Municipals were mostly steady Wednesday, with triple-A yields largely unmoved by the Fed deciding to skip a rate hike for the first time in 15 months and the short-lived selloff of short U.S. Treasuries. Equities were mixed.
The Federal Open Market Committee decided unanimously to hold rates at its meeting, but its statement said "additional policy firming … may be appropriate."
"Despite getting the hawkish pause that many had expected, short-maturity bonds sold off [right] after the announcement and the Treasury curve is more inverted," said Matt Buscone, co-head of portfolio management at Breckinridge Capital Advisors.
But once the market had some time to digest the news, short-maturity bonds improved somewhat but still ended the day weaker.
The two-year UST was yielding 4.741% at 2:15 p.m. but fell to 4.703% by close Wednesday. The 10-year UST was at 3.820% and the 30-year UST was at 3.889% at 2:15 p.m., with yields moving a little lower to 3.796% and 3.878%, respectively, at the close.
The Fed's updated dot plot "now shows two more hikes prior to year-end and the median forecast for the Fed Funds rate at 5.6%," he said.
Munis did not follow USTs lower yet, "but given the outperformance of munis over the last couple days and while I wouldn't be surprised if they weaken a little given how expensive ratios are," Buscone said.
The two-year muni-Treasury ratio Wednesday was at 63%, the three-year at 65%, the five-year at 66%, the 10-year at 68% and the 30-year at 90%, according to Refinitiv MMD's 3 p.m. read. ICE Data Services had the two-year at 64%, the three-year at 66%, the five-year at 65%, the 10-year at 68% and the 30-year at 90% at 4 p.m.
Munis, he noted, "continue to be helped by the re-investment of June and upcoming July maturities and limited primary supply giving dealers little incentive to cheapen their offerings."
Meanwhile, the Investment Company Institute reported investors added $484 million out of municipal bond mutual funds in the week ending June 7, after $710 million of outflows the previous week. Exchange-traded funds saw inflows of $136 million after $339 million of inflows the week prior.
Both primary market activity and secondary market trading Wednesday was limited, "a bit muted in anticipation of the [Fed's] announcement," said Matthew Gastall, executive director and head of Wealth Management Municipal Research and Strategy at Morgan Stanley.
This week's calendar is under $4 billion, which he said was likely impacted by issuers waiting to see what the Fed would decide to do at its June meeting.
Bond Buyer 30-day visible supply is at $7.47 billion.
In the coming weeks, Gastall estimates issuance will accelerate, but for the most part, he said recent trading activity has been more cautious ahead of the releases of key economic data. Throughout the last 18 months, reports like Tuesday's consumer price index, Wednesday morning's producer price index, and Wednesday afternoon's FOMC announcement, have all taken on heightened levels of importance.
"Most of the Street will be paying attention to the comments after the meeting and the future actions," a New York trader said.
"If they pause and then mention leaning towards another hike, I think the market reacts negatively, which I suspect they will do," he said, adding "it will all depend on future economic numbers."
However the new deals that have priced this week were doing well, he said.
"No one is looking to push levels, and no one is underwriting deals through the triple-A scales," he said.
In the competitive market Wednesday, Chesterfield County, Virginia, (Aaa/AAA//) sold $104.800 million of general obligation public improvement bonds to BofA Securities, with 5s of 1/2024 at 3.17%, 5s of 2028 at 2.68%, 5s of 2033 at 2.60%, 5s of 2038 at 3.15% and 4s of 2043 at par, callable 1/1/2033.
The Richland County School District #2, South Carolina, (Aa2/AA//) sold $158.415 million of GOs, Series 2023A, to Jefferies, with 5s of 3/2024 at 3.13%, 5s of 2028 at 2.73%, 5s of 2033 at 2.66%, 5s of 2038 at 3.25% and 5s of 2039 at 3.29%, callable 3/1/2032.
Secondary trading
Wisconsin 5s of 2024 at 3.12%. Texas 5s of 2024 at 3.08% versus 3.12% original on Tuesday. Washington 5s of 2025 at 3.00% versus 3.01% on 6/6 and 3.00% on 6/2.
NY State Urban Development Corp. 5s of 2028 at 2.88%-2.86%. California 5s of 2028 at 2.65%-2.62% versus 2.66% Friday and 2.61% on 6/6. Los Angeles USD 5s of 2029 at 2.56%.
NYC 5s of 2032 at 2.82%-2.81% versus 2.86%-2.85% Tuesday and 2.89% on 6/8. Virginia Commonwealth Transportation Board 5s of 2033 at 2.69%. Ohio Water Development Authority 5s of 2034 at 2.80% versus 2.85% Monday and 2.92% original on Friday.
Palm Beach County, Florida, 5s of 2045 at 3.55%-3.54%. LA DWPN 5s of 2049 at 3.63%-3.65% versus 3.65%-3.55% Tuesday.
AAA scales
Refinitiv MMD's scale was unchanged: The one-year was at 3.07% and 2.95% in two years. The five-year was at 2.66%, the 10-year at 2.59% and the 30-year at 3.50% at 3 p.m.
The ICE AAA yield curve was changed up to two basis points in spots: 3.11% (+2) in 2024 and 2.99% (flat) in 2025. The five-year was at 2.64% (-1), the 10-year was at 2.59% (-1) and the 30-year was at 3.55% (-1) at 4 p.m.
The IHS Markit municipal curve was unchanged: 3.06% in 2024 and 2.95% in 2025. The five-year was at 2.66%, the 10-year was at 2.58% and the 30-year yield was at 3.49%, according to a 4 p.m. read.
Bloomberg BVAL was unchanged: 3.03% in 2024 and 2.93% in 2025. The five-year at 2.63%, the 10-year at 2.57% and the 30-year at 3.54% at 4 p.m.
Treasuries ended Wednesday mixed.
The two-year UST was yielding 4.703% (+3), the three-year was at 4.317% (+3), the five-year at 4.008% (flat), the 10-year at 3.796% (-3), the 20-year at 4.069% (-5) and the 30-year Treasury was yielding 3.878% (-6) at 4 p.m.
FOMC skips
While rates remain in a range between 5% to 5.25%, the new dot plot suggests the year will end with a rate 50 basis points higher and falling to a range between 4.25% and 4.50% at the end of 2024.
In his press conference, Fed Chair Jerome Powell said many members expect further hikes this year as the risk to inflation is to the upside.
When asked why the panel didn't raise rates at this meeting since the expectation is the panel will lift rates 50 basis points this year, Powell said, "as we get closer and closer to the destination … it's reasonable to go a little slower." He added skipping this meeting "allows the economy a little more time to adapt."
By not raising rates, the Fed indicated "they are getting quite close to the peak," said Brian Coulton, Fitch Ratings chief economist. "But the bias remains very much towards some further increases in rates. The projections and the dots point to two further hikes this year."
Core inflation, he said, remains "sticky," and as such, "the Fed seems far from confident that it has done enough to tame inflation."
"Inflation is coming down, but slowly," Mortgage Bankers Association SVP and Chief Economist Mike Fratantoni said. "Multiple indicators suggest the economy here and abroad, will slow significantly in the near term, but the job market continues to appear resilient in the most recent data. With this muddled picture, it is not surprising that the FOMC held rates steady at its June meeting — but kept their options open for July and later this year. Nevertheless, we expect that the Fed is at the top of its rate hiking cycle."
But Thomas Holzheu, Swiss Re chief economist Americas, said the meeting "illustrated a conflicted central bank navigating a complex economic environment that continues to challenge its policy goals."
While inflation is cooling and the labor market weakening sufficiently to skip a rate hike, he said, "the 2% inflation target remains a distant goal and underlying economic resilience sees the Fed maintain a tightening bias heading into the second half."
The 500 basis points of policy tightening the Fed implemented in this cycle and its impact on the economy, Holzheu said, "will result in a mild recession in the second half of this year."
It's not surprising the Fed sees more tightening this year, said Whitney Watson, global co-head of fixed income at Goldman Sachs Asset Management, "with the economy proving resilient, downside risks from banking stress fading, debt limit uncertainty behind us and inflation still hovering above target."
Jay Hatfield, CEO at Infrastructure Capital Management, called it "a hawkish pause." He noted stock prices fell while long-term bonds were flat and 2-year bond yields rose 15 bp to 4.75% after the announcement.
Morning Consult Chief Economist John Leer called the decision "a real head-scratcher." He added, "In short, it kicked the can down the road. We're setting ourselves up for a summer characterized by extremely volatile financial markets due to greater uncertainty around the path of monetary policy."
The dot plot "caused heartburn" for the markets, "implying their concern for high inflation outweighs the softening in growth we are experiencing," said Jeff Klingelhofer, co-head of investments, at Thornburg Investment Management.
The Summary of Economic Projections now sees GDP increasing 1.0% this year, up from the previous estimate of 0.4%, while unemployment was lowered to 4.1% from 4.5% and inflation was cut a tick to 3.2%.
May performance
BlackRock has "turned increasingly constructive on the asset class over the near term," according to its monthly municipal market update.
In May, munis posted negative total returns amid continuing volatility, BlackRock strategists noted.
"Interest rates rose throughout most of the month as banking concerns abated, economic data exceeded expectations, comments from the Federal Reserve turned more hawkish, and debt ceiling negotiations remained contentious to the very end," they said.
Munis also underperformed U.S. Treasuries in the intermediate part of the curve and outperformed in the front and long end, BlackRock's analysts reported. "Shorter-duration (i.e., less sensitive to interest rate changes) and triple-B rated bonds performed best," they said.
While muni mutual funds saw consistent outflows, they said, fund flows were "counterbalanced by manageable primary and secondary supply."
Issuance in May "was in line with historical expectations at $31 billion, 2% below the five-year average, and outpaced reinvestment income from maturities, calls, and coupons by $3 billion," BlackRock said. "As a result, deals were oversubscribed by 4.3 times on average, slightly above the year-to-date average of 4.0 times."
Bank portfolio liquidations disrupted the market less than initially feared, they said.
There was only a "negligible month-over-month increase in daily bid-wanteds" due to orderly selling, they said. Most of the activity came from lower-coupon bonds with shorter maturities.
BlackRock projected the coming months to improve valuations and "more favorable seasonal supply-and-demand dynamics."
Primary to come:
The Louisiana Stadium and Exposition District (A2//A/) will price $549.5 million of tax-exempt Series 2023A senior revenue bonds Thursday. Serials 2024-2053. BofA Securities.
The Florida Development Finance Corp. is set to price $120 million of solid waste disposal revenue bonds Thursday on behalf of the Waste Pro USA Inc. project. Serials 2032. Citigroup Global Markets.
The Minnesota Housing Finance Agency (Aa1/AA+//) is set to price $150 million of non-AMT tax-exempt and taxable social bonds on Thursday. Serials 2024 to 2035, terms in 2038, 2043, 2048, 2053. RBC Capital Markets.
Christine Albano and Christina Baker contributed to this story.
