Municipals were little changed on the day Wednesday in light trading with few deals of size pricing while the Investment Company Institute reported the largest inflows into municipal mutual funds since November.
While other markets made moves following better-than-expected inflation figures, with U.S. Treasuries ending mixed and equities rallying, triple-A muni yield curves saw a basis point bump or two, or no changes, depending on the scale.
"Wall Street is now anticipating a Fed pivot in September as pricing reflects a half-point increase," said Ed Moya, senior market analyst at Oanda. "If inflation continues to drop, the bull-steepening trade will gain further momentum."
Inflation decelerated sharply in July as gas prices, airfares, and used car prices posted significant declines, leading to the consumer price index to rise 8.5% year-over-year, a larger drop than the 8.7% consensus estimate.
Because of this, traders are "growing confident that if the next inflation report, on September 13, confirms this softening pricing pressure trend, the Fed may seriously consider a smaller pace of tightening," Moya said. "It is too early to say that the Fed will only raise rates by a half-point in September, but if inflation keeps on cooling sharply the Fed's dovish tendencies will return."
The lower-than-expected pace of inflation is "a welcome relief to markets, but in absolute terms, inflation remains far too high," said Phillip Neuhart, director of market and economic research at First Citizens Bank Wealth Management. "One month does not make a trend and the Fed is likely to continue to tighten monetary policy until it is clear inflation is in a persistent downtrend."
For its part, the municipal market is well situated to put in a strong performance in the second half of the year, "should the inflation data ease and fund outflows stop," noted Craig Brandon and Cindy Clemson, co-directors of municipal investments, Global Fixed Income at Eaton Vance, part of Morgan Stanley Investment Management,
"Investors have responded to notably higher yields inside of five years, and the municipal curve has steepened since May, even as the Treasury curve has inverted," they said. "Municipals are now trending more expensive in first few years of the curve, but they are fairly valued in five years and cheaper further out compared to their five-year averages."
Muni-UST ratios on Wednesday moved a basis point up or down depending on the maturity and UST movements throughout the day. The five-year was at 62%, the 10-year at 80% and the 30-year at 96%, according to Refinitiv MMD's 3 p.m. read. ICE Data Services had the five at 61%, the 10 at 83% and the 30 at 95% at a 4 p.m. read.
Increased Treasury volatility is also increasing ratio volatility, Brandon and Clemson said.
"It is still an opportunistic entry point for investors in high tax brackets who are looking to put some cash to work," they said.
The Investment Company Institute reported investors poured in $1.589 billion into muni bond mutual funds in the week ending August 3 compared to $246 million of outflows the previous week.
Refinitv Lipper
Secondary trading
California 5s of 2024 at 1.66% versus 1.68%-1.66% Tuesday. Maryland 5s of 2024 at 1.78% versus 1.74% Tuesday.
Maryland 5s of 2025 at 1.71%. Triborough Bridge and Tunnel 5s of 2025 at 1.83%-1.80%. Delaware 5s of 2026 at 1.79%. Fairfax County, Virginia, 5s of 2026 at 1.83%-1.82%. Ohio 5s of 2027 at 1.90%.
King County, Washington, 5s of 2031 at 2.21% versus 2.26% Tuesday. Baltimore County, Maryland, 5s of 2035 at 2.61%. New York City TFA 5s of 2039 at 3.20%.
Minnesota 5s of 2042 at 2.87% versus 2.89% original. Washington 5s of 2045 at 3.19%-3.15% versus 3.10% Thursday. District of Columbia 5s of 2047 at 3.18% versus 3.13% Thursday.
Los Angeles Department of Water and Power 5s of 2052 at 3.05%.
AAA scales
Refinitiv MMD's scale was left unchanged at the 3 p.m. read: the one-year at 1.59% and 1.69% in two years. The five-year at 1.82%, the 10-year at 2.24% and the 30-year at 2.91%.
The ICE AAA yield curve was firmer in spots: 1.65% in 2023 and 1.69% in 2024. The five-year at 1.82% (-1), the 10-year was at 2.28% (-1) and the 30-year yield was at 2.90% (-2) at 4 p.m.
The IHS Markit municipal curve was unchanged: 1.56% in 2023 and 1.69% in 2024. The five-year was at 1.82%, the 10-year was at 2.24% and the 30-year yield was at 2.92% at a 4 p.m. read.
Bloomberg BVAL was firmer in spots: 1.54% in 2023 and 1.65% in 2024. The five-year at 1.82% (-1), the 10-year at 2.24% (-1) and the 30-year at 2.91% at 4 p.m.
Treasuries were mixed at the close.
The two-year UST was yielding 3.227% (-4), the three-year was at 3.159% (-5), the five-year at 2.929% (-3), the seven-year 2.865% (-1), the 10-year yielding 2.788% (+1), the 20-year at 3.281% (+5) and the 30-year Treasury was yielding 3.040% (+5) at the close.
NYC to sell $1B GOs next week
New York City said it will sell more than $1 billion of general obligation bonds next week.
The deals consist of $950 million of tax-exempt fixed-rate bonds and $125 million of taxable fixed-rate bonds.
Proceeds of the sales will be used to fund capital projects.
The tax-exempts are expected to be priced on Wednesday, Aug. 17, by a group led by book-running lead manager Jefferies, with BofA Securities, Citigroup, J.P. Morgan Securities, Loop Capital Markets,
Ramirez & Co., RBC Capital Markets, Siebert Williams Shank, and Wells Fargo Securities serving as co-senior managers.
There will be a one-day retail order period on Tuesday, Aug. 16.
The city will also competitively sell $125 million of taxable fixed-rate bonds on Wednesday, Aug. 17.
Additionally, the city said it expects to issue $300 million of tax-exempt variable-rate demand bonds during the week of Sept. 6, bringing the total GO sales to $1.375 billion.
More on inflation
"It's hard to be impressed by an 8.5% inflation rate but there does seem to be some slightly better news in this release with the slowdown in core inflation on a month-on-month basis to 0.3% from 0.7%," said Brian Coulton, chief economist at Fitch Ratings.
He noted car prices have stabilized and core goods inflation continues to fall on a year-on-year basis, but the slight slowdown in core services inflation month-to-month to 0.4% was flattered by a fading of the reopening boost to airfares and hotel tariffs.
"More importantly rental inflation — a key driver of services inflation — continued to rise, hitting 5.8% year-on-year," he said.
One month "does not make a trend," but the slowing sequential month-on-month inflation and decline in inflationary expectations in July will be welcomed by the Fed, noted Mickey Levy and Mahmoud Abu Ghzalah of Berenberg Capital Markets.
"While we continue to expect the Fed to hike rates by 75bp in September, should headline and core inflation remain similarly subdued in August, it could tilt the Fed toward a 50bp rate hike at its next meeting," they said.
"The responsiveness of short-term inflation expectations with respect to actual inflation suggests upside surprises to headline inflation, such as a reversal in energy commodity price trends or further supply shocks, could once again tip inflationary expectations into dangerous territory," Levy said. "Further, as we have argued in the past, elevated shorter-term inflationary expectations will likely seep into workers' wage demands, particularly as wages 'catch up' to the jump in the price level, which together with the Q2 surge in unit labor costs and decline in productivity should keep the Fed on its hawkish tack."
Oliver Blackbourn, multi-asset portfolio manager at Janus Henderson Investors, said noted the lower inflation figures boosted markets that have been recently "shaken by the hawkishness" of the Fed.
"Following on the heels of a very hot payrolls release on Friday, the lower-than-expected inflation data were instantly seized upon by markets as fuel for a further rally," Blackbourn said.
But markets will have to await public comments from Fed officials to see how they parse the greater-than-expected decline in inflation, Blackbourn said.
While inflation has been expected to peak over the summer, "the Fed will doubtless be focused on the signs about underlying inflation, particularly against a very tight looking labor market."
"The continued increase in services costs will perhaps provide less comfort to the Fed than the rollover in goods price inflation has given to investors," he added.
New-issue calendar:
The Triborough Bridge and Tunnel Authority, New York, (Aa3/AA-/AA-/AA/) is set to price Thursday $400 million of general revenue bonds, Series 2022A. Morgan Stanley & Co.
Cook County, Illinois, (A2/A+/AA-/) is set to price Thursday $279.805 million, consisting of $270.620 million of general obligation refunding bonds, Series 2022A, serials 2022-2029 and 2033 and $9.185 million of taxable general obligation refunding bonds, Series 2022B, serials 2022-2025, 2029 and 2033. Barclays Capital.
The Hays Consolidated Independent School District, Texas, (Aaa//AAA/) is set to price Thursday $182.230 million of unlimited tax school building bonds, Series 2022, insured by the Permanent School Fund Guarantee Program. FHN Financial Capital Markets.
The Sarasota County Public Hospital District, Florida, (A1//AA-/) is set to price Thursday $150 million of Sarasota Memorial Hospital Project fixed rate hospital revenue bonds, Series 2022. J.P. Morgan Securities.
The Lehigh County Industrial Development Authority, Pennsylvania, (A1/A+//) is set to price Thursday $115.500 million of non-AMT PPL Electric Utilities Corporation Project pollution control revenue refunding bonds, Series 2016. Morgan Stanley & Co.
The authority (A1/A+//) also is set to price Thursday $108.250 million of non-AMT PPL Electric Utilities Corporation Project pollution control revenue refunding bonds, Series 2016B. Morgan Stanley & Co.
Chip Barnett contributed to this report.
