U.S. Treasuries pared back gains with yields rising by four to six basis points Friday and stocks rallied to record highs as investors' concerns over a lull in the economic recovery quieted. Municipal bonds did as they often do on a summer Friday — stayed on the sidelines and awaited the coming week's larger new-issue calendar.
Triple-A benchmarks were little changed Friday while investors will see $10 billion of supply, the largest calendar since the week of June 14 ($11 billion), according to The Bond Buyer, Ipreo and Refinitiv data. Tax-exempts are $7.44 billion while taxables make up $2.68 billion.
Leading the calendar is $832 million of forward delivery bonds from the Metropolitan Pier & Expo Authority, Illinois, (/BBB+/BB+/AA-/) and the New York City Transitional Finance Authority (Aa3/AA/AA/) with $589.1 million of exempt building aid revenue refunding bonds in a negotiated deal and $210 million of taxable BARBs in the competitive market Wednesday.
The largest loans in the competitive market are Colorado with $370 million of educational loan program tax anticipation notes Tuesday, and Santa Clara County, California, (/AAA/AA+/) on Tuesday with $350 million of taxable general obligation bonds.
Thirty-day visible supply is at $13.73 billion, according to The Bond Buyer data.
The diversity of credits should give investors much to work with for reinvestment needs. Net negative supply is at -$12.3 billion, per Bloomberg data.
Municipal-to-UST ratios were lower, reflecting the movement in Treasuries. They were at 62% in 10 years and 67% in 30 on Friday, according to Refinitiv MMD. ICE Data Services had the 10-year muni-to-Treasury ratio at 63% and the 30-year at 68%.
While municipals hit the pause button Friday, the movement in yields mark the largest one-week decline in 2021 at 12 and 14 basis points in 10 and 30 years, respectively, according to Refinitiv MMD. ICE Data Services, IHS Markit and Bloomberg BVAL benchmark yields also marked the largest drops of 2021.
Participants don't see yields reaching the highs touched in the first half of the year.
"We do not expect the 10-year AAA to retest the 1.16% peak in 2H," BofA Securities wrote in a Friday report. "It should finish the year unchanged. The 30-year AAA should finish the year much lower than 1.39%."
Muni indexes are on track to achieve or exceed BofA's total return targets.
"In particular, we reiterate our view that the taxable muni index (TXMB) should return 5% for the year," wrote Yingchen Li and Ian Rogow, municipal strategists at BofA.
They also noted the AA index has recovered 86% of yield-to-worst spread to the AAA index's crisis widening; the A index has recovered 104%, the BBB 104% and high yield 95%.
One noticeable byproduct of the week's rally is the spread compression between AAA and AA revenue names — where in many cases on the shorter end of the curve the AA bond is trading nearly on top of AAA names, noted FHN Financial's Kim Olsan.
Case in point: New York City water 4s of 2024 traded at 0.18% while Prince George's County, Maryland, 5s of 2024 at 0.20%.
The spread between ICE Data Service's AAA and AA scales is six basis points, seven basis points and 13 basis points on the 5-, 10- and 30-year maturities, respectively.
The Bloomberg Barclays Municipal bond index has returned 1.73% year-to-date, with the best performance continuing to be out long, while the high-performing high-yield index is now up to 6.98% YTD and taxables are up 1.64% YTD.
Secondary trading and scales
Trading was light. Ohio water 5s of 2022 traded at 0.08%-0.07%. Florida PECO 5s of 2022 at 0.07%.
Maryland 5s of 2025 at 0.33%, the same as Thursday while 5s of 2026 at 0.41% versus 0.42% Thursday. Georgia 5s of 2027 at 0.48%. North Carolina 5s of 2027 at 0.56%-0.55%. NYC TFA 5s of 2027 at 0.60%-0.59%. Wisconsin 5s of 2028 at 0.61%. New York City 5s of 2028 at 0.72%-0.71%.
Washington 5s of 2029 traded at 0.71% versus 0.82% Tuesday and 5s of 2030 at 0.82% versus 0.90% Tuesday. Austin, Texas, 5s of 2032 at 1.03% versus 1.10% Wednesday.
Baltimore County, Maryland, 4s of 2037 at 1.20%-1.19%. Arlington County, Virginia, 5s of 2040 at 1.18%-1.17%. West Virginia 5s of 2042 at 1.38% versus 1.50% Wednesday.
Los Angeles Department of Water and Power 5s of 2048 at 1.38%-1.35% versus 1.47%-1.46% Wednesday.
According to Refinitiv MMD, short yields were steady at 0.08% in 2022 and 0.12% in 2023. The yield on the 10-year sat at 0.84% while the yield on the 30-year was steady at 1.33%.
The ICE municipal yield curve showed bonds steady at 0.08% in 2022 and to 0.12% in 2023. The 10-year maturity held at 0.87% and the 30-year yield at 1.35%.
The IHS Markit municipal analytics curve showed short yields at 0.07% and 0.10% in 2022 and 2023, respectively, with the 10-year steady at 0.84%, and the 30-year yield also unmoved at 1.35%.
Bloomberg BVAL saw short yields at 0.10% and 0.12% while the 10-year was at 0.85% and the 30-year remained at 1.35%.
Treasuries were weaker and equities hit new highs. The 10-year Treasury was yielding 1.359% and the 30-year Treasury was yielding 1.988% near the close. The Dow Jones Industrial Average rose 460 points or 1.34%, the S&P 500 was up 1.12% while the Nasdaq gained 0.91%.
Fed’s Monetary Policy Report
The pandemic continues to have impact on the economy, despite vaccinations and reopening, requiring the Federal Reserve to keep accommodation in place until the economy fully recovers, according to the Monetary Policy Report to Congress.
The report offered little new information, pretty much echoing what Federal Reserve Board Chairman Jerome Powell has been saying for months.
Powell will deliver the report and take questions from the House Financial Services Committee on Wednesday and the Senate Banking Committee on Thursday.
Keeping rates at the zero lower bound, buying $120 billion of Treasury securities and agency mortgage-backed securities a month and its forward guidance “will help ensure that monetary policy continues to deliver powerful support to the economy until the recovery is complete,” the report said, suggesting tapering is not on the table soon.
The Federal Open Market Committee expects to keep its asset buys at the current rate, the report said, “until substantial further progress has been made toward its maximum-employment and price-stability goals,” with the panel assessing progress toward its dual mandate at each meeting. Again, a phrase used often by Powell.
The recently released minutes from its past meeting showed while the belief of the panel, in general, was conditions for taper were not yet met, some participants see tapering occurring “somewhat earlier than they had anticipated at previous meetings.”
As for the economy, “shortages of material inputs and difficulties in hiring have held down activity in a number of industries,” the report said. “In part because of these bottlenecks and other largely transitory factors, PCE (personal consumption expenditures) prices rose 3.9% over the 12 months ending in May.”
It is “uncertain” when these bottlenecks will ease “as they reflect both the global supply chain and some industry-specific reasons for the tight conditions,” the report says. But, once these issues are resolved, “production is expected to pick up and price pressures to ease,” noting that is already the case with lumber prices.
But despite these issues, and a rise in of longer-term inflation expectations, the Fed sees inflation as transitory and “in a range that is broadly consistent with the FOMC’s longer-run inflation objective.”
But, the report notes, should this year’s “sharp rise in inflation … be followed by a period of higher inflation pressures,” it could “call for a change in the stance of monetary policy.”
The labor market has improved rapidly, but the unemployment rate remains elevated and the labor force participation rate “has not moved up from the low rates that have prevailed for much of the past year,” the report said.
Among the issues for labor force participation rate remaining low include school closures that have forced workers into caregiving, fear of contracting COVID-19 in the workplace and extra unemployment insurance benefits. These factors should ease in the next few months, the report says. But the Fed remains concerned about potential structural changes including accelerated retirements.
“The Fed’s focus on potential longer lasting impacts of the pandemic on the structure of the labor market, including accelerated retirement (which could suggest a more persistent drag on the labor force) and accelerated adoption of technology by firms (which suggests potential for a slower employment recovery, and potential for longer term scarring),” was interesting, said Wilmington Trust Senior Economist Rhea Thomas.
If retirement continues to be a viable option for older workers, who would have worked longer under other conditions, she said, there’s a chance for a near-term increase in wages.
Even without the pandemic, retirement of Baby Boomers would have lifted the number out of the workforce by 0.3-percentage points, the report said.
But, Thomas added, firms turning to technology to offset “labor shortages suggests longer term downside pressures for both wages and inflation, as it increases productivity by allowing firms to produce more with fewer workers and reduces costs.”
Despite being mentioned only briefly in the report, Thomas said, “this is a factor that we believe is a key trend to watch, as it could suggest a slower recovery of full employment.”
Firms turning to technology is one reason Wilmington sees inflation as transitory.
Separately, wholesale inventories grew 1.3% in May, following an unrevised 1.1% gain in April.
Economists polled by IFR Markets expected a 1.1% increase.
Sales rose 0.8% in May following April’s 1.1% growth.
Primary market to come
The New York City Transitional Finance Authority (Aa3/AA/AA/) is set to price $589.1 million of building aid revenue refunding bonds, Fiscal 2022 Series S-1, Subseries S-1A. Loop Capital Markets.
The Water Works Board of the City of Birmingham, Alabama, (Aa2/AA//) is set to price on Monday $469.3 million of senior taxable water revenue refunding bonds, Series 2021, serials 2022-2036, term 2043. Raymond James & Associates, Inc.
The Rector and Visitors of the University of Virginia (Aaa/AAA/AAA/) is set to price on Wednesday $300 million of taxable general revenue pledge refunding bonds, term 2051. Barclays Capital Inc.
The Rector and Visitors of the University of Virginia (Aaa/AAA/AAA/) is also set to price on Tuesday $100 million of general revenue pledge bonds, Series 2021A. Goldman Sachs & Co. LLC.
Ohio (Aa2/AA//) is set to price on Wednesday $270.4 million of Cleveland Clinic Health System Obligated Group hospital revenue Series 2021A bonds $69.445 million, serials 2047-2049 and $201 million of forward delivery hospital revenue refunding bonds, serials 2023-2039. Barclays Capital Inc.
The Dormitory Authority of the State of New York is set to price $250 million of exempt and taxable New York University revenue bonds, $224.1 million of exempts and $25.9 million of taxables on Tuesday. BofA Securities.
The Florida Development Finance Corp. (A2///) is set to price on Thursday $221.2 million of Lakeland Regional Health Systems healthcare facilities revenue refunding bonds. J.P. Morgan Securities LLC.
The California Community Housing Agency is set to price on Tuesday $215.7 million of essential housing revenue bonds, Series 2021A-1 senior bonds and Series 2021A-2 junior bonds (Fountains at Emerald Park). Jefferies LLC.
The Central Florida Expressway Authority (A1/A+/A+/) is set to price on Thursday $200.9 million of senior-lien revenue bonds, serials 2026-2035, Series 2021D. RBC Capital Markets.
The Michigan Finance Authority (/AAA//) is set to price $198.75 million of taxable student loan asset-backed notes, Series 2021-1, consisting of $60 million of fixed rate and $138.75 million of floating rate. BofA Securities.
The Maryland Department of Transportation (A1//A/) is set to price on Wednesday $195.4 million of special transportation project revenue bonds (Baltimore/Washington International Thurgood Marshall Airport), Series 2021B (qualified airport bonds-AMT), serials 2026-2041, terms 2046, 2051. Citigroup Global Markets Inc.
The Arlington Higher Education Finance Corp., Texas, (Aaa/AAA//) (PSF guarantee) is set to price $182.86 million of educational revenue and refunding bonds (Harmony Public Schools), $155.8 million of exempt Series 2021A, serials 2024-2041, terms 2046, 2051, $4.3 million of taxable Series 2021B, serials 2024-2025, and $22.675 million of forward-delivery Series 2021C, serials 2022-2024. Truist Securities Inc.
The City of Clarksville, Tennessee, (Aa2//AA/) is set to price $180.84 million of water, sewer & gas revenue bonds, Series 2021A. Morgan Stanley & Co. LLC.
The California Health Facilities Financing Authority (/AA-/AA-/) on Tuesday is set to price $170 million of Children's Hospital of Orange County revenue and refunding revenue bonds, $88.7 million of Series 2021A and $81.3 million of refunding Series 2021B. Morgan Stanley & Co. LLC.
Charlotte, North Carolina, (Aa2/AA+/AA+/) on Wednesday is set to price $164.1 million of refunding certificates of participation transit projects, Series 2021A. Goldman Sachs & Co. LLC.
The Catholic Bishop of Chicago (Ba1///) is set to price $150 million of Series 2021 senior bonds, term 2041. PNC Capital Markets LLC.
Weld County School District No. 6 (Aa2/AA//) is set to price on Tuesday $145 million of general obligation bonds, serials 2022-2041, term 2045, Colorado State Intercept Program. RBC Capital Markets.
The South Dakota Housing Development Authority (Aaa/AAA//) is set to price on Wednesday $139.285 million of homeownership mortgage bonds, $119.285 million of non-AMT Series 2021 B, serials 2021-2033, and terms 2036, 2041, 2051 and $20 million of Series C taxable refunding bonds, serials 2022-2030. Wells Fargo Securities.
The JEA, Florida, (Aa3/AA+/AA/) is set to price on Tuesday $128.765 million of water and sewer system revenue refunding bonds, serials, 2023-2041. Wells Fargo Securities
Westmoreland County, Pennsylvania, is set to price on Wednesday $126.48 million of taxable general obligation bonds, serials 2021-2041. Boenning & Scattergood, Inc.
The New York State Bridge Authority (Aa3/A+//) is set to price on Wednesday $112.95 million of general revenue and general revenue refunding forward-delivery bonds, $76.475 million of series A, serials 2028-2041, terms 2046, 2051, $36.48 million of Series B, 2022-2036. RBC Capital Markets.
Oberlin College, Ohio, (Aa3/AA-//) is set to price $110.59 million of bonds, $80.65 million of green taxable bonds (Climate Bond Certified) and $29.94 million of corporate CUSIP bonds. Morgan Stanley & Co. LLC.
The Wisconsin Health and Educational Facilities Authority (/AA-/AA-/) is set to price on Wednesday $104.9 million of Gundersen Health System refunding revenue bonds. BofA Securities.
Grand Rapids, Michigan, (Aa2/AA//) is set to price on Tuesday $102 million of taxable sanitary sewer system revenue refunding bonds, serials 2022-2035, term 2042. Citigroup Global Markets Inc.
San Antonio, Texas, Education Facilities Corp. (Baa1///) is set to price $100.3 million of higher education revenue improvement and refunding bonds (University of the Incarnate Word Project), Series 2021A, serials 2038-2054. Raymond James & Associates, Inc.
In the competitive market, Colorado is set to sell $370 million of educational loan program tax anticipation notes, maturing 6/29/2022, at 11 a.m. eastern on Tuesday.
Broward County, Florida, (MIG1//) is set to sell $160 million of tax anticipation notes, maturing 6/30/2022, at 11 a.m.
Orange County Sanitation District, California, (Aaa/AAA/AAA/) is set to sell $135.5 million of wastewater refunding obligation bonds at 10:45 a.m.
On Wednesday, Santa Clara County, California, (/AAA/AA+/) is set to sell $350 million of taxable general obligation bonds at 10:30 a.m.
The New York City Transitional Finance Authority is set to sell $210.3 million of taxable building aid revenue bonds at 10:15 a.m.
San Jose, California, (Aa1/AA+/AAA/) is set to sell $200 million of general obligation bonds at 10:30 a.m.
New Hampshire is set to sell $123 million of Series 2021 C exempt at 10:30 a.m. and $10.2 million of taxable bonds at 11 a.m.
On Thursday, Memphis, Tennessee, is set to sell $160 million of general improvement refunding bonds at 10:30 a.m.
