Triple-A municipal benchmarks saw another seven basis point cut in yields on bonds outside of 10 years on Wednesday, pushing municipal to U.S. Treasury ratios higher amid sloppy trading and cheaper pricing levels on high-grade competitive deals.
Municipal bonds could not ignore another rise in U.S. Treasury rates, Federal Reserve Board Chairman Jerome Powell's congressional testimony and a resulting equity rebound, along with approval of emergency use of a new COVID vaccine and the likelihood of more federal stimulus.
“The municipal yield curve continues to steepen, and refuge from significant price losses only exists at the very short end of the market at this time,” said Michael Pietronico, chief executive officer at Miller Tabak Asset Management.
Municipal yields rose seven basis points on Wednesday to 1.09% in 10-years and 1.75% in 30, bringing Refiniv MMD benchmark yields in those maturities 33 basis points higher in one week.
The 10-year muni/UST ratio is at 78.5% Wednesday and the 10-year at 77.6%, according to Refinitiv MMD. ICE Data Services showed ratios rose four basis points to 77% in 10 years and up two basis points to 79% in 30. BVAL showed 10-year ratios rose to 75% and at 79.6% in 30 years.
The 10-year muni/UST ratio on Feb. 16, the day before the sell-off began, was at 54% and the 30-year was at 65%, according to MMD.
"Muni/UST ratios have corrected a lot over the past 10 days, but even with the ongoing inflows it still feels like there is a bit of room to go," said Greg Saulnier, municipal analyst at Refinitiv MMD. He noted 1% in 10-years and 2% in 30 years started to provide some footing Tuesday, "but with rates selling off today after the J&J vaccine news, it looks like it added another leg lower for munis."
The Investment Company Institute reported $2.517 billion of inflows into municipal bond mutual funds for the week ended Feb. 17. Flows from Refinitiv Lipper to be reported Thursday may be more telling of how the sell-off has affected the funds, as ICI reports lag and Wednesday's figures do not include the past week's sell-off.
Rising global bond yields are suggesting financial markets are much more optimistic about the economy than the Fed.
"Powell is strongly optimistic about the economic outlook for the second half of the year, while the Treasury market seems to indicate that the recovery could take off in the second quarter," said Edward Moya, senior market analyst at OANDA. "If bond market selloff deepens with the 10-year breaking past 1.50%, that could prove to be disruptive for financial conditions."
Besides the steepening yield curve, Pietronico said the political forecast is raising concerns among bond investors over inflation.
“It is our view that the stimulus talk coming from Washington, D.C., is becoming counter-productive to the financial markets at this time as the economy seems to be on very solid footing already,” he said.
In the primary Wednesday, Maryland (Aaa/AAA/AAA/) sold $207.4 million of GOs to BofA Securities. Bonds in 2025 with a 5% coupon yield 0.43%, 5s of 2026 yield 0.54% and 5s of 2031 yield 1.13%. The second, $217.5 million of GOs, also went to BofA. Bonds in 2032 with a 5% coupon yield 1.20%, 5s of 2033 yield 1.26%, 5s of 2034 at 1.32%, 5s of 2035 at 1.39% and 5s of 2036 at 1.43%.
The last, $50 million of taxable general obligation bonds, sold to Wells Fargo Securities. Bonds in 2024 yield 0.27% and 0.52% in 2025, priced at par.
Maryland was trading even cheaper in the secondary Wednesday. Maryland GO 5s of 2024 at 0.32%. Maryland 5s of 2026 traded at 0.58%. Maryland 5s of 2031 traded at 1.14% versus 1.09% Wednesday.
Brookline, Massachusetts, (Aaa/AAA//) sold $167.9 million of general obligation municipal purpose loan of 2021 bonds to BofA. Bonds in 2024 with a 4% coupon yield 0.10%, 4s of 2026 at 0.54%, 3s of 2031 at 1.13%, 2s of 2036 at 1.83%, 2s of 2041 at 2.05% and 2s of 2046 at 2.27%.
The Regents of the University of California (Aa2/AA/AA/) priced several large deals with Jefferies LLC running the books on all of them.
Jefferies priced $1.09 billion taxable general revenue bonds in two series. The first, $615.6 million, had bonds in 2022 yield 0.163%, 0.87% in 2026, 1.997% in 2031, 2.447% in 2036, 2.847% in 2041 and 3.146% in 2051, all priced at par. The second series, $475 million, yield 3.071% in 2051 at par.
Jefferies priced $290 million of exempt general revenue bonds. Bonds in 2022 with a 3% coupon yield 0.13%, 5s of 2026 at 0.53%, 5s of 2031 at 1.07%, 5s of 2036 at 1.40%, 4s of 2041 at 1.88%, 4s of 2046 at 2.02%, and 4s of 2051 at 2.07%
It was unclear whether the issuer priced $892.9 million of limited project revenue bonds; $448.9 million of taxable limited project revenue bonds; and $397.4 million of limited project forward delivery revenue bonds.
BofA priced $258.2 million of refunding revenue bonds for the Sacramento County Sanitation District Financing Authority, California, (Aa2/AA/AA-/). Bonds in 2021 with a 5% coupon yield 0.17%, 5s of 2026 at 0.64%, 4s of 2031 at 1.25%, and 3s of 2034 at 1.73%.
BofA priced $139 million of general revenue forward delivery bonds for the Nebraska Public Power District (A1/A+/A+/). Bonds in 2023 with a 5% coupon yielded 0.55%, 5s of 2027 at 1.14%, 5s of 2031 at 1.66%, 5s of 2036 at 1.98% and 5s of 2041 at 2.18%.
Piper Sandler & Co. priced $108.7 million of unlimited tax school building bonds, PSF guaranteed, for the Clear Creek Independent School District (Aaa//AAA/). Bonds in 2022 with a 5% coupon yield 0.16%, 5s of 2026 yield 0.62%, 5s of 2031 at 1.22%, 3s of 2036 at 1.63% and 3s of 2041 at 1.83%.
Trading
Minnesota GOs 5s of 2023 traded at 0.19%. Maryland GO 5s of 2024 at 0.32%. Virginia Beach 5s of 2026 at 0.57% versus 0.38% on Feb. 17. Howard County, Maryland, 5s of 2028 at 0.88% versus 0.54% on Feb. 17. New York City GO 5s of 2029 at 117%.
University of Texas 5s of 2030 at 1.14% versus 84.3% on Feb. 17. Washington GO 5s of 2031 at 1.24%. Washington 5s of 2032 at 1.30% versus 0.94% on Feb. 17. Iowa green 5s of 2034 at 1.39%. Water Environment, Oregon, 5s of 2032 at 1.41%-1.38% versus 0.86% original.
Washington GO 5s of 2039 at 1.62% versus original 1.22%.
New York City Transitional Finance Authority 5s of 2038 at 2.16%-2.13%, 4s of 2039 at 2.20%-2.07% versus 1.58% on Feb. 11. NYC TFA 4s of 2040 traded at 2.24%-2.11% versus 1.74% on Feb. 17.
New York City water 5s of 2041 at 1.88%-1.87% versus 1.60% Friday.
Texas water 4s of 2045 at 1.82%-1.71% versus 1.49%-1.43% on Feb. 17.
Massachusetts GO 5s of 2050 at 1.95% versus 1.86%-1.85% Friday.
Economy
The highlight of the day was Federal Reserve Board Chair Jerome Powell’s second day of testimony before Congress, before the House Financial Services Committee on Wednesday.
“What stands out in Powell’s testimony is what it does not mention, more so than what is included,” said Berenberg Capital Markets Chief Economist for the U.S. Americas and Asia Mickey Levy. “The Fed is silent on any risks involved in its monetary policy, and how it may respond if things change and do not follow the Fed’s script.”
With Powell pointing to uncertainties ahead and these two Congressional panels “charged with supervising the Fed,” he asserted, “the Fed’s semi-annual report and Chair Powell’s testimony should have mentioned that the Fed is following potential risks and balancing them with its mandated objectives.”
New home sales grew 4.3% in January to a 923,000 seasonally adjusted annual rate from an upwardly revised 885,000 in December and 774,000 a year ago.
The December figure was originally reported as 847,000. Economists polled by IFR Markets expected 855,000 sales.
Only the Northeast region saw fewer sales in January, a 13.9% drop to 31,000 from 36,000 a month earlier.
The median sale price fell about $7,000 to $346,400, while the average price was up about $14,000 to $408,800.
"With existing home inventory at all-time lows, the demand for new construction remains strong," said National Association of Home Builders Chief Economist Robert Dietz. "Though, rising building and development costs, combined with recent increases in mortgage interest rates, threaten to exacerbate existing affordability conditions. Builders are exercising discipline to ensure home prices do not outpace buyer budgets."
ICI reports record $2.921 billion more inflows
Long-term municipal bond funds and exchange-traded funds saw combined inflows of $2.921 billion in the week ended Feb. 17, ICI reported Wednesday.
In the previous week, muni funds saw a revised inflow of $4.093 billion, ICI said.
Long-term muni funds alone had an inflow of $2.517 billion in the latest reporting week after an inflow of $3.483 billion in the prior week.
ETF muni funds alone saw an inflow of $404 million after an inflow of $610 million in the prior week.
Taxable bond funds saw combined inflows of $14.643 billion in the latest reporting week after an inflow of $14.482 billion in the prior week.
ICI said the total combined estimated inflows from all long-term bond funds and ETFs were $17.364 billion after an inflow of $18.576 billion in the previous week.
Secondary market
High-grade municipals were weaker across the scale, according to final readings on Refinitiv MMD’s AAA benchmark scale. Short yields were at 0.10% in 2022 and 0.16% in 2023. The 10-year rose to 1.09% and the 30-year to 1.75%, both seven basis point cuts.
The ICE AAA municipal yield curve showed short maturities rose to 0.12% in 2022 and 0.19% in 2023. The 10-year rose seven basis points to 1.07% while the 30-year yield rose seven to 1.75%.
The IHS Markit municipal analytics AAA curve showed yields at 0.12% in 2022 and at 0.15% in 2023 while the 10-year rose seven basis points to 0.96% and to 30-year rose six to 1.64%.
The Bloomberg BVAL AAA curve showed yields at 0.10% in 2022 and up one basis point to 0.15% in 2023, while the 10-year rose four basis points to 1.03%, and the 30-year yield rose four basis points to 1.71%.
The three-month Treasury note was yielding 0.09%, the 10-year Treasury was yielding 1.38% and the 30-year Treasury was yielding 2.23% near the close. Equities ended the day stronger with the Dow up 451 points, the S&P 500 up 1.21% and the Nasdaq up 1.00%.
Christine Albano contributed to this article.
