar
The Arizona Industrial Development Authority is on the day-to-day calendar with $177.97 million of revenue bonds (NewLife Forest Restoration Project), consisting of $110.045 million of senior federally taxable series 2021A (sustainability-linked bonds), term 2041 and $67.925 million of subordinate federally taxable series 2021B (sustainability-linked bonds), term 2046. Goldman Sachs & Co.
The Successor Agency to the Redevelopment Agency of the City and County of San Francisco (/AA///) is on the day-to-day calendar with $107.34 million of taxable third-lien tax allocation social bonds, 2021 Series A (affordable housing projects), serials 2023-2031, insured by Assured Guaranty Municipal Corp. Citigroup Global Markets.
Lynne Funk contributed to this report.
