Another reversal for U.S. Treasuries and equities while municipals held steady on Monday ahead of one of the largest new-issue weeks of the year at $17 billion.
U.S. Treasuries erased most of Friday's gains and equities rallied on easing concerns over Omicron. Triple-A benchmark yields were little changed to softer in spots.
This led to ratios falling with the five-year muni to UST ratio at 48%, the 10 at 74% and the 30 at 85%, according to ICE Data Services. Refinitiv MMD's 3 p.m. read had them at 50% in five years, 72% in 10 and 84% in 30.
In the primary, the Florida State Board of Education (Aaa/AAA/AAA//) sold $124.155 million of forward delivery public education capital outlay refunding bonds to BofA Securities. Bonds in 6/2023 with a 5% coupon yield 0.35%, 5s of 2026 at 0.7%, 5s of 2031 at 1.19% and 5s of 2033 at 1.29%, noncall.
Ahead of this week’s glut of volume, the municipal market is poised to absorb the late-year burst of supply as market technicals are expected to remain positive through year end.
“Against a wall of volatility in risk assets, municipal bonds are exhibiting admirable performance with more stable yields relative to U.S. Treasuries,” Jeff Lipton, managing director and head of municipal credit and market strategy and municipal capital markets at Oppenheimer Inc. said on Monday.
“Technicals are holding in nicely and the new-issue market, despite noted growth, will still find it challenging to accommodate near-term reinvestment needs,” due to the overwhelming source of demand, Lipton noted.
Although the month just started, "munis have the potential to finish December with positive returns," Lipton said.
Credit is healthy as the year comes to a close, he said, adding, “Muni credit can be expected to demonstrate continued resiliency entering 2022, particularly against the challenges brought on by the new Omicron variant.”
He noted, in the past week, new-issue syndicate activity revealed a “hearty” appetite for product, with “aggressive” bidding on competitive deals, despite inflationary and COVID concerns.
“Secondary retail inquiries have slowed down into December and can be expected to remain quiet through year-end,” Lipton said, while most notable traders are “very much order driven.”
Secondary trading
Wake County, North Carolina, 5s of 2022 at 0.13%. California 5s of 2022 at 0.15% versus 0.16%-0.14% Thursday. Montgomery County, Maryland, 5s of 2023 at 0.27%. Maryland 4s of 2023 at 0.26%. Texas water 5s of 2023 at 0.27%-0.26%.
Washington Suburban Sanitation District 5s of 2024 at 0.37%. District of Columbia 5s of 2025 at 0.38%.
Washington 5s of 2028 at 0.83%. Baltimore County 5s of 2029 at 0.92%. Maryland 5s of 2030 at 1.01%-1.00%. California 5s of 2030 at 1.06%. Alexandria, Virginia, 5s of 2031 at 1.03% versus 1.04%-1.03% Thursday.
Ohio water green 5s of 2034 at 1.17% versus 1.21%-1.20% Thursday. Los Angeles DWP 5s of 2045 at 1.50%. Harris County, Texas, 4s of 2047 at 1.73%-1.72% versus 1.77% original. LA DWP 5s of 2049 at 1.53%.
AAA scales
Refinitiv MMD's scale was unchanged, save for a one basis point cut on bonds in 2025: the one-year at 0.15% and 0.24% in 2023. The 10-year sat at 1.03% and at 1.48% in 30.
The ICE municipal yield curve showed yields unchanged at 0.17% in 2022 and down one to 0.27% in 2023. The 10-year maturity sat at 1.04% and the 30-year yield was steady at 1.49%.
The IHS Markit municipal analytics curve was steady: 0.17% in 2022 and at 0.25% in 2023. The 10-year was at 1.02% and the 30-year at 1.49% as of a 3 p.m. read.
The Bloomberg BVAL curve was steady at 0.17% in 2022 and 0.22% in 2023. The 10-year yield sat at 1.04% and the 30-year yield rose one to 1.49%.
Treasuries sold off and equities rallied.
The five-year UST was yielding 1.205%, the 10-year at yielding 1.427%, the 20-year at 1.842% and the 30-year Treasury was yielding 1.754% near the close. The Dow Jones Industrial Average gained 651 points or 1.88%, the S&P was up 1.17% while the Nasdaq gained 0.89% near the close.
Economy
With little in the way of economic data this week, the market is focusing on inflation and the Federal Reserve.
The bond market has reacted to positive economic data by “pricing in rate hikes in short-term Treasury yields,” said John Hancock Investment Management's Co-Chief Investment Strategists Emily Roland and Matt Miskin. “However, the re-emergence in COVID cases/risks is causing longer dated Treasury yields to fall. This resulted in the most notable market development of the week to us — the 2- and 10-year Treasury yield spread narrowing meaningfully.”
The yield curve suggests an “evolving” cycle, but Roland and Miskin don’t see it portending a recession just yet. “It can steepen again, but we likely need the Fed to backtrack recent hawkish comments.”
But the flat curve will likely prevent the Fed from raising “rates several times,” since if they “raise rates far,” it will invert the curve.
“The terminal rate that the Fed thinks the fed funds will reach over the ‘long run’ is 2.5%,” they said. “We are going to need a massive adjustment to Treasury yields for the Fed to get there given the levels on longer dated yields. Hard to see it given that economic growth is likely to slow next year as are inflationary pressures.”
Indeed, respondents in a NABE Outlook survey lifted their expectations for inflation, seeing the core consumer price index up 6.0% for the year ending in the last quarter of 2021, nearly a full percentage point higher than in the previous survey.
Supply chain issues, demand and rising wages were the factors respondents said would like inflation.
“Nearly three-fourths of respondents — 71% — anticipate that the Federal Reserve's preferred gauge of inflation, the change in the core PCE price index, will not cool down to or below the Fed’s target of 2% year-over-year until the second half of 2023 or later,” said NABE Vice President Julia Coronado, founder and president, MacroPolicy Perspectives LLC.
The median expectations for the rates are now 0.375% by the end of 2022, up from the 0.125% expected in September, with 38% of respondents expecting two or more rate hikes next year, up from 15% in the September survey.
Economists with BofA Global Research expect rates lifted 200 basis points by early 2024, with the first hike in June 2022, and continuing quarterly.
Markets will “remain challenging” next year, they said, with the U.S. pricing in “persistent inflation but an aborted hiking cycle,” they said. “If breakevens are right, the recovery should be robust enough for the Fed to hike more than priced. If nominal rates are right, inflation is likely to be weaker than priced. This should put upward pressure on real rates.”
Once full employment and sustainable inflation averaging 2% occurs, they said, “the Fed will turn more hawkish.”
For its part, S&P Global Ratings expects inflation “to moderate later in 2022, though we don't expect core PCE inflation to reach the Fed's average 2.0% inflation target until late 2023.”
Liftoff will be in September, they predict, with “three more hikes in 2023 and another two in 2024. The risk is for even tighter Fed policy.”
Primary to come
The Golden State Tobacco Securitization Corp. is set to price Tuesday $2.747 billion of senior taxable current interest bonds, consisting of $2.235 billion of Series 2021A-1, serials 2022-2032, terms 2036, 2041 and 2050 and $512.5 million of subordinate taxable Series 2021B-1, terms 2031 and 2050. Jefferies.
The Golden State Tobacco Securitization Corp. is also set to price Tuesday $1.445 billion of tobacco settlement asset-backed bonds, Series 2021B-2 subordinate capital appreciation bonds, term 2066. Jefferies.
The San Joaquin Hills Transportation Corridor Agency (/A/BBB/) is set to price Wednesday $1.185 billion of taxable senior lien tolls road refunding revenue bonds, Series 2021A and Series 2021B. Goldman Sachs & Co.
The Sales Tax Securitization Corp., Illinois, (/AA/AA-/AA+/) is set to price Wednesday $791.070 million of taxable second lien sales tax securitization bonds, Series 2021B. Loop Capital Markets.
The Sales Tax Securitization Corp. (/AA/AA-/AA+/) is also set to price Wednesday $276.335 million of second lien sales tax securitization bonds, Series 2021A. Loop Capital Markets.
The Massachusetts Water Resources Authority (Aa1/AA+/AA+//) is set to price Thursday $694.09 million of taxable general revenue refunding green bonds, 2021 Series C, serials 2022-2036, terms 2041 and 2044. Citigroup Global Markets.
The Bay Area Toll Authority, California (Aa3/AA/AA//) is set to price Monday $300 million of San Francisco Bay Area Toll Bridge revenue bonds, 2021 Series F-2. Citigroup Global Markets.
The Bay Area Toll Authority (Aa3/AA/AA//) is also set to price Tuesday $276.715 million of San Francisco Bay Area Toll Bridge revenue bonds, consisting of $100 million of 2021 Series D (term rate) and $176.715 million of 2021 Series E (index rate). J.P. Morgan Securities.
San Diego Community College District (Aaa/AAA//) is set to price Tuesday $524.97 million of taxable general obligation refunding bonds, serials 2022-2037, term 2041. RBC Capital Markets.
The Metropolitan Atlanta Rapid Transit Authority (Aa2/AA+//) is set to price Wednesday $381.805 million of taxable sales tax revenue refunding bonds, Series 2021D (green bonds). Goldman Sachs & Co.
The Indiana Finance Authority (Aaa////) is set to price Tuesday $375 million of environmental improvement revenue bonds, Series 2021 (Fulcrum Centerpoint LLC Project), serial 2045. Morgan Stanley & Co.
Oregon Health and Science University (Aa3/AA-/AA-//) is set to price Thursday $334.115 million of revenue green bonds, Series 2021A. J.P. Morgan Securities.
The New York City Housing Development Corp. (Aa2/AA+///) is set to price Wednesday $319.725 million of corporation multi-family housing revenue bonds, consisting of $137.25 million, 2021 Series K-1 (sustainable development bonds), serials 2026-2033, terms 2036, 2041, 2046 and 2051 and $182.475 million of 2021 Series K-2 (sustainable development bonds), term 2060. Jefferies.
The New York City Housing Development Corp. (Aa2/AA+//) is set to price Wednesday $100 million of taxable index floating rate sustainable development multi-family housing revenue bonds, 2021 Series L. Wells Fargo Corporate & Investment Banking.
The California Municipal Finance Authority (A3/A-//) is set to price Tuesday $395.855 million of Community Health System revenue bonds, consisting of $261.845 million of Series 2021A, serials 2025-2041, terms 2046 and 2051 and $134.01 million of Series 2021B, serials 2022-2036, term 2046. Citigroup Global Markets.
Vernon, California, (Baa2/BBB+//) is set to price Tuesday $237,765 million of electric system revenue bonds, consisting of $184.875 million of 2021 Series A and $52.89 million of forward delivery 2022 Series A . Goldman Sachs & Co.
The National Finance Authority (Baa3///) is set to price Tuesday $184.9 million of taxable federal lease revenue bonds (SSA Birmingham Project), serial 2028. Oppenheimer & Co.
Chicago (/BBB+/BBB-/A/) is set to price Tuesday $183.015 million of general obligation bonds, Series 2021A. Loop Capital Markets.
California Municipal Finance Authority Special Finance Agency is set to price Monday $166.925 million of essential housing revenue bonds, consisting of $97.5 million of Series 2021A-1 senior bonds, term 2061 and $69.425 million of Series 2021A-2 junior bonds, term 2052 (Skycrest Apartments). Jefferies.
Andover, Massachusetts, (/AAA//) is set to price Tuesday $165 million of taxable pension obligation bonds, serials 2022-2036, term 2039. Stifel, Nicolaus & Company.
Minnesota Housing Finance Agency (Aa1/AA+//) is set to price Tuesday $150 million of residential housing finance bonds, consisting of $22.69 million social bonds, 2021 Series G, serials 2022-2034 and $127.31 million, 2021 Series H social bonds, serials 2022-2023 and 2026-2027, terms 2036, 2041, 2046 and 2052. RBC Capital Markets.
Omaha, Nebraska, is set to price Wednesday $146,195 million, consisting of $92.82 million of various purpose and refunding bonds, Series 2021A and $55.375 million of taxable general obligation refunding bonds, Series 2021B. D.A. Davidson & Co.
Pompano Beach, Florida, (//BBB/) is set to price $139.885 million of revenue bonds (John Knox Village Project), Series 2021, consisting of $89.885 million of Series 2021A, $25.43 million of Series B-1 and $24.57 million of Series B-2. HJ Sims & Co.
Lakeland, Florida, (/AA/AA/) is set to price Tuesday $131.81 million of energy system revenue bonds, Series 2021, serials 2022-2041, term 2048. Citigroup Global Markets.
The New Hope Cultural Education Facilities Finance Corp., Texas, is set to price Thursday $125 million of Jubilee Academic Center education revenue bonds. D.A. Davidson & Co.
Santa Maria Joint Union High School District (Santa Barbara and San Luis Obispo Counties, California) (Aa2///) is set to price Wednesday $114.43 million, consisting of $67 million of Series 2021, serials 2023-2026 and 2030-2042 and $47.43 million of taxables, serials 2022-2037. Raymond James & Associates.
The Massachusetts Housing Finance Agency (Aa1///) is set to price Wednesday $100 million of non-AMT single family housing notes, Series 2021, serial 2022. Citigroup Global Markets.
Competitive
Little Rock, South Dakota, (Aa2///) is set to sell Tuesday $315.94 million of refunding and construction bonds, Series A at 11 a.m. eastern Tuesday.
The San Francisco Public Utilities Commission is set to sell $51.145 million of power revenue green bonds, 2021 Series A at 11 a.m. Tuesday and $73.855 million of power revenue bonds, 2021 Series B at 11:30 a.m. Tuesday.
Pulaski County Special School District, Arkansas, is set to sell $108.75 million of refunding and construction bonds, tax exempt, Series 2021B at noon Thursday eastern.
Christine Albano contributed to this report.
