Municipals were little changed Thursday as U.S. Treasuries were weaker out long and equities were off after a hotter-than-expected inflation report.
The two-year muni-to-Treasury ratio Thursday was at 61%, the three-year at 61%, the five-year at 62%, the 10-year at 67% and the 30-year at 84%, according to Refinitiv Municipal Market Data's 3 p.m. EST read. ICE Data Services had the two-year at 62%, the three-year at 62%, the five-year at 62%, the 10-year at 67% and the 30-year at 83% at 3 p.m.
The market is undergoing a repricing with the Fed now expected to cut rates six times, down from eight a few weeks ago, said Jim Robinson, CEO and CIO of Robinson Capital Management.
If the terminal rate is 3.5%, UST yields could rise 50 to 100 basis points higher on the long end, he said.
The economy continues to "chug along," and the market is in "pretty good shape," Robinson said.
Mutual funds flows have
Inflows continued this week as LSEG Lipper reported fund inflows of $418.8 million for the week ending Wednesday, compared to $1.88 billion of inflows the prior week. This marks 15 straight weeks of inflows.
High-yield funds saw inflows of $307.9 million, down from $602.6 million the week prior.
"Flows are coming in back into the market, without a huge amount of supply," Robinson said.
The new-issue calendar is estimated at $13 billion next week. Bond Buyer 30-day visible supply sits at $16.63 billion.
There will continue to be an influx of supply through the presidential election in November as market participants grapple with the uncertainty over who wins, said Jennifer Johnston, director of municipal bonds research at Franklin Templeton.
"People want to get the bonds issued beforehand," she said.
In past years, issuers have come to the market in November and December to get deals done before the end of the year, Johnston said.
There may be a slight reprieve in issuance in the weeks after the election, but with nothing set to happen right away regardless of the winner — the inauguration is not until January — issuers may take advantage of the final weeks of 2024 and tap the capital market, she said.
"There's some telegraphing [from candidates] based on campaign policies and promises, but it's still going to take a while before everything starts to set in," she said.
This means things should be "standard" regarding issuers coming to market, according to Johnston.
"People are still going to do something to issue their bonds," she said. "There's plenty measures on ballots this November for more bonds and plenty of programs out there that bonds have been approved for. So there will still be plenty to do in the muni market."
In the primary market Thursday, BofA Securities priced for the Cabarrus County Development Corp., North Carolina, (Aa1/AA+/AA+/AA+) $242.66 million of limited obligation refunding bonds, Series 2024A, with 5s of 8/2025 at 3.00%, 5s of 2029 at 2.58%, 5s of 2034 at 2.96%, 5s of 2039 at 3.31% and 5s of 2044 at 3.64%, callable 8/1/2034.
AAA scales
Refinitiv MMD's scale was little changed: The one-year was at 2.68% (unch) and 2.44% (unch) in two years. The five-year was at 2.41% (unch), the 10-year at 2.75% (+2) and the 30-year at 3.66% (unch) at 3 p.m.
The ICE AAA yield curve was little changed: 2.73% (unch) in 2025 and 2.49% (unch) in 2026. The five-year was at 2.43% (unch), the 10-year was at 2.72% (unch) and the 30-year was at 3.61% (unch) at 3 p.m.
The S&P Global Market Intelligence municipal curve was little changed: The one-year was at 2.73% (unch) in 2025 and 2.47% (+1) in 2026. The five-year was at 2.42% (+1), the 10-year was at 2.72% (unch) and the 30-year yield was at 3.61% (unch) at 3 p.m.
Bloomberg BVAL was little changed: 2.72% (unch) in 2025 and 2.47% (unch) in 2026. The five-year at 2.44% (+1), the 10-year at 2.71% (+2) and the 30-year at 3.62% (unch) at 3 p.m.
Treasuries saw losses 10 years and out.
The two-year UST was yielding 3.994% (-3), the three-year was at 3.907% (-2), the five-year at 3.918% (flat), the 10-year at 4.074% (+2), the 20-year at 4.417% (+3) and the 30-year at 4.384% (+4) at 3:05 p.m.
CPI
Analysts remain divided about what the stronger-than-expected consumer price index will mean for Federal Reserve policymakers since the Fed appears to be concentrating on the labor market.
The Fed is more focused on the labor market, noted Whitney Watson, global co-head and co-CIO of Fixed Income and Liquidity Solutions within Goldman Sachs Asset Management, and that "data, however, remains in the driving seat for the Fed and we see next month's payrolls release as the more important data point in determining the pace and extent of Fed easing."
But services inflation remains "a problem," according to Olu Sonola, Fitch Ratings head of U.S. Economic Research. "Coming on the heels of the surprisingly strong September employment data, this report encourages the Fed to maintain a cautious stance with the pace of the easing cycle," he said.
While the Fed remains likely to cut rates by a quarter point in November, Sonola said, "a December cut should not be taken for granted."
Sal Guatieri, BMO senior economist, said, "A second straight high-side surprise in the core CPI will have the Fed questioning its aggressive start to the easing cycle."
The data "virtually rules out another large cut in November." He leans to a quarter-point cut next month but notes "much will depend on whether we see a second straight strong jobs report in October."
While last week's nonfarm payrolls number trumps CPI in importance, John Kerschner, head of US Securitised Products at Janus Henderson Investors, said "given the current uncertainty of the Fed's future path of interest rate cuts, it did take on heightened importance."
Initial jobless claims topping expectations complicated matters, he said. There are signs "of [bond] market confusion or lack of conviction. Now the market will wait for a barrage of Fed speakers … and PPI … to try and decipher just what is going on with this surprisingly strong economy and somewhat torn Federal Reserve Open Market Committee."
Still, "[o]ne higher-than-expected CPI report is not enough to cause panic," noted Mercatus Center Macroeconomist Patrick Horan. "However, it's important to remember that nominal GDP or total spending growth is still very strong relative to recent historical trends. When nominal GDP growth is too high, inflation will also likely rise. Although [Thursday]'s report does not necessarily signal reignited inflation, we don't want it to start a new trend."
The report supports DWS U.S. Economist Christian Scherrmann's "view that it may have been a bit premature to turn a blind eye to this part of the Fed's reaction function."
It appears "much of the disappointment in core inflation came from notoriously volatile transportation services, but a jump in medical services combined with a weaker print in housing could have implications," he said.
"Whether we get a repeat of Q4 2023, where elevated rate cut expectations stalled the disinflationary process in Q1 2024, remains to be seen, but certainly the odds of a 50bps cut in November are fading — we even expect an upcoming discussion on a potential skip," Scherrmann said." For now, we remain in the 25bps camp for the November meeting, as translating today's input into core PCE prices could lead to less disappointment."
Neither CPI nor initial jobless claims "change our base case that the Fed will cut rates 25 bps in November and again 25 bps in December," said Darrell Cronk, CIO for Wealth & Investment Management at Wells Fargo.
Noting the three-month rolling core rate of 3.1%, higher than the Fed would like, he said that is "not high enough to alter their cutting path for the rest of 2024."
Seema Shah, chief global strategist at Principal Asset Management, agreed that a half-point cut in November is "highly improbable," but the sticky CPI "should not be significant enough to drastically alter the Fed's overall rate trajectory and certainly not concerning enough to deter the Fed from pursuing policy normalization. A series of 25bps cuts over the coming Fed meetings (November and December) remains our base case."
Gary Siegel contributed to this story.
