Municipals were weaker Tuesday amid another spike in U.S. Treasury yields while equities rallied.
The primary market was active, with
Triple-A benchmark yields rose two to five basis points while UST yields rosefour to five. The municipal to UST ratio five-year was at 66%, 76% in 10 and 85% in 30, according to Refinitiv MMD's 3 p.m. read. ICE Data Services had the five at 65%, the 10 at 78% and the 30 at 85% at a 4 p.m. read.
Following the yield collapse in January, there was a noteworthy increase in
“However, it appears as though the market overshot itself and is in the process of trying to find a new range that meets both buyers’ and sellers’ objectives,” she said.
Early in February, she said a cautious commitment theme has emerged, with all other factors influencing broad yield direction — muni fund flows, supply, redemptions, and the Federal Open Market Committee — still in play. The back half of the muni curve has been more volatile since February started with a nominal trend up in yield based on where January’s yields closed out, Olsan said.
She said implied triple-A yields past 2035 have driven a 10 basis point flattening in this range, putting the curve slope around 120 basis points. Trade flows in recent days suggest to higher volume outside 12 years — MSRB statistics show this range has accounted for 53% of secondary activity, with a portion of that coming through swap transactions.
Credit has widened in response to changes in absolute yields.
Aside from the largest rate increase in five years in January, Olsan said the credit curve is widening across the yield curve. On the short end, double-A-rated revenue bonds were around +5/AAA in late December, but the margin is currently +9/AAA. The 5-year spread in single-A revenues has increased to +14/AAA, up from +10/AAA at the end of December.
In the intermediate range, single-A revenue bond spreads have increased to +26/AAA, while double-As are currently trading at +16/AAAs. Because of the real rate increases, she said double-A revenue bonds that were trading at 1.25% in late 2021 are now trading at 1.70%.
Out long, Olsan said credit spreading in both double-A and single-A revenue names is more evident in the 20-year range.
In the primary market Tuesday, BofA Securities priced for the South Carolina Public Service Authority (A2/A/A-//) $930.99 million of tax-exempt refunding revenue obligations, 2022 Series A. Bonds in 12/2023 with a 5% coupon yields 1.01%, 5s of 2027 at 1.59%, 5s of 2032 at 1.99%, 4s of 2037 at 2.42%, 4s of 2042 at 2.55%, 4s of 2047 at 2.73%, 4s of 2052 at 2.82%, 4s of 2055 at 2.9% and 5s of 2055 at 2.71%, callable 6/1/2032.
Citigroup Global Markets priced for the Ohio Turnpike Commission (Aa3/A+/A+/) $310.22 million of forward-delivery turnpike junior lien revenue refunding bonds, 2022 Series A, dated date 11/17/2022. Bonds in 2/2024 with a 5% coupon yields 1.55%, 5s of 2027 at 1.91%, 5s of 2032 at 2.29%, 5s of 2038 at 2.5% and 5s of 2039 at 2.53%, callable 2/15/2033.
Wells Fargo Bank priced for the Greater Orlando Aviation Authority (Aa3/AA-/AA-/AA) $287.305 million of airport facilities bonds. The first tranche, $183.27 million of alternative minimum tax revenue bonds, Series 2022A, saw bonds maturing in 10/2023 with a 5% coupon yields 0.99%, 5s of 2027 at 1.66%, 5s of 2032 at 2.13%, 4s of 2037 at 2.47%, 5s of 2046 at 2.51% and 4s of 2052 at 2.82%, callable 10/1/2031.
The second tranche, $66.055 million of taxable revenue bonds, Series 2022B, saw bonds maturing in 10/29 with a 2.625% coupon at par and 3.6s of 2o51 at par, callable 10/1/2031.
The third tranche, $8.675 million of alternative minimum tax refunding revenue bonds, Series 2022C, saw bonds maturing in 10/2023 with a 5% coupon yields 0.99%, 5s of 2027 at 1.66% and 5s of 2028 at 1.77%, noncall.
The fourth tranche, $19.815 million of non-alternative minimum tax refunding revenue bonds, Series 2022D, saw bonds maturing in 10/2023 with a 5% coupon yields 0.82%, 5s of 2027 at 1.4% and 5s of 2032 at 1.77%, callable 10/1/2031.
The fifth tranche, $11.49 million of taxable refunding revenue bonds, Series 2022E, saw bonds maturing in 10/2023 with a 1.481% coupon at par, 2.302s of 2027 at par and 2.9s of 2032 at par, callable 10/1/2031.
Loop Capital Markets priced for the San Diego County Water Authority Financing Agency (Aa2/AAA/AA+/) $170 million of water revenue bonds, Series 2022A, with 5s of 5/2023 at 0.61%, 5s of 2027 at 1.20%, 5s of 2032 at 1.50%, 5s of 2037 at 1.80%, 4s of 2042 at 2.10%, 5s of 2047 at 2.06%, 5s of 2052 at 2.13%, callable in 5/1/2032.
In the competitive market, Washington (Aaa/AA+/AA+//) sold $199.125 million of various purpose general obligation bonds, Series 2022C – Bid Group 1 to BofA Securities. Bonds maturing in 2/2023 with a 5% coupon yields 0.65%, 5s of 2027 at 1.24% and 5s of 2032 at 1.54%, noncall.
Washington also sold $269.135 million of various purpose GOs, Series 2022C — Bid Group 3 to BofA Securities. Bonds maturing in 2/2042 with a 5% coupon yields 1.93% and 5s of 2047 at 2.04%, callable 2/1/2032.
The state also sold $281.23 million of various purpose GOs, Series 2022C — Bid Group 2 to J.P. Morgan Securities LLC. Bonds in 2/2033 with a 5% coupon yield 1.63%, 5s of 2037 at 1.79% and 5s of 2041 at 1.93%, callable 2/1/2032.
The state last sold $266.38 million of GOs on Nov. 2 in the competitive market. The 10-year with a 5% coupon was bought at 1.25%, or +9 basis points to the Bloomberg BVAL triple-A curve and the long bond on the deal, 4s of 2042, yielded 1.77%, +25 to BVAL.
The Las Vegas Valley Water District (Aa1/AA//) sold $253.82 million of limited tax general obligation water refunding bonds, Series 2022C to Morgan Stanley & Co. Bonds maturing in 6/2023 with a 5% coupon yield 0.70%, 5s of 2027 at 1.28%, 5s of 2032 at 1.60%, 4s of 2037 at 1.95% and 4s of 2042 at 2.10%, callable 6/1/2032.
The issuer also sold $31.495 million of limited tax GO water refunding bonds, Series 2022B to Morgan Stanley & Co. Bonds maturing in 2028 with a 5% coupon yields 1.35% and 5s of 2032 at 1.60%, noncall.
Secondary trading
Ohio 5s of 2023 at 0.71%. New York State Urban Development Corp. sales tax 5s of 2024 at 0.97%-0.96%. NYC TFA future tax 5s of 2024 at 1.10%.
North Carolina 5s of 2026 at 1.17%. Massachusetts 5s of 2026 at 1.23% versus 1.22% Monday and 1.20% Friday. Baltimore County, Maryland 5s of 2027 at 1.28%-1.24%. Georgia 5s of 2028 at 1.32%. New York City waters 5s of 2030 at 1.55%.
Ohio conservation project 5s of 2031 at 1.50%-1.49%. University of California 5s of 2032 at 1.71%-1.70%. New York City 5s of 2033 at 1.88%. Maryland 5s of 2034 at 1.62%-1.60% versus 1.68% on 1/31.
Washington 5s of 2041 at 1.93-1.94%. California 5s of 2041 at 1.88% versus 1.79%-1.76% Thursday. Massachusetts 5s of 2049 at 2.13%-2.12% versus 2.07% on 2/1. Massachusetts 5s of 2051 at 2.14%-2.13%.
AAA scales
Refinitiv MMD's scale saw two to five basis point cuts at the 3 p.m. read: the one-year at 0.63% (+2) and 0.90% (+2) in two years. The five-year at 1.19% (+3), the 10-year at 1.48% (+4) and the 30-year at 1.91% (+5).
The ICE municipal yield curve saw two to four basis point cuts: 0.61% (+2) in 2023 and 0.92% (+2) in 2024. The five-year at 1.18% (+3), the 10-year was at 1.52% (+4) and the 30-year yield was at 1.92% (+4) in a 4 p.m. read.
The IHS Markit municipal curve was cut by two changed: 0.64% (+2) in 2023 and 0.87% (+2) in 2024. The five-year at 1.19% (+2), the 10-year at 1.46% (+2) and the 30-year at 1.91% (+5) at a 4 p.m. read.
Bloomberg BVAL was cut one to five basis points: 0.67% (+1) in 2023 and 0.89% (+2) in 2024. The five-year at 1.23% (+2), the 10-year at 1.50% (+4) and the 30-year at 1.90% (+5) at a 4 p.m. read.
Treasury yields were weaker while equities ended in the black.
The two-year UST was yielding 1.342%, the five-year was yielding 1.814%, the 10-year yielding 1.960%, the 20-year at 2.317% and the 30-year Treasury was yielding 2.256% at the close. The Dow Jones Industrial Average gained 371 points or 1.06%, the S&P was up 0.84% while the Nasdaq gained 1.28% at the close.
Speculating on Fed
While analysts expect a Federal Reserve rate hike at its March meeting, no consensus exists what happens after that.
Most see the Fed being aggressive, but some don’t.
After the taper tantrum, the Fed has tried not to surprise the markets, noted Drew Peterson, vice president and research analyst at Appleton Partners. While he sees a 25-basis point hike at the March meeting, Peterson said “the market has likely gotten ahead of itself by responding to current conditions rather than expectations and we feel that by the second half of the year the case for continuing beyond an initial few hikes will have weakened.”
Fed officials speaking about data dependence “seems to be tacit recognition of that,” he said.
And while annualized consumer price index readings “will remain elevated for some time,” Peterson added, “the monthly series should start moderating over the next several months regardless of Fed policy.”
The plunge in retail spending in December is “a primary reason we expect inflation to slow,” he said. “Surging spending earlier in Q4 had been widely interpreted as post-pandemic consumer demand, although we were more inclined to view these two months as front-loaded holiday shopping driven by supply chain concerns.”
If this is accurate, Peterson said, “early Q4 strength in consumer demand is unlikely to persist.”
Also, gross domestic product’s stronger-than-expected fourth quarter number was fueled by inventory building, which, he said, “cannot continue indefinitely.” Also, “after an extended COVID-influenced inventory drawdown, replenishment is the strongest sign yet that the bottlenecks that have fueled inflation are easing.”
But David Kelly, chief global strategist at JPMorgan Funds, thinks 25-basis point rate hikes every quarter through 2023 and aggressive balance sheet reduction beginning in July “would have the best chance of maintaining an upwardly-sloping yield curve and allowing for a gradual return to positive real rates across all Treasury maturities. This would gradually reduce excess demand in the economy and, importantly, reduce incentives for financial speculation.”
But, he noted, “Fed messaging on this issue is frankly worrying,” pointing to Federal Reserve Board Chairman Jerome Powell’s comments that the Federal Open Market Committee will use the funds rate target as its primary monetary policy tool.
“If the Fed is more aggressive and unpredictable in raising the federal funds rate it runs the risk of destabilizing financial markets,” Kelly said. “This could make it more reluctant to engage in aggressive balance sheet reduction. This, in turn, could lead to a flatter yield curve and concerns that the economy could slow down too much in 2023.”
If inflation falls, but remains above the Fed’s 2% target, he said, “it is doubtful that the Fed would have the fortitude to continue to battle inflation in the face of public or political pressure to ease policy,” while will impede “any scenario leading to much higher long-term interest rates.”
Kelly said, investors need to be aware “that if, because of Fed impatience, rates rise more rapidly over the next year, there is a considerable risk of a subsequent relapse as the Fed abandons its new-found and still shaky inflation-fighting resolve.”
JPM sees headline CPI up 0.4% in January and core to gain 0.3%, with annualized increases of 7.2% and 5.8%, respectively.
“Year-over-year inflation numbers should ease somewhat over the summer as supply issues diminish and a lack of federal government aid constrains consumer spending,” Kelly said. “However, still elevated wage growth along with strong gains in owners’ equivalent rent and higher inflation expectations overall may prevent core consumption deflator inflation from falling below 3% throughout 2022 or 2023.”
In data released Tuesday, small business optimism slipped, while 22% of small business owners surveyed said inflation was their biggest concern, according to the National Federation of Independent Business.
The net percentage of respondents that expect the economy to improve in the next six months was up slightly to a negative 33% reading.
Inflation is causing this pessimism, said Wells Fargo Securities Senior Economist Mark Vitner. “The NFIB survey was one of the first economic indicators to signal that inflation would prove to be far more menacing than the Fed or most private forecasters had been projecting,” he said.
This month’s report implies “inflation will get worse before it gets better,” Vitner said. And even when inflation subsides, he said, “it will likely pressure business operating margins, which is a reason why such a large proportion of business owners remain pessimistic about the near-term economic outlook.”
“More small business owners started the New Year raising prices in an attempt to pass on higher inventory, supplies, and labor costs,” said NFIB Chief Economist Bill Dunkelberg. “In addition to inflation issues, owners are also raising compensation at record high rates to attract qualified employees to their open positions.”
Separately, the U.S. trade deficit widened to $80.7 billion in December from $79.3 billion a month earlier, on growing imports as businesses restocked inventory.
The shortfall for all of 2021 was a record $859.1 billion, up from $676.7 billion in 2020.
Primary to come:
The Port of Portland, Oregon (/AA-//) is set on the day-to-day calendar with $511.35 million of alternative tax minimum Portland International Airport revenue bonds, Series Twenty-Eight, serials 2023-2042, terms 2047 and 2052. Jefferies.
Norwich, Connecticut (/AA//) is set to price Thursday $145 million of general obligation bonds, Issue of 2022. Piper Sandler & Co.
Competitive:
The University System of Maryland is set to sell $23.95 million of auxiliary facility and tuition revenue bonds, 2022 Refunding Series B, at 10:45 a.m. eastern Thursday.
The University System of Maryland is set to sell $97.64 million of auxiliary facility and tuition revenue bonds, 2022 Series A, at 10:30 a.m. Thursday.
