Muni focus is on DASNY's $2.8B, yield curves ignore UST weakness post-CPI

Munis were steady as the primary market took focus with the $2.8 billion retail pricing from the Dormitory Authority of the State of New York. U.S. Treasuries were weaker and equities rallied after the Consumer Price Index showed inflation ticked up in February.

Bond yields didn't move much upon the CPI release, but Treasuries grew weaker as the session progressed while muni investors turned their focus to the primary, with secondary trading providing little direction to triple-A yield curves.

"It's possible that markets were positioned for a hotter print, but it's also likely investors are still digesting the implications: cuts arrive later and we end up with fewer in 2024," said Jeffrey Cleveland, chief economist at Payden & Rygel.

The two-year muni-to-Treasury ratio Monday was at 59%, the three-year at 59%, the five-year at 58%, the 10-year at 58% and the 30-year at 83%, according to Refinitiv Municipal Market Data's 3 p.m. EST read. ICE Data Services had the two-year at 60%, the three-year at 59%, the five-year at 59%, the 10-year at 60% and the 30-year at 82% at 3:30 p.m.

"The muni AAA [high grade] curve has been relatively steady thus far in March, but lags relative to the broader fixed income market after sizable muni outperformance in February," according to J.P. Morgan research. 

The 2-5-10-30yr AAA HG scale "remains rich and particularly overvalued in 10yrs on the curve," while absolute yields are "still attractive in the context of our longer-term projections for lower rates this year," J.P. Morgan noted.

The AAA HG curve is "rich" on a ratio basis versus the UST market, relative to historical averages across the curve, they said.

"Current valuations and expectations for technicals suggest underperformance in the less favorable technical environment in March and April," J.P. Morgan said.

In 5-10-30yrs on the curve, "tax-exempt ratios to UST, taxable munis, and corporate bonds are still close to three-year lows, indicating munis are nearly as rich as during the inflow cycle of 2021 in 5-10yrs," they noted.

"Outsized muni bond reinvestment demand continues to chase undersized new-issue supply," said Anders S. Persson, Nuveen's chief investment officer for global fixed income, and Daniel J. Close, Nuveen's head of municipals.

However, that dynamic should change this week as the market will see a heavy new-issue calendar.

The retail pricing for $2.8 billion of tax-exempt general purpose state personal income tax revenue bonds from the Dormitory Authority of the State of New York (Aa1//AA+/AAA/) leads the primary market. The first tranche, $2.843 billion of tax-exempts, Series 2024A, saw yields range from 2.91% with a 5% coupon in 2026 to 4.25% with a 4% maturing in 2054.

In the competitive market Tuesday, Henrico County, Virginia, (Aaa/AAA/AAA/) sold $121.355 million of GO public improvement bonds, Series 2024A, to Fifth Third Securities. The issuer saw yields range from 3.15% with a 5% coupon in 2024 to 3.58% with a 4% maturing in 2043.

Issuers should be paying attention to the richness of current ratios, said Matt Fabian, a partner at Municipal Market Analytics.

"What most institutional investors view as prohibitory richness in tax-exempt municipals versus Treasuries — with the 10y M/T ratio content to creep along at or below 60%, the 5yr richer still — [separately managed accounts] will disregard in their pursuit of scarce product to refill income-oriented ladders," he said.

This has widened some spreads throughout this year and is "creating some, albeit still-modest and most-reliably income-based, opportunity in longer, lower-rated paper," he said.

Further, while SMAs and exchange-traded funds rely "more heavily on ratings than do mutual funds, their demand is also "highly sector-specific," he said.

There were larger inflows into muni mutual funds last week, with LSEG Lipper reporting "long duration and high yield strategies gathering the most assets," Fabian said.

However, he said the market is still a long way from seeing leadership from "the funds or other institutional investors."

AAA scales
Refinitiv MMD's scale was unchanged: The one-year was at 2.95% and 2.71% in two years. The five-year was at 2.40% (unch), the 10-year at 2.40% and the 30-year at 3.57% at 3 p.m.

The ICE AAA yield curve was little changed: 2.96% (-1) in 2025 and 2.74% (unch) in 2026. The five-year was at 2.41% (unch), the 10-year was at 2.43% (unch) and the 30-year was at 3.51% (unch) at 3:30 p.m.

The S&P Global Market Intelligence municipal curve was unchanged: The one-year was at 2.93% in 2025 and 2.71% in 2026. The five-year was at 2.40%, the 10-year was at 2.40% and the 30-year yield was at 3.54%, according to a 3 p.m. read.

Bloomberg BVAL was bumped one basis point out long: 2.91% (unch) in 2025 and 2.76% (unch) in 2026. The five-year at 2.38% (unch), the 10-year at 2.44% (unch) and the 30-year at 3.58% (-1) at 3:30 p.m.

Treasuries were weaker.

The two-year UST was yielding 4.598% (+7), the three-year was at 4.344% (+5), the five-year at 4.156% (+7), the 10-year at 4.156% (+6), the 20-year at 4.418% (+6) and the 30-year at 4.314% (+5) at 3:30 p.m.

CPI
The February consumer price index came in higher than expected, moving the likelihood that rate cuts won't come before summer.

The futures market Monday night was pricing in a 5% chance of a rate cut at the Federal Open Market Committee's March meeting, and that fell to less than 1% after the release, noted Josh Jamner, investment strategy analyst at ClearBridge Investments. But on the bright side, he said, "the internals show that the read-through to the more important core [personal consumption expenditures] measure could be more favorable for the Fed and investors."

This CPI report "does not preclude nor confirm a rate cut from occurring around midyear," Jamner said.

Noting that it's just one report, Christian Chan, CIO of AssetMark, said, "the print was not high enough (or low enough) to push the Fed off of their dot plots, which will be updated next week."

"It looks to me like rate cuts are going to have to wait until later in the year," said Cleveland of Payden & Rygel. "Beneath the surface, the big driver of core CPI was shelter. But we can slice and dice the data differently. Services excluding rent rose 0.6% in February, the same reading as in January — so way too hot. The much vaunted 'super core' — core services ex-shelter — rose 0.5% in February. Again, way too spicy for us."

These numbers won't give the Fed the confidence it seeks that inflation is trending toward its 2% target, he said.

"I don't see how the January and February core CPI readings help matters," Cleveland said. He now expects the first cut will be in the third quarter, with just two cuts this year.

Wells Fargo Securities senior economists Sarah House and Michael Pugliese agreed the report is unlikely to provide "the FOMC with the confidence it needs to begin cutting rates."

While disinflation progress should "resume in the coming months," they said, "we think the FOMC will need to see it to believe it."

Wells expects a rate decrease in the summer.

The report was "ugly" and won't "soothe nerves on the FOMC," according to Scott Anderson, chief U.S. economist and managing director at BMO Economics. "The three-month and six-month moving averages of core inflation accelerated and are moving in the wrong direction for a Fed that is trying to bring inflation to heal," he said, although a few categories showed "notable price relief."

The inflation problem has not been solved, Anderson said. "Clearly, restrictive monetary policy has not yet fully done its work and a patient and slightly hawkish Fed must remain in place for the monetary medicine to fully take effect."

Although core was above expectations, Greg Wilensky, head of U.S. fixed income at Janus Henderson Investors, said, "shelter inflation was better behaved and the spike in food inflation last month was not repeated," which is good news for the market.

While "core services inflation ex-shelter continues to be sticky on the way down," he said, "some of this strength is coming from categories like airfares that are less likely to cause angst for the Fed."

Core PCE, the Fed's preferred inflation measure, Wilensky said, "will continue to be better behaved than its CPI cousin in February."

Still a May move by the Fed "has likely been removed," but he sees "June as the most likely month for the first cut, but this could shift to July if the inflation data does not start to improve next month."

While the Fed seems "inclined to cut rates," ING Chief International Economist James Knightley, said, "the data isn't there to justify it." He expects a June cut, with "a May rate cut is a very remote possibility now."

The two months of hotter-than-expected CPI means "the Fed should not be too quick to declare that the inflation surge is over," said Mercatus Center macroeconomist Patrick Horan. While "recent numbers are nowhere near as hot as 2021-2022, they also don't show a soft landing yet."

Morgan Stanley economists said the report is consistent with its expectation "of a bumpy path ahead," with first quarter numbers "overall higher than what we have seen in the last six months."

That and other factors mean no rate cuts until June, they said in a report. "We think 2.5% core PCE inflation is a good place to start adjusting policy, which is around the April/May timeframe."

"This is a sober reminder of the tendency for inflation to perpetuate itself," said Fitch Ratings' Chief Economist Brian Coulton. "Core inflation is proving to be stubborn, with the annual rate barely falling to 3.8% in February (from 3.9%) and the month-on-month rate flat, at 0.4%."

Fitch watches "core inflation momentum, measured by the three month on previous three month seasonally adjusted change in prices, annualized," he said. "That has risen to 3.8% in February, up from 3.0% last October. That is not the direction the Fed wants to see."

Primary on Tuesday
RBC Capital Markets held a one-day retail order for $2.843 billion of tax-exempt general-purpose state personal income tax revenue bonds, Series 2024A, from the Dormitory Authority of the State of New York (Aa1//AA+/AAA/).

Morgan Stanley priced for the California Health Facilities Financing Authority (/AA-/AA-/) $177.060 million of Children's Hospital of Orange County revenue bonds.

The first tranche is $58.650 million of Series 2024A.

The second tranche is $118.410 million of Series 2024B.

RBC Capital Markets priced for the Texas Department of House and Community Affairs (Aaa/AA+//) $150 million of non-AMT residential mortgage revenue bonds, Series 2024A.

Oppenheimer priced for the Cahokia Unit School District No. 187, Illinois, (/AA//) $122.580 million.

The first tranche is $72.580 million of alternate revenue source GO lease certificates, Series 2024A.

The second tranche is $25 million of GO school bonds, Series 2024B.

Competitive on Tuesday
Henrico County, Virginia, (Aaa/AAA/AAA/) sold $121.355 million of GO public improvement bonds, Series 2024A, to Fifth Third Securities.

Gary Siegel contributed to this story.