Municipals ended the month in the red but yields rose only a basis point or two on most triple-A scales on Monday while U.S. Treasuries were also softer and equities rallied hard.
Triple-A benchmark yields rose slightly as did UST, keeping muni to UST ratios in a higher range. The municipal to UST ratio five-year was at 76%, 87% in 10 and 93% in 30, according to Refinitiv MMD's 3 p.m. read. ICE Data Services had the five at 76%, the 10 at 89% and the 30 at 92%.
Market volatility has led to all municipal bond indexes being deep in the red, seeing the worst performance to start the year since 2018 and the biggest monthly losses since March 2020.
The Bloomberg Municipal Index is at negative 2.70%, while high-yield sits at negative 2.65%. Taxable munis saw losses of 2.41% through Jan. 28 and the Municipal Impact Index has seen losses of 3.38%.
Looking deeper, the GO index has lost 2.76% and the revenue bond index 2.77%. The five-year muni has lost 2.39%, the 10-year 2.85% and the long (22+) 3.49%.
For impact, the green index has lost 3.25%, the social, 4.47% and the sustainable, 3.16%.
January municipal bond issuance
Tax-exempts dislocated from Treasuries last week, posting negative total returns and significantly underperforming for a fourth consecutive week on market volatility, accelerating fund outflows, and elevated secondary market activity, said Peter Block, managing director, at Ramirez & Co.
He said investors remained uninterested in new issues, requiring underwriters to raise yields and drawdown unsold balances when repricing.
Investor bids wanted were roughly 85% above average the past week and remained elevated on Monday. Friday's bids wanteds just missed the billion mark at $961.96 million after $1.280 billion on Thursday.
Market liquidity has been challenged, Block said.
Par volume of trading per the Municipal Securities Rulemaking Board showed Friday's total at $15.053 billion while Thursday was at $14.982 billion. Trading was elevated again on Monday.
Tax-exempts underperformed by an average of 15.3 ratios throughout the curve, headed by the 2-year spot, which increased by 18.7 ratios to 76.6% and the 5-year spot, which increased by 16.6 ratios to 75%.
Block said spreads on general market names remain tight compared to historical levels, while they are wider for coupons below 5%. Munis are projected to continue to underperform for a few more weeks as markets remain volatile and investors re-evaluate their muni holdings, he said.
Bond Buyer 30-day visible supply sits at $12.15 billion while net negative supply is at $12.246 billion, per Bloomberg data.
Secondary trading
New York City Transitional Finance Authority 5s of 2023 at 0.74%. Mecklenburg County, Maryland 5s of 2023 at 0.71%-0.66%. Baltimore County, Maryland 5s of 2024 at 0.99%. Maryland 5s of 2024 at 1.01%. Florida PECOs 5s of 2024 at 1.00% versus 0.52% original on 1/13. Columbus, Ohio 5s of 2026 at 1.33%.
New York State Urban Development Corporation 5s of 2027 at 1.42%. Washington 5s of 2028 at 1.47%. Delaware 5s of 2029 at 1.45%-1.42% versus 1.16% on 1/21.
Charleston, South Carolina waters 4s of 2031 at 1.63%-1.62%. Baltimore County, Maryland 5s of 2031 at 1.62%. University of Texas 5s of 2031 at 1.63%. Maryland 5s of 2033 at 1.63%-1.62% versus 1.66% on Friday and 1.50% on Thursday.
DASNY 5s of 2034 at 1.84%. Ohio Water Development Authority 5s of 2034 at 1.72%. Los Angeles Department of Water and Power 5s of 2035 at 1.81%.
Washington 5s of 2045 at 2.09%-2.08%. Ohio waters 5s of 2046 at 1.98%-1.97% versus 1.86% on Wednesday and 1.75% on 1/21. Los Angeles Department of Water and Power 5s of 2046 at 2.14% versus 2.03% on Wednesday and 1.81% original. Massachusetts 5s of 2050 at 2.18%.
AAA scales
Refinitiv MMD's scale saw a basis point cut on the short end at the 3 p.m. read: the one-year at 0.62% (+1) and 0.90% (+1) in two years. The five-year at 1.22%, the 10-year at 1.55% and the 30-year at 1.95%.
The ICE municipal yield curve was saw one to three basis point cuts: 0.63% (+3) in 2023 and 0.914% (+3) in 2024. The five-year at 1.23% (+2), the 10-year was at 1.58% (+1) and the 30-year yield was at 1.94% (+1) in a 4 p.m. read.
The IHS Markit municipal curve was cut by one to two basis points: 0.65% in 2023 and 0.88% in 2024. The five-year at 1.21% (+2), the 10-year at 1.58% (+5) and the 30-year at 1.97% at a 4 p.m. read.
Bloomberg BVAL was cut one to two basis points: 0.66% (+1) in 2023 and 0.89% (+2) in 2024. The five-year at 1.22% (+1), the 10-year at 1.56% (+1) and the 30-year at 1.95% (+1) at a 4 p.m. read.
Treasuries were weker and equities rallied to end the month.
The two-year UST was yielding 1.182%, the five-year was yielding 1.617%, the 10-year yielding 1.790%, the 20-year at 2.188% and the 30-year Treasury was yielding 2.121% at the close. The Dow Jones Industrial Average gained 406 points or 1.17%, the S&P was up 3.41% while the Nasdaq gained 3.41% at the close.
Are markets expecting too much?
With the Federal Reserve poised to raise rates “soon” and inflation still raging, the market increased its expectations for rate hikes and talk of a 50 basis point increase entered the conversation
“With the economy likely to slow and [as] inflation momentum wanes, the bigger question remains: How fast and by how much can the Fed raise rates without choking off growth or flattening the yield curve?” asked Stifel Chief Economist Lindsey Piegza.
Other analysts have pondered the issue.
“There are clearly many risks to any economic forecast including new variants of the virus, geopolitical concerns and domestic political issues,” said David Kelly, chief global strategist at JPMorgan Funds. “However, one of the greatest risks is that the Federal Reserve turns too active in its new-found zeal to defeat inflation.”
The rise in the consumer price index, he said, results more from supply-chain issues “caused by the pandemic and generous federal government aid.” And these pressures will diminish in the coming months, Kelly said.
While rate hikes are needed to prevent asset bubbles in stocks, housing and speculative investments, he said, “if they instead embark on an aggressive attack on inflation starting with, for example, a 50-basis point fed funds increase that some are predicting for March, they risk precipitating a crash in asset prices and greater weakness in economic growth.”
Weak growth could “interrupt their normalization, which would be particularly unfortunate since it would take many years of steady uninterrupted tightening to actually bring monetary policy back to balance,” Kelly added. “If the Fed fails by trying to fine-tune the business cycle with overly aggressive tightening, it is also those assets with the highest valuations that are most vulnerable. This suggests that whether the Fed forecasts for 2022 turn out to be on the mark or not, the most logical strategy for investors is to focus more intently on valuations and balance in the year ahead.”
Scott Anderson, chief economist at Bank of the West, agreed the Fed needs to be careful.
“The U.S. economy today is hardly a picture of roaring aggregate demand growth that must be tamed ASAP,” he said. Pointing to the decline in consumer spending growth in the past half year, Anderson warned, “there is a real danger of the Fed overdoing it on the monetary tightening front, just as the economy is naturally slowing down, fiscal stimulus is unwinding, and financial conditions are about to tighten.”
Given the lag in monetary policy, he said, “the danger of the Fed overdoing it is high, especially if they decide to raise interest rates by more than a percentage point this year.” Especially at the start, he said, it makes sense for the Fed to proceed slowly and gauge “the reaction of markets, consumers, and prices to somewhat tighter monetary conditions.”
While rising prices and the Omicron variant are cited for consumer confidence declines, Anderson asks, “is the solution really to stomp on the monetary brakes?”
If the Fed raise more than three or four times this year, he said, “the Fed’s inflation problem this year could swiftly become a growth one in 2023.”
But Berenberg Capital Markets Chief Economist for the U.S. Americas and Asia Mickey Levy, a member of the Shadow open Market Committee, said “the Fed is farther behind the rise in inflation than at any time since the late 1970s, and combined with super-tight labor markets, it may be forced to raise rates faster than is currently anticipated in financial markets.”
Even if the Fed raises six times this year and four next year, as Levy forecasts, “that would still leave the real Fed funds rate negative and may not be sufficient to lower inflation and interrupt the wage-price feedback loop.”
Inflation, Levy said, will rise more than the Fed forecasts, with personal consumption expenditure inflation on an annualized basis continuing to gain before receding in the second half of the year. While the Fed expects PCE inflation to fall to 2.6% and core PCE to drop to 2.7% in the fourth quarter, Levy expects both numbers will “remain elevated, near 4%,” with services inflation accelerating, while goods see disinflation or moderate deflation.
Wages are rising and will continue to do so, Levy said, with labor shortages allowing wages to catch up to inflation expectations.
“By any measure, the Fed must raise rates significantly to get monetary policy back toward neutral,” he said. “The real Fed funds rate is deeply negative. The Fed must close that gap.”
It won’t be easy. “The difficult challenge will be to raise rates sufficiently to slow demand sufficiently to interrupt the wage-inflation feedback loop and dampen inflationary expectations, but not too much and generate recession,” he said. “And it must accomplish this task in a polarized Washington political environment and knowing that raising rates will force an adjustment of valuations in financial markets.”
Having waited too long to taper and liftoff, Levy said, “the Fed ought to raise rates aggressively to close the gap between the Fed funds rate and inflation. Even if the Fed assumes inflation will fall to 3%-3.5% as supply bottlenecks dissipate, that would require raising rates quickly to that range.”
Balance sheet runoff “should also be fairly aggressive,” he said, as “moving more slowly would not slow aggregate demand and may fuel ongoing inflationary expectations.”
However, Levy expects the Fed will move slower than he thinks it should. “Based on its experiences and economic performance during the past decade, the Fed has reinterpreted ‘gradual’ to mean much slower rate increases than before the financial crisis, when a rate increase at every meeting was considered gradual and the Fed occasionally raised rates in between meetings,” he said. “The members of the FOMC have a distinct dovish tilt and this will be accentuated when President Biden’s three nominees become governors.”
Additionally, he expects “cross currents from the White House and Congress.” Not to mention the Fed is aware of how it impacts financial markets. “The Fed definitely wants to avoid a monetary tightening that would generate recession.”
Primary to come:
Rayburn Country Securitization is set to price next week $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 Friday $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 Thursday $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 Tuesday $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.
City of San Antonio, Texas, Electric and Gas Systems (Aa3/A+/AA-//) is set to price Tuesday $347.865 million of fixed and variable rate junior lien revenue refunding bonds, Series2022, serials 2026-2044, term 2049. Jefferies.
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 next week $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 daily $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:
Massachusetts (Aa1/AA/AA+/) is set to sell $300 million of general obligation bonds consolidated loan of 2022, Series A at 10 a.m. eastern Tuesday.
Massachusetts (Aa1/AA/AA+/) is set to sell $350 million of general obligation bonds consolidated loan of 2022, Series A at 10:30 a.m. Tuesday.
Hampton, Virginia, is set to sell $117.37 million of general obligation public improvement bonds, Series 2022A at 10 a.m. eastern Thursday.
Lynne Funk contributed to this report.
