Triple-A benchmark yields were little changed on the shorter end of the curve, while bonds outside of five years saw the first bumps of substance in 2022 to begin the new month. Treasuries were softer to close the session, while equities rebounded to end in the black.
The municipal to UST ratio five-year was at 76%, 84% in 10 and 90% in 30, according to Refinitiv MMD's 3 p.m. read. ICE Data Services had the five at 73%, the 10 at 85% and the 30 at 89%.
Last week, municipal market price drops escalated, with tax-exempt triple-A benchmark yields increasing 27 to 34 basis points, nearly doubling the sector's year-to-date losses and unsettling institutional investors, said Matt Fabian, a partner at Municipal Market Analytics.
He said losses were triggered in part by the Federal Open Market Committee's announcement that rate rises in March were probable.
“Fed clarity, along with heavy media coverage of inflation data and the negative implications for bond investors, helped catalyze the
Customer-sold volumes ended the week at 201% of recent averages, surpassing customer buying by more than $1 billion for the first time since the third quarter of 2020, as compared to earlier in the month, Fabian said.
He said primary dealers were trimming muni inventories throughout last week, decreasing non-variable rate demand obligation balances by 24% between Dec. 15 and Jan. 19.
It's unclear if this trend continued last week, but Fabian said offered side curves don’t seem to have been lowered quickly enough, resulting in still-oversold valuations at the 11-year maturity and longer.
“This is consistent with anecdotal commentary about offered lists trading away at sharp discounts, and it suggests that some/many sellers remain optimistic about a quick return of fund buying,” he said.
While this may be true, Fabian believes that regaining retail interest amid the barrage of negative media coverage will be difficult, especially with yields still uncomfortably low for most non-fund buyers. With major fund NAVs down 2.5% to 3.5% year-to-date and widespread concerns about price decline possibilities for recent, low-coupon market structures.
Muni-to-Treasury ratios do, however, signal value, especially given that cheap-to-eval purchasing opportunities are expected to continue to emerge as trade and price discovery remain unresolved, he said.
January will go down in history as the month with the greatest monthly loss since index records began in 1980. No sector was spared, with losses ranging from 0.66% in short maturities to nearly 3% in long maturities, said Kim Olsan, senior vice president at FHN Financial. This is in contrast to a year earlier, when all but taxables saw gains.
Rates have raced higher by as much as 70 basis points throughout the month, and this has had a direct influence on buyer mood, she said. Curve movements are driving some inquiry into shorter duration buckets.
The main muni index fell 2.74%, setting a record high for January in almost 40 years. General obligation bonds were given no preference over revenues by bidders, as both groups lost more than 2.75%. While overall supply last month fell 15% from last January as just $24 billion was issued, Olsan said the mix of general obligation to revenue debt issues was at near parity.
She said short-term bonds selling behind 1% now provide appealing relative value to a broader range of investors. Losses in the middle range were as high as 3% and the availability of high-grade credits with yields of above 1.5% is a significant component of that huge yield shift. Index losses hit 3.5% at the long end of the curve, as benchmark rates surged roughly 50 basis points, she said. Sub-5% structures have widened significantly as a result of the increased coupon variability in this range.
“Implied AAA spreads in 3% 20-year bonds are +50/AAA 5s, up from a low of +36/AAA 5s at end of 2021,” said Olsan. “An example of the dramatic moves can be seen in a Dorm Authority of New York 3% due 2041 that came in early December at 2.09% (+79/AAA) and traded at the end of January at a 2.75% (+106/AAA) bidside.”
In the primary market, Jefferies priced for the City of San Antonio, Texas, Electric and Gas Systems (Aa3/A+/AA-/) $361.2 million of junior lien revenue refunding bonds. The first tranche, $236.365 million of junior lien refunding bonds, saw 5s of 2026 at 1.32%, 5s of 2027 at 1.42%, 5s of 2032 at 1.85%, 4s of 2037 at 2.23%, 5s of 2042 at 2.17%, 5s of 2044 at 2.23%, callable in 2/1/2032. The second trance, $124.835 million of junior lien refunding bonds with 2s of 2049 at 1.90%, noncall, mandatory tender in 12/1/2027, soft put.
BofA Securities priced for Wellstar Health System (A2/A+//) $257.17 million of revenue anticipation certificates. The first tranche, pricing for Paulding County Hospital Authority, Georgia, $81.43 million of Series 2022A, saw bonds maturing in 4/2023 with a 5% coupon yield 0.87%, 5s of 2027 at 1.63%, 5s of 2032 at 2.11%, 5s of 2037 at 2.33%, 5s of 2042 at 2.37% and 5s of 2043 at 2.41%, callable 4/1/2032.
The second tranche, pricing for Cobb County Kennestone Hospital Authority, Georgia, $175.74 million of Series 2022A, saw bonds maturing in 4/2052 with a 4% coupon yield 2.85%, callable in 4/1/2032.
BofA Securities priced for the Okaloosa County School Board, Florida (Aa3//AA/) $113.56 million of certificates of participation, Series 2022A. Bonds maturing in 10/2022 with a 5% coupon yield 0.72%, 5s of 2027 at 1.58% and 5s of 2030 at 1.82%, noncall.
In the competitive market, Massachusetts (Aa1/AA/AA+/) sold $300 million of general obligation bonds consolidated loan of 2022, Series A, to Citigroup Global Markets. Bonds maturing in 2/2028 with a 5% coupon yield 1.35%, 5s of 2032 at 1.61%, 3s of 2037 at 2.27% and 3s of 2038 at 2.32%, callable 2/1/2032.
Massachusetts also sold $350 million of general obligation bonds consolidated loan of 2022, Series B, to Wells Fargo Bank. Bonds maturing in 2/2039 with a 5% coupon yield 2.06%, 4s of 2042 at 2.14% and 3s of 2048 at 2.85%, callable 2/1/2032.
Secondary trading
Ohio 5s of 2023 at 0.71%. DASNY 5s of 2024 at 1.03%. New York City Transitional Finance Authority 5s of 2024 at 1.06%. Maryland 5s of 2024 at 1%. Maryland 5s of 2025 at 1.13%-1.12%.
Massachusetts 5s of 2026 traded at 1.24%.
District of Columbia 5s of 2028 at 1.43%-1.42% versus 1.11% on 1/20.
Minnesota 5s of 2028 at 1.38%New York City 5s of 2028 at 1.52%. Montgomery County, Maryland 4s of 2028 at 1.45%-1.44%.
Georgia 5s of 2033 at 1.55%. Maryland 5s of 2033 at 1.57% versus 1.47%-1.46% on 1/26. Harris County, Texas 5s of 2034 at 1.69%. Maryland 5s of 2035 at 1.69%.
Los Angeles Department of Water and Power 5s of 2036 at 1.79% versus 1.88% on Friday and 1.52% on 1/22. Ohio State Water Development Authority 5s of 2038 at 1.75%. University of California 5s of 2042 at 1.95%. Los Angeles Department of Water and Power 5s of 2046 at 2%.
AAA scales
Refinitiv MMD's scale was bumped three to five basis points outside of five years at the 3 p.m. read: the one-year at 0.64% (+2 Feb. roll) and 0.91% (+1 Feb. roll) in two years. The five-year at 1.24% (+2 Feb. roll), the 10-year at 1.50% (-5) and the 30-year at 1.91% (-4).
The ICE municipal yield curve saw one to five basis point bumps: 0.61% (-1) in 2023 and 0.93% (-1) in 2024. The five-year at 1.19% (-4), the 10-year was at 1.54% (-5) and the 30-year yield was at 1.90% (-4) in a 4 p.m. read.
The IHS Markit municipal curve was little changed on the short end and bumped out longer: 0.65% in 2023 and 0.88% in 2024. The five-year at 1.21%, the 10-year at 1.52% (-6) and the 30-year at 1.94% (-3) at a 4 p.m. read.
Bloomberg BVAL was bumped two to five basis points: 0.66% (unch) in 2023 and 0.88% (unch) in 2024. The five-year at 1.20% (-2), the 10-year at 1.53% (-3) and the 30-year at 1.90% (-5) at a 4 p.m. read.
Treasuries were steady and equities ended in the black.
The two-year UST was yielding 1.172%, the five-year was yielding 1.627%, the 10-year yielding 1.797%, the 20-year at 2.187% and the 30-year Treasury was yielding 2.120% at the close. The Dow Jones Industrial Average gained 272 points or 0.77%, the S&P was up 0.68% while the Nasdaq gained 0.75% at the close.
Inflation
Investors continue to speculate whether the first Federal Reserve rate hike in March will be 25 or 50 basis points. Inflation will eventually determine the answer.
“Before the U.S. economic data [was released on Tuesday], a lot of traders were thinking it is time to forget about a half-point rate hike in March, unless inflation gets significantly hotter,” said Edward Moya, senior market analyst at OANDA. “Wall Street was starting to lean towards a 25-basis point increase in March, but that won’t remain the base case if wage pressures and prices paid continue to soar.”
The Institute for Supply Management’s prices index jumped to 76.1 in January from 68.2 in December. While the JOLTS report showed job openings rose to 10.925 million in December, suggesting a “super tight” labor market, Moya said.
“Pricing pressures are still ascending at a pace that should concern the Fed and wage pressures are only going to get hotter as the number of job openings increase,” he added.
Indeed, inflation is driving investor decisions, said Jim Besaw, CIO at GenTrust Wealth Management. “The primary driver of markets over the medium to long term will be not whether current inflation is high but whether inflation is sustained at a level closer to 3-4% than the Fed's target of 2%.”
The Fed would need to be more aggressive if inflation is sustained at the higher rate. “While this is not our base case scenario,” Besaw said, “we do believe it is a substantially higher probability than the market is currently pricing in.”
While nearly all analysts see inflation slowing in the near future, he said, “we are skeptical of the speed with which the market believes this will happen.”
The reason? “Many large components of inflation such as rents are just now starting to adjust. Further, businesses appear to be using increased consumer expectations of inflation as cover to increase prices. This often happens with inflation as momentum can take years to work through the system.”
While the market is pricing in four rate hikes this year and three next, Besaw said, “If inflation maintains at closer to its current level than market expectations, more hikes will be needed and sooner.”
Wilmington Trust sees inflation running at a 3% pace by yearend, as “virus-driven demand fades and supply chain pressures ease,” said Luke Tilley, chief economist at the company.
The three biggest upside risks are continued supply chain issues, wage pressures and housing costs, he said. “Homeowner and renter costs are the single largest weight in inflation indices so are a key driver of inflation,” Tilley said. Government measures of housing costs could lag private measures by half a year, he noted. “Recent surges in alternative measures … could portend sustained increases in the official government statistics.”
So where is the U.S. in the economic cycle? At the midpoint, said National Retail Federation Chief Economist Jack Kleinhenz. Growth should continue while the Fed moves rates higher, but the question is for how long.
“The key to extending the expansion is to balance growth, inflation and interest rates,” he said. “Clearly, this expansion is different from the past, and the policy approach will be different.”
Primary to come:
Rayburn Country Securitization is set to price $908.289 million of senior secured cost recovery bonds, consisting of $205.399 million of Series 2022 Class A-1, term 2032; $353.327 million of Series 2022 Class A-2, term 2043; and $349.623 million of Series 2022 Class A-3, term 2051. Jefferies.
Triborough Bridge And Tunnel Authority (/AA+/AA+/AA+) is set to price $650.915 million of payroll mobility tax senior lien bonds, Series 2022A, serials 2034-2042, terms 2047, 2052 and 2057. Ramirez & Co.
Virginia Small Business Financing Authority (/BBB-/BBB/) is set to price Thursday $627.625 million of tax-exempt/alternative minimum tax senior lien revenue refunding bonds, Series 2022. J.P. Morgan Securities.
The Black Belt Energy Gas District (Baa1//A-/) is set to price $490.78 million of gas project revenue bonds, 2022 Series A. Goldman Sachs & Co.
The New York Liberty Development Corp. is set to price Wednesday $449.19 million of green tax-exempt liberty revenue refunding bonds, Series 2022A, consisting of $355.19 million of Series 1 (Aaa///), $58.8 million of Series 2 (Aa3///) and $35.2 million of Series 3 (A2///). Goldman Sachs & Co.
The Department of Airports of the City of Los Angeles, California, (Aa3/AA-/AA-/) is set to price $412.275 million, consisting of $293.845 million of private activity/alternative minimum tax subordinate revenue and refunding revenue bonds, 2022 Series C, serials 2024-2042, terms 2045 and 2049; $99.895 million of private activity/non-alternative minimum tax subordinate refunding revenue bonds, 2022 Series D, serials 2023-2035; and $18.535 million of governmental purpose/non-alternative minimum tax subordinate refunding revenue bonds, 2022 Series E, serials 2026-2039. Loop Capital Markets.
Tarrant County Cultural Education Facilities Finance Corp., Texas, (Aa3/AA-//) is set to price Thursday $215.68 million of hospital revenue bonds, Series 2022. UBS Financial Services.
Arlington Independent School District, Texas, (Aaa/AAA//) is set to price Wednesday $195.035 million of unlimited tax school building and refunding bonds, Series 2022, serials 2023-2047, insured by Permanent School Fund Guarantee Program. Siebert Williams Shank & Co.
Broward County, Florida, (Aa1/AA+//) is set to price Wednesday $178.67 million of water and sewer utility revenue bonds, Series 2022, serials 2028-2043, term 2047. Siebert Williams Shank & Co.
Clifton Higher Education Finance Corp., Texas, (/AAA//) is set to price Wednesday $173.005 million of variable rate education revenue bonds, Series 2021T, serials 2022-2042, terms 2047 and 2050, insured by Permanent School Fund Guarantee Program. Baird.
Upper Arlington City School District, Ohio, is set to price $125.23 million of unlimited tax general obligation revenue bonds, consisting of $55.71 million of Series A, serials 2032-2037, terms 2040, 2044 and 2048; $64.545 million of Series B, serials 2022-2028, terms 2052 and 2055; $4.975 million of Series A-CAB, serials 2022-2031. Stifel, Nicolaus & Co.
Georgetown Independent School District, Texas, (Aaa/AAA//) is set to price $103.88 million of taxable unlimited tax refunding bonds, Series 2022-A, insured by Permanent School Fund Guarantee Program. FHN Financial Capital Markets.
Massachusetts State College Building Authority (Aa2/AA-//) is set to price Wednesday $102.86 million of project and refunding revenue bonds, Series 2022A, serials 2023-2042, terms 2047 and 2052. Jefferies.
National Community Renaissance of California (/A+//) is set to price Thursday $100 million of taxable social corporate CUSIP bonds, Series 2022, serial 2032. Morgan Stanley & Co.
Competitive:
Hampton, Virginia, is set to sell $117.37 million of general obligation public improvement bonds, Series 2022A at 10 a.m. eastern Thursday.
