Municipals saw more losses and outflows from mutual funds, but outperformed a rout in U.S. Treasuries while equities also sold off Thursday.
Triple-A muni benchmarks were cut up to five basis points while UST yields rose 10 to 14 basis points five years and out.
Muni to UST ratios were at 83% in five years, 91% in 10 years and 99% in 30, according to Refinitiv MMD's 3 p.m. read. ICE Data Services had the five at 82%, the 10 at 91% and the 30 at 101% at a 3:30 p.m. read.
Investors pulled more from municipal bond mutual funds in the latest week, with Refinitiv Lipper reporting $2.669 billion of outflows, though that was down from $2.875 billion of outflows in the previous week.
In the primary, Siebert Williams Shank & Co. priced for the Triborough Bridge and Tunnel Authority (/AA+/AA+/AA+) $914.235 million of payroll mobility tax senior lien refunding bonds, Series 2022C. Bonds in 5/2040 with a 5% coupon yield 3.68%, 5s of 2042 at 3.73%, 5s of 2047 at 3.89%, 4.125s of 2052 at 4.23%, 5.25s of 2052 at 3.89% and 5.25s of 2057 at 3.99%, callable 5/15/2032.
Blocks of the Triborough Bridge and Tunnel Authority in 2026 with a 5% coupon traded to yield 2.70% in the secondary market.
J.P. Morgan Securities priced for Presbyterian Healthcare Services, New Mexico, (Aa3/AA/AA/) $315.925 million of taxable corporate CUSIP bonds, Series 2022. Bonds in 8/2052 with a 4.875% coupon priced at par, callable 2/1/2052.
Wells Fargo Bank priced for North Carolina (Aa1/AA+/AA+/) $300 million of Build NC limited obligation bonds, Series 2022A. Bonds in 5/2023 with a 4% coupon yield 2.02%, 5s of 2027 at 2.65%, 5s of 2032 at 3.04%, 3.5s of 2037 at 3.57% and 5s of 2037 at 3.28%, callable 5/1/2032.
In the competitive, Santa Clara County, California, sold $237.995 million of election of 2008 general obligation bonds, 2022 refunding series D (dedicated unlimited ad valorem tax bonds) to Jefferies. Bonds in 8/2022 with a 5% coupon yield 1.95%, 5s of 2027 at 2.55%, 5s of 2030 at 2.73%, 5s of 2034 at 3.00% and 5s of 2042 at 3.90%, callable 8/1/2032.
The municipal market woke to a rather positive tone on Thursday as the asset class held steady in the face of a fairly strong Treasury market selloff following
“As is often the case, traders fixated on one line in the commentary — Mr. Powell’s comment that a 75-basis point hike was not ‘actively considered,’” said Interactive Brokers Chief Strategist Steve Sosnick. “After an evening to consider that comment, many investors realized that a 12.5 basis point reduction in the implied fed funds rate for the coming six weeks was hardly worth the enthusiastic response.”
“We will see how the day plays out, but it is nice to see bid-wanted volume down and anecdotally for us, new account activity and interest in municipals at these levels seems to be picking up,” JB Golden of Advisors Asset Management said on Thursday.
“As bond markets go, municipals seem cheap by just about any measure and valuations would seem to indicate the potential for significant crossover demand,” Golden said, adding that outflows seem to be moderating a bit, but with the inflationary backdrop and rates seemingly biased to the upside, he said, it likely pays to remain “cautious on duration.”
“I think the market was expecting 50 basis points to 75 basis points and
However, Golden said the press conference that followed the decision sparked a strong rally in the Treasury market, and the equity markets and was also accompanied by a steepening of the yield curve.
“The 2s-10s spread widened from 18 basis points to start the day out to 30 basis points by the close,” he said. “The market seemed to take Powell’s press conference comments that 75 basis points was never an option as dovish, and that sparked a relief rally across both bond and equity markets,” Golden said.
The relief was short-lived, however, he said, as the selloff in both equity and bond markets resumed a day later.
“While the Fed may have intentions to return to a more data-dependent stance with considerations of market volatility playing a role, the inflationary backdrop is likely to make that decision for them,” he said. “I think that is the reality you see playing out in the markets today.”
Golden added: “75 basis points may be off the table and the Fed may have intentions for a few 50 basis point hikes then a pause, but if inflation does not cooperate, their hand would be forced regardless of market volatility.”
The Fed is trying to convince markets that they have the inflation situation under control, he said, “but the market is not buying it.”
“The next few months will be very telling, while many would agree inflation has probably peaked, the Fed needs significant moderation for the balance of the year and that is not necessarily a given,” he said.
The steepening of the curve — which continued to widen Thursday — would seem to indicate a little less concern from markets that Fed tightening will push the economy into recession, according to Golden.
“However, given all the uncertainty surrounding inflation, it is probably wise not to read too much into the steepening at this point,” he said.
“The anticipated news was already built into the market, and that turned the whole affair into a non-event,” said Peter Delahunt, director of municipals at StoneX.
“The elevated level of bid lists took a respite” on Wednesday after the Fed decision, Delahunt said.
“Pricings by some issuers appeared to wait until the announcement was in the rearview mirror before coming into the market,” he noted, adding that overall Wednesday was a slow day.
“With the news behind us, we'll see if the outflows resume with their prior momentum or whether the higher yields and pending summer rollovers will mitigate the outflows and stabilize the market,” Delahunt said.
Entering May, municipal participants are extremely guarded after the indices posted negative returns for April with now-heavier losses year-to-date, noted Jeffrey Lipton, managing director of credit research at Oppenheimer & Co. said.
“This week’s FOMC meeting adds more anxiety as central bank messaging is of critical importance,” he said.
“A 50- basis-point rate hike in the funds rate is fully priced in and all eyes are now focused on subsequent policy sessions to see just how much tightening the Fed will apply to combat inflation,” Lipton continued. “Munis now offer favorable relative value and investors should be seeking opportunistic situations that could offer an inflationary hedge.”
Secondary trading
New York Dormitory PIT 5s of 2023 at 1.95%-1.93%. Maryland 5s of 2023 at 2.10%-2.07% versus 2.02% Tuesday and 2.07% Monday. Georgia 5s of 2024 at 2.29%-2.27%.
District of Columbia 5s of 2026 at 2.57% versus 2.55%-2.56% Tuesday. Florida 5s of 2026 at 2.48% versus 2.49% Wednesday. NYC TFA 5s of 2026 at 2.76%.
Washington 5s of 2030 at 2.88% versus 2.80% Friday and 2.79% original (on 4/27). Columbus, Ohio, 5s of 2032 at 2.92%-2.91% versus 2.93% Wednesday and 2.87% original (on 4/27).
NYC TFA 5s of 2035 at 3.45%-3.43% versus 3.44% Tuesday and 3.28% Friday. Boston 5s of 2036 at 3.00%-2.99%.
NY Dorm PIT 5s of 2041 at 3.67%-3.62% versus 3.70%-3.69% Tuesday. Los Angeles DWP 5s of 2042 at 3.43%.
AAA scales
Refinitiv MMD’s scale was cut up to three basis points 3 p.m. read: the one-year at 1.97% (unch) and 2.25% (unch) in two years. The five-year at 2.51% (unch), the 10-year at 2.81% (+3) and the 30-year at 3.14% (+3).
The ICE municipal yield curve was cut two basis points: 2.01% (+1) in 2023 and 2.33% (+3) in 2024. The five-year at 2.50% (+3), the 10-year was at 2.78% (+3) and the 30-year yield was at 3.19% (+2) at a 3:30 p.m. read.
The IHS Markit municipal curve was cut: 1.99% in 2023 (unch) and 2.27% (+3) in 2024. The five-year at 2.53% (+3), the 10-year was at 2.79% (+3) and the 30-year yield was at 3.14% (+3) at 4 p.m.
Bloomberg BVAL was cut up to one to four basis points: 1.98% (+2) in 2023 and 2.25% (+3) in 2024. The five-year at 2.54% (+3), the 10-year at 2.78% (+4) and the 30-year at 3.10% (+4) at a 4 p.m. read.
Treasury yields rose.
The two-year UST was yielding 2.716% (+7), the three-year was at 2.911% (+9), five-year at 3.015% (+10), the seven-year 2.080% (+11), the 10-year yielding 3.059% (+12), the 20-year at 3.373% (+14) and the 30-year Treasury was yielding 3.156% (+12) at a 3:30 p.m. read.
Inflation still the issue
The Federal Reserve’s actions these days are an attempt to rein in inflation. Thursday’s quarterly productivity numbers won’t help the central bank.
Productivity dropped 7.5% in the first quarter on an annualized basis, “the sharpest drop in 74 years,” said Wells Fargo Securities Senior Economist Sarah House. “The Fed may be crossing its fingers for a boom in productivity as the painless way out of current inflation, but there are few signs of getting it.”
Of course, productivity rose 6.3% in the fourth quarter and has been volatile during the pandemic. “Smoothing through the quarterly volatility,” she said, “the trend in productivity growth looks no better than before the pandemic.”
Meanwhile, unit labor costs surged 11.6% on an annualized basis, “signaling inflation pressures persist not only outside the U.S. with elevated commodity prices and still-knotted supply chains, but from within as the U.S. labor market remains exceptionally tight,” House said.
Overall, the report suggests, she said, “the Fed still has significant work to do in bringing down inflation.”
Indeed, the Fed will not be able to stop at neutral, said Joseph Kalish, chief global macro strategist at Ned Davis Research. “Neutral is not enough,” he said. “Policy will need to become restrictive in order to bring inflation back to the Fed’s long-term target of 2%. The question is how much will the Fed need to do beyond neutral.”
That, he said, depends on inflation, inflation expectations, the labor market and other factors.
What struck DWS Group U.S. Economist Christian Scherrmann was the vote was unanimous. “This implies that even the most hawkish voters do not see the need for an even more front-loaded approach right now and that the verbal guidance, given ahead of the meeting, have pushed market expectations into line with the FOMC’s current view on the likely future path of policy rates,” he said.
Of course, Scherrmann added, upward surprises on inflation numbers and slowing growth could become issues. “For now, however, it seems that officials are fine with the pace of the economy.”
The war between Russia and Ukraine, COVID lockdowns and supply issues will keep the economic outlook “extremely uncertain,” he said, “and therefore, despite the straightforward communication, investors should be aware, too, that the path of rates remains far from certain.”
Economic growth could get worse, said Edward Moya, senior market analyst at OANDA. “The Ukraine invasion will continue to drive upward pressure on prices,” he said.
“Inflation is not slowing down anytime soon,” Moya said, yet Fed Chair Jerome Powell ruled out 75 basis point increases for now. “Wall Street still believes the Fed will be able to deliver a soft landing.”
But Jeff Klingelhofer, co-head of investments at Thornburg Investment Management, believes the Fed “is clutching to the idea of transitory inflation.” He called the post-meeting statement “dovish” since it was “slightly dismissive of inflation.”
When speaking, Fed officials seem “super hawkish,” Klingelhofer said, “but their tone changes to more dovish in official communications.”
If the Fed were truly worried about inflation, he said, “they could hike more aggressively.”
But surpassing the neutral rate may not be “a given,” said Andrzej Skiba, head of the BlueBay U.S. Fixed Income team at RBC Global Asset Management. Powell, he said, implied “it’s a possibility, however not a certainty in his opinion.”
And while the Fed will keep aggressively raising rates in “upcoming meetings in order to reassure the market of its desire and ability to combat inflation,” Skiba said, the “Fed might stop hiking earlier than current market pricing would indicate. With balance sheet reduction and a stronger U.S. dollar contributing to the goal of tighter financial conditions, fewer hikes than expected might do the job.”
Bond investors can expect more pain, said Bryce Doty, senior vice president/portfolio manager of Sit Investment Associates. “While the worst may be over in terms of bond market losses with the Bloomberg Aggregate Bond Index down 9.5% in the first four months of the year, inflation is still a problem. Labor and supply shortages causing rampant inflation will not improve due to higher rates nor from a lower Fed balance sheet.”
Mutual funds see outflows
In the week ended May 4, weekly reporting tax-exempt mutual funds saw investors pull more money out with Refinitiv Lipper reporting $2.669 billion of outflows Thursday, following an outflow of $2.875 billion the previous week.
Exchange-traded muni funds reported inflows of $618.167 million after inflows of $287.580 million in the previous week. Ex-ETFs, muni funds saw outflows of $3.287 billion after $3.162 billion of outflows in the prior week.
The four-week moving average narrowed to negative $3.300 billion from negative $3.445 from in the previous week.
Long-term muni bond funds had outflows of $1.721 billion in the last week after outflows of $2.153 billion in the previous week. Intermediate-term funds had outflows of $442.469 million after $351.972 million of outflows in the prior week.
National funds had outflows of $2.277 billion after $2.440 billion of outflows the previous week while high-yield muni funds reported $879.413 million of outflows after $729.260 million of outflows the week prior.
Informa: Money market muni assets rise
Tax-exempt municipal money market fund assets added $2.11 billion, bringing them up to $93.10 billion for the week ending May 3, according to the Money Fund Report, a publication of Informa Financial Intelligence.
The average seven-day simple yield for the 148 tax-free and municipal money-market funds dropped from 0.14% to 0.13%.
Taxable money-fund assets added $4.09 billion, bringing total net assets to $4.351 trillion in the week ended May 3. The average seven-day simple yield for the 774 taxable reporting funds rose from 0.13% to 0.14%.
