Municipals were weaker Wednesday, following U.S. Treasuries to higher yields in a risk-on trade that saw equities rally after a four-day rout.
Triple-A muni yields rose three to five basis points across the curve while UST were up seven to nine, pushing ratios slightly lower.
Municipal to UST ratios showed the five-year at to 77%, 90% in 10-years and 95% in 30, according to Refinitiv MMD's 3 p.m. read. ICE Data Services had the five at 77%, the 10 at 94% and the 30 at 95% at a 4 p.m. read.
The Investment Company Institute on Wednesday reported $3.502 billion of outflows in the week ending March 2, up from $2.647 billion of outflows in the previous week.
Exchange-traded funds saw inflows at $92 million versus $556 million of inflows the week prior.
The primary was active Wednesday with several large new-issues pricing, some facing concessions to get done. California seeing bumps on the short end for an institutional pricing and cuts on bonds outside of 2024 from Tuesday's retail offering. Further cuts were made from a preliminary pricing in the morning.
Wells Fargo Bank priced and repriced for institutions $2.229 billion of general obligation bonds for California (Aa2/AA-/AA/). The first tranche, $1.460 billion of various purpose general obligation bonds, saw bonds in 4/2023 with a 5% coupon yield 0.94% (-4), 5s of 2027 at 1.65% (+4), 5s of 2032 at 2.05% (+5), 5s of 2047 at 2.53% (+5) and 3 of 2052 at 3.29% (+4), callable 4/1/2032.
The second tranche, $769.825 million of various purpose general obligation refunding bonds, saw bonds in 4/2023 with a 5% coupon yield 0.94% (-4), 5s of 2035 at 2.13%-2.27% (+3 and +5), 5s of 2037 at 2.33% (+5), 4s of 2042 at 2.61% (+2), 5s of 2042 at 2.24%-2.44% (+5) (call 10/1/2028), callable 4/1/2032 at par.
A California 5 of 9/2031 traded at 1.96-1.97%, in line with Wednesday's pricing. The 5s of 2031 traded at 1.73%-1.71% to start the month.
Jefferies priced and repriced for the New York City Transitional Finance Authority (Aa1/AAA/AAA/) $851.37 million of tax-exempt future tax secured subordinate bonds with up to three basis point cuts. The first tranche, $788.71 million of Fiscal 2022 Series D, Subseries D-1, saw bonds in 11/2023 with a 5% coupon yield 1.12%, 5s of 2027 are 1.68%, 5s of 2032 at 2.13%, 4s of 2037 at 2.67% and 5s of 2041 at 2.43%, callable 5/1/2032.
The second tranche, $62.66 million of Fiscal 2022 Series E, saw bonds in 11/2022 with a 5% coupon yield 0.78%, 5s of 2027 at 1.68% and 5s of 2030 at 1.99% (+3), noncall.
The TFA also sold $169.985 million of taxable future tax secured subordinate bonds to UBS Financial Services. Bonds priced at par: 2.10% in 11/2024 and 3.58% in 2037, callable 5/1/2032.
RBC Capital Markets priced for the Hospitals and Higher Education Facilities Authority of Philadelphia (Baa3/BBB/BBB/) $166.07 million of Temple University Health Obligated Group revenue bonds. Bonds in 7/2035 with a 5% coupon yield 2.72%, 5s of 2037 at 2.77% and 4s of 2040 at 3.05%, callable 7/1/2032.
Goldman Sachs priced for the Dormitory Authority of the State New York (A3/BBB+//) $143.2 million of tax-exempt The New School Revenue Bonds, with 5s of 7/2023 at 1.16%, 5s of 2027 at 1.90%, 5s of 2032 at 2.42%, 5s of 2037 at 2.86%, 5s of 2042 at 2.96%, 4s of 2047 at 3.25% and 4s of 2052 at 3.32%, callable 7/1/2032.
RBC Capital Markets priced for Northwest Independent School District, Texas (Aaa//AAA/) $141.264 million of taxable unlimited tax refunding bonds, Series 2022. Bonds in 2/2026 with a 5% coupon yield 2.104%, 5s of 2031 at 2.593%, 3.213s of 2038 at par and 3.536s of 2045 at par, callable 2/15/2032.
BofA Securities priced for Kansas City, Missouri (Aa2/AA/) $132.725 million of general obligation refunding and improvement bonds, Series 2022A. Bonds in 2/2023 with a 5% coupon yield 1.08%, 5s of 2027 at 1.67%, 5s of 2032 at 2.14%, 4s of 2037 at 2.62% and 3s of 2042 at 3.14%, callable 2/1/2032.
BofA Securities priced for Florida Housing Finance Corporation (Aaa///) $120 million of non-alternative minimum tax social homeowner mortgage revenue bonds, 2022 Series 1. Bonds in 1/2023 at 0.90% par, 1.1s of 7/2023 at par, 5s of 1/2027 at 1.80%, 2.05s of 7/2027 at par, 2.7s of 1/2032 at par, 2.75s of 7/2032 at par, 3s of 7/2037 at 2.97%, 3.125s of 7/2042 at par, 3.25s of 7/2046 at par and 3.5s of 7/2052 at 2.18%, callable 7/1/2031.
Most of 2021 was a seller’s market, but 2022 has been shaping up to be a buyer’s market, said Kim Olsan senior vice president of municipal bond trading at FHN Financial.
She said within five years, relative values were below 40% at the start of the year, and within 10 years, they barely reached 70%. Long 5% munis fell short of 80% to the long bond.
But after more than two months, Olsan said such values have risen to 70%-80% on the short end and around 100% over 15 years and out.
New flows were attracted by the retreat in January and February, but the current framework looks to be more opportunistic and patient.
She said it's possible the market may experience further selling, which could worsen wider ratios, but at that point, the majority of the curve would arguably be oversold. The 10-year muni-UST ratio has traded at an average of 93% over the previous 10 years, while the 30-year ratio has averaged 99%.
Daily bid volume has averaged $935 million par value so far this year, compared to $634 million par value at the same time last year, per Bloomberg data. ICI reports fund flows have been negative since mid-January, resulting in a cumulative net outflow of more than $10 billion. In comparison, inflows reached $22 billion over the same time last year.
“Persistent heavy selling combined with outflows will pressure rates, but the opportunity to leg up into higher yield ranges has only been presented a few times in the last several years,” Olsan said. “Since 2017, weaker periods have typically lasted 30-60 days — excluding March 2020 — and then a rally ensues. The buy-into-pullbacks theme is further reinforced with municipal credit holding firm.”
The coupon stack has undergone one of the most significant alterations this year, she said. Fewer than five issuers (in mainstream GOs and essential services) have adopted 2%-range couponing since the beginning of February, and even then only selectively, she said.
This is a reversal from last year, when buyers flocked to those lower coupons in search of more discounts. Since January, a significant rate hike has obliterated the low-coupon market for a larger audience, Olsan said.
Informa: Money market muni funds rise
Tax-exempt municipal money market fund assets added $470.2 million, bringing their up to $84.86 billion for the week ending March 7, according to the Money Fund Report, a publication of Informa Financial Intelligence.
The average seven-day simple yield for the 148 tax-free and municipal money-market funds rose to 0.02%.
Taxable money-fund assets lost $31.23 billion, bringing total net assets to $4.426 trillion in the week ended March 1. The average seven-day simple yield for the 775 taxable reporting funds remained at 0.02%.
Secondary trading
District of Columbia 5s of 2023 at 0.97%-0.98%. Florida Board of Education 6s of 2023 at 1.00-1.10%. Georgia 5s of 2023 at 1.16%. Fairfax County, Virginia 5s of 2024 at 1.34%-1.31%. New York City TFA 5s of 2024 at 1.32%-1.24% versus 1.17%-1.14% on 3/1.
Georgia 5s of 2025 at 1.28%. Ohio 5s of 2025 at 1.28%. Triborough Bridge and Tunnel Authority 5s of 2026 at 1.58%.
Maryland 5s of 2027 at 1.48% versus 1.49% Tuesday. Vermont 5s of 2027 at 1.51%. Mecklenburg County, North Carolina 5s of 2027 at 1.49% versus 1.46% Tuesday. Maryland 4s of 2029 at 1.80%. Georgia 5s of 2029 at 1.68%.
California 5s of 2031 at 1.96-1.97% versus 1.71-1.73% on 3/1. Ohio 5s of 2031 at 1.80%-1.79%. University of North Carolina at Chapel Hill 5s of 2033 at 1.89%. NYC Municipal Water Finance Authority 5s of 2034 at 2.15-2.19% versus 2.13-2.14% Tuesday. Georgia 4s of 2035 at 2.06%-2.03%. New York City TFA 4s of 2042 at 2.79%.
AAA scales
Refinitiv MMD's scale saw five basis point cuts at the 3 p.m. read: the one-year at 0.95% (+5) and 1.19% (+5) in two years. The five-year at 1.45% (+5), the 10-year at 1.76% (+5) and the 30-year at 2.18% (+5).
The ICE municipal yield curve was cut two to four basis points: 0.91% (+3) in 2023 and 1.21% (+4) in 2024. The five-year at 1.45% (+4), the 10-year was at 1.79% (+3) and the 30-year yield was at 2.19% (+3) in a 3 p.m. read.
The IHS Markit municipal curve was also cut: 0.93% (+3) in 2023 and 1.20% (+3) in 2024. The five-year at 1.47% (+3), the 10-year at 1.75% (+3) and the 30-year at 2.15% (+5) at a 4 p.m. read.
Bloomberg BVAL saw two to five basis point cuts: 0.92% (+4) in 2023 and 1.14% (+4) in 2024. The five-year at 1.46% (+5), the 10-year at 1.75% (+5) and the 30-year at 2.16% (+5) at a 4 p.m. read.
Treasuries were weaker while equities rallied.
The two-year UST was yielding 1.671% (+7), the five-year was yielding 1.874% (+9), the 10-year yielding 1.940% (+9), and the 30-year Treasury was yielding 2.2309% (+8) at the close. The Dow Jones Industrial Average gained 653 points or 2%, the S&P was up 2.57% while the Nasdaq gained 3.59% at the close.
Fed rate hikes
The Federal Reserve’s tightening will not be as aggressive as originally expected, according to analysts, and the worries about stagflation and recession grow.
“The risks of stagflation in the U.S. have risen,” said Scott Ruesterholz, portfolio manager at Insight Investment. “We have estimated that every $1 in gasoline prices costs consumers about $100 billion, or 0.45% of GDP,” he said. “Given an over $2 trillion savings stockpile, consumers can manage through some of this increase by dipping into savings, but gasoline will likely crowd out some other discretionary spending, given weakening real disposable personal income.”
But his base case is for strong economic growth despite inflation. “It would likely take even hotter inflation and a larger hit to business confidence to cause real growth to stagnate.”
Also, don’t expect recession. “The flatness of the curve is partly due to the natural flow into safe haven assets during geopolitical uncertainty,” Ruesterholz said.
Higher consumer prices curb purchasing power, he said, so the Fed can cool the economy with fewer rate hikes.
“Recent events have increased uncertainty and possible outcomes,” Ruesterholz said.
Indeed, “the odds of an aggressive tightening of monetary policy this year are now considerably lower,” said James Solloway, chief market strategist at SEI. But the costs of less tightening: “the Federal Reserve remains behind the curve on taming inflation.”
Inflation expectations for “the next couple years will need to be revised upward,” he said.
Still, Wells Fargo Investment Institute Senior Global Market Strategist Scott Wren believes the “Fed will be able to hike rates at a pace and to a magnitude that will create a headwind for demand yet still allow the economy to keep growing,” although there’s an increasing risk of recession.
“Even before the Russian invasion of Ukraine, the probability of a monetary policy error by the Fed was far from zero,” he said. “Some have been arguing that the Fed is behind the curve and should have started raising interest rates over the course of the last six to 12 months. The Fed now finds itself in the unenviable position of having to battle higher-than-expected inflation during a global rise in geopolitical tensions that has further pushed already high energy prices even higher along with a vast array of other commodities.”
The Fed’s attention is focused on inflation, noted Ed Al-Hussainy, senior interest rate and currency analyst at Columbia Threadneedle Investments. This, he said, “allows for low sensitivity to incoming data and market volatility unless moves become disorderly or liquidity collapses.”
With the market pricing in 150 basis points of hikes this year and a terminal rate of 1.75% to 2%, he questions if this is enough to stop inflation. “The Fed will have to lean hard on wage growth data to assess whether inflation is becoming embedded, and the medium-term expectations anchor is moving higher above 2%.”
The turmoil in Ukraine “may have made the Fed’s job easier,” said Deborah Cunningham, chief investment officer, global liquidity markets at Federated Hermes.
“Even as the conflict and international sanctions threaten to push energy prices higher,” she said, “officials surely realize they must not add to the risk and uncertainty by increasing rates sharply.”
The Summary of Economic Projections, Cunningham said, can be a tool to assure the market. If Federal Open Market Committee participants “are relatively in agreement, it would provide needed stability.” She expects no dissent on a 25 basis point rate hike, and the dot plot to signal “a more aggressive projected course of hikes this and next year.”
Primary to come:
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The Regents of the University of Michigan (Aaa/AAA//) also has $582.74 million of taxable general revenue bonds, Series 2022C, on the docket. Goldman Sachs.
The University of Massachusetts Building Authority (Aa2/AA-/AA/) is on the day-to-day calendar with $559.565 million, consisting of $351.95 million of taxable project revenue bonds, Senior Series 2022-2, serials 2024-2037, terms 2042 and 2052 and $207.615 million of taxable refunding revenue bonds, Senior Series 2022-3, serials 2022-2037, term 2041. Citigroup Global Markets.
Denver Public Schools, Colorado (Aa1/AA/AA/) is set to price Thursday $345 million of general obligation bonds, Series 2022A. Stifel, Nicolaus & Co.
The Northern California Power Agency (Aa3//AA-/) is set to price Thursday $119.72 million of Hydroelectric Project Number One revenue bonds, 2022 Refunding Series A, serials 2024-2032. Citigroup Global Markets.
The District of Columbia Water and Sewer Authority is set to price Thursday $100 million of public utility subordinate lien multimodal revenue bonds, Series 2022E. RBC Capital Markets.
