Municipals were steady to end a month that saw anemic supply and muni yields selling off. U.S. Treasuries were firmer out long, and equities ended down.
The three-year muni-UST ratio was at 62%, the five-year at 63%, the 10-year at 66% and the 30-year at 91%, according to Refinitiv MMD's 3 p.m. ET read. ICE Data Services had the three at 63%, the five at 63%, the 10 at 67% and the 30 at 91% at 4 p.m.
Municipal and UST yields rose "again last week on stronger data and expectations for more Fed rate hikes to combat medium-term inflation; projections of a hypothetical terminal fed funds rate above 6% help loosen investor expectations generally, allowing higher yields regardless of 'value,'" said Matt Fabian, a partner at Municipal Market Analytics.
This is a conundrum for USTs — with the two-year nearing 5% and the 10-year nearing 4% — "but more so for tax-exempt municipals as the entire curve now yields safe income at or near typical retail triggers," he said.
Still, "theoretical, yield-hungry demand has not arisen, trading flows have instead subsided to below 100% of recent daily averages and fund flows are turning negative again," he noted.
In other words, he said, "investors appear more worried about price declines than scarce supply and reinvestment, creating more downside performance potential via 2022-style liquidity challenges, etc., if fund outflows actually become sustained."
Fabian noted, "unfavorable March seasonal expectations do not help here, nor does the weak current reinvestment data." Around $15 billion of maturities and calls are expected in the next 30 days versus $17 billion in March 2022 and $18 billion in March 2021.
"Also biasing market action to the negative: widespread perceptions of municipals being too rich: via lagging muni-UST ratio averages."
Fabian argues muni-UST levels are evolving and, "because of thin tax-exempt supply and, reasonably volatile and elevated inflation, may well have evolved into structurally lower/richer ranges."
February municipal bond issuance
Total volume for the month was $18.303 billion in 391 issues versus $31.602 billion in 877 issues a year earlier, according to Refinitiv data.
In the primary market Tuesday, BofA Securities priced for the Chicago Board of Education (//A/BBB) $519.680 million of dedicated capital improvement tax bonds, Series 2023, with 5.25s of 4/2033 at 4.35%,5s of 2038 at 5.01%, 5s of 2043 at 5.18% and 5.75s of 2048 at 5.24%, callable 4/1/2033.
Siebert Williams Shank & Co. priced for Tarrant County Hospital District, Texas, (Aa1//AA/AAA/) $439.790 million of limited tax bonds, Series 2023, with 5s of 8/2024 at 3.16%, 5s of 2028 at 2.94%, 5s of 2033 at 3.02%, 5.25s of 2038 at 3.71%, 4s of 2043 at 4.40%, 4.25s of 2048 at 4.61%, 5.25s of 2053 at 4.20% and 4.25s of 2053 at 4.66%, callable 8/15/2032.
Morgan Stanley & Co. priced for the Illinois Housing Development Authority $120 million of non-AMT social bonds, Series 2023A, with all bonds pricing at par — 3.2s of 10/2023, 3.45s of 4/2028, 3.55s of 10/2028, 3.85s of 4/2033, 3.90s of 10/2033, 4.5s of 10/2038, 4.8s of 10/2043 and 4.9s of 4/2047 — except 5.25s of 4/2053 at 4.00%, callable 10/1/2032.
RBC Capital Markets priced for Burbank, California, (Aa3/AA-//) $120 million of water and power electric revenue bonds, Series 2023, with 5s of 6/2026 at 2.65%, 5s of 2028 at 2.55%, 5s of 2033 at 2.64%, 5s of 2038 at 3.37%, 5s of 2043 at 3.79%, 5s of 2048 at 3.99% and 5s of 2053 at 4.04%, callable 6/1/2031.
Infrastructure and inversion
The bond markets are witnessing a rare situation that could hinder spending on infrastructure projects around the country, said Amanda Hindlian, president of fixed income and data services at ICE.
"This dynamic has the potential to shake up market fundamentals and we're watching it closely: the inverted municipal bond yield curve," she wrote in a Monday market comment.
In December, the ICE municipal AAA yield curve inverted and is now at a record level of inversion since ICE started tracking it in 2010.
She said the largest inversion between the one-year and three-year was about 52 basis points on Feb. 15. She noted the next highest inversion was only about 15 basis points on March 18, 2020, at the height of COVID fears.
"The current prolonged inversion is notable because unlike the inverted Treasury yield curve — a common recession bellwether — the muni curve rarely inverts," Hindlian said.
So what are the implications?
"Muni issuers are being sidelined and new issuance projections for 2023 could be cut. This comes amid a lackluster period for the sector, with new issues falling about 20% last year — the biggest drop in four decades," she said. "In practical terms, municipalities have seen short-term financing costs for infrastructure projects soar, with project delays seeming likely."
She said it would be interesting to see whether higher correlations between Treasuries and munis will start to be seen.
"One interpretation of the current inversion is that munis have simply followed the Treasury inversion after the Fed's historic tightening, albeit after a long delay. This dynamic could spell less opportunity to spot compelling relative value trades between Treasuries and munis, with more porous volatility contagion across both markets," she said. "Already, we're seeing the debt ceiling debacle shake muni markets along with Treasuries. Could additional market volatility threaten the perceived safe-haven status of munis?"
She said, however, munis have traditionally been immune to the kinds of market dynamics that affect broader asset classes.
"More predictability through increased correlation with Treasuries may not be a bad thing. Alongside this, we're seeing electronic trading grow steadily for the sector, which supports liquidity and market participation. Notably, the advent of ETFs and separately managed accounts has broadened the scope of individuals who access munis," she said.
"Traditionally seen as a solid retirement investment, younger individuals are now recognizing the tax benefits munis offer," Hindlian said. "This shift has allowed greater institutional adoption of munis, reflected in the 200% growth we saw in institutional firms accessing our muni liquidity last year."
AAA scales
Refinitiv MMD's scale was unchanged. The one-year was at 3.03% and 2.95% in two years. The five-year was at 2.64%, the 10-year at 2.59% and the 30-year at 3.56% at 3 p.m.
The ICE AAA yield curve was little changed: 3.10% (flat) in 2024 and 3.00% (flat) in 2025. The five-year was at 2.66% (flat), the 10-year was at 2.60% (flat) and the 30-year yield was at 3.59% (+1) at 4 p.m.
The IHS Markit municipal curve was unchanged: 3.04% in 2024 and 2.95% in 2025. The five-year was at 2.62%, the 10-year was at 2.58% and the 30-year yield was at 3.58% at a 4 p.m. read.
Bloomberg BVAL was little changed: 3.15% (unch) in 2024 and 2.93% (unch) in 2025. The five-year at 2.62% (unch), the 10-year at 2.62% (unch) and the 30-year at 3.60% (unch).
Treasuries were firmer out long.
The two-year UST was yielding 4.791% (+1), the three-year was at 4.505% (+1), the five-year at 4.169% (flat), the seven-year at 4.071% (flat), the 10-year at 3.907% (-1), the 20-year at 4.099% (-1) and the 30-year Treasury was yielding 3.895% (-4) at 4 p.m.
Secondary trading
Florida BOE 5s of 2024 at 3.01% versus 3.07% Friday. Harris County, Texas, 5s of 2025 at 3.06%. Illinois Finance Authority 5s of 2026 at 3.17%-3.14%.
Florida 5s of 2029 at 2.65%. Maryland 5s of 2029 at 2.66%. California 5s of 2030 at 2.64% versus 2.60% Thursday.
Huntsville, Alabama, 5s of 2035 at 3.08%. Wisconsin 5s of 2037 at 3.25%-3.22%. Triborough Bridge and Tunnel Authority 5s of 2037 at 3.40%.
NY Dorm PIT 5s of 2046 at 4.00%-3.97% versus 3.68%-3.67% on 2/9. San Antonio ISD, Texas, 5s of 2052 at 4.00% versus 4.00%-3.82% on 2/22 and 4.02% on 2/21.
Economic reports
Looking at Tuesday's data, the Conference Board reported its consumer confidence index for February dropped for a second straight month — to 102.9 from a downwardly revised 106.0 in January, originally reported at 107.1.
"Consumer confidence declined again in February," said Ataman Ozyildirim, senior director at The Conference Board. "The decrease reflected large drops in confidence for households aged 35 to 54 and for households earning $35,000 or more."
The Board noted that its expectation index, which is based on consumers' short-term outlook fell to 69.7 from 76.0 in January. The indexes are based on a 1985 baseline.
"Notably, the expectations index has now fallen well below 80 — the level which often signals a recession within the next year. It has been below this level for 11 of the last 12 months," The Conference Board said.
"Consumer confidence has declined for two consecutive months due to volatile equity markets, still-elevated inflation and growing recession concerns," said Scott Anderson, chief economist at Bank of the West.
"There was encouraging news on the Fed's struggle to lower inflation with average one-year ahead inflation expectations easing to 6.3% — the lowest since April 2021," Anderson said. "Even so, the outlook for consumer spending turned dour with the percentage of consumers planning to purchase autos, homes, major appliances, and take vacations over the next six months, all falling in February."
Wells Fargo said a tight labor market was keeping consumers "feeling secure about their present situation, but still high prices and rising borrowing costs leave consumers particularly concerned about what lies ahead."
In a market comment, Wells Fargo noted that the 3.1 point drop in the confidence index poured some cold water on the streak of strong economic data received to start the year.
"Confidence has now fallen in four of the past five months and this report tells us that although consumers are still enjoying the benefits of a tight labor market, still high prices and higher interest rates are making them less sanguine about future economic conditions," Wells Fargo said.
"Amidst the sea of discouraging news, U.S. consumer confidence data released this morning was ice cold," said José Torres, senior economist at Interactive Brokers, "Favorable for fighting inflation, but at a significant implied cost — declining consumer spending, which represents approximately 70% of the country's GDP."
He said, "with growing fears about a resurgence in inflation, investors face a challenging start to March. Upcoming job market data on Friday, March 10, and results for the next consumer price index are like to be too strong for the Fed and market sentiment may hinge, in part, on the potential for tight labor conditions to fuel wage pressures and the ability of consumers to continue spending as they burn through COVID-19 stimulus payments and increasingly use credit cards to finance their expenditures."
"How consumers manage their rising variable rate debt burdens, the delayed effect of Fed rate hikes, the impact of future rate increases, and persistent inflationary pressures will determine the path of economic performance and asset valuations in 2023," Torres said.
Primary to come
The Southeast Energy Authority in Alabama is set to issue $650 million of Series 2023 commodity supply revenue bonds. The issue will be priced by Goldman Sachs. The deal is rated A1 by Moody's Investors Service.
The Port of Portland, Oregon, is set to sell $583 million of Series 29 Port International airport revenue green bonds subject to the alternative minimum tax on Thursday. Goldman is the senior manager on the deal, which is rated AA-minus by both S&P Global Ratings and Fitch Ratings.
The Washington Metropolitan Area Transit Authority in the District of Columbia is planning a $392 million Thursday sale of Series 2023 dedicated revenue green bonds. RBC Capital Markets is the senior bookrunner. The bonds are rated AA by S&P and Fitch and AA-plus by Kroll Bond Rating Agency.
The Texas Department of Housing and Community Affairs is slated to sell a $230 million offering of residential mortgage revenue bonds on Wednesday. The Series 2023A non-AMT bonds are structured with serials running from 2024 to 2035 and terms in 2038, 2043, 2048 and two in 2053. The bonds will be lead managed by RBC and are rated Aaa by Moody's and AA-plus by S&P.
Portland Community College, Oregon, plans a $225 million sale of Series 2023 general obligation bonds. Rated AA-plus by S&P, the bonds are being senior managed by Piper Sandler
Triple-A-rated Cambridge, Massachusetts, is competitively selling a $93.63 million general obligation bond deal on Wednesday while in the short-term sector, Oyster Bay, N.Y., is competitively selling $162 million of water district notes Wednesday.
