Municipals were steady Friday, while U.S. Treasuries were mixed and equities sold off in the aftermath of Federal Reserve Chair Jerome Powell's promise the Fed will keep raising interest rates to combat inflation.
In light of the market's concern over Powell's speech at Jackson Hole, BofA strategists Yingchen Li and Ian Rogow "continue to view the Fed's hawkishness as a better way to keep inflation expectations down."
The turning point for the current bearishness, they said, can be "anything in the forthcoming economic data that offers clear indications for weakened consumer spending or, more directly, a continued decline in inflation."
"The magnitude of yield curve flattening/inversion signifies the level of success of the Fed's approach," they noted.
But "the futures market-implied peak fed funds rate for this tightening cycle is still around 3.75%," they said, "no different than at mid-June's peak bearishness."
Fed tightening cycles drive the municipal curve flatter, and "historical averages from the last four Fed tightening cycles suggest that the 1s30s slope should flatten to the 63bps range," they said.
Most of the flattening, they noted, should come from the front end.
One year after the last hike the slope should "steepen to the 74bps range."
Ratios should richen during the cycle, with historical averages suggesting 10- and 30-year ratios "around current levels," but the 30-year should "richen to the 90% range one year after the last hike," the BofA strategists said.
The two- and three-year muni-UST ratios are around 66% and 67%. The five-year was at 71%, the 10-year at 84% and the 30-year at 101%, according to Refinitiv MMD's 3 p.m. read. ICE Data Services had the five at 71%, the 10 at 88% and the 30 at 98% at a 4 p.m. read.
Smaller calendar
Investors will be greeted Monday with a smaller new-issue calendar, estimated at $5.882 billion, down from total sales of $6.134 billion in the week of Aug. 22.
There are $5.570 billion of negotiated deals on tap and $312.8 million on the competitive calendar.
The primary is led by the $1.768 billion of general airport senior lien revenue and revenue refunding bonds from Chicago O'Hare International Airport, followed by $697 million of taxables from the Oklahoma Development Finance Authority and $316 million of revenue bonds from the New Jersey Housing and Mortgage Finance Agency.
The Arlington Heights School District No. 25, Illinois, leads the competitive calendar with $59 million of GOs.
Secondary trading
North Carolina 5s of 2023 at 2.24%. New York City TFA 5s of 2023 at 2.21%-2.23% versus 2.26% Thursday and 2.25% Monday. Ohio 5s of 2024 at 2.31%.
Wisconsin 5s of 2026 at 2.33%--2.32%. California 5s of 2026 at 2.33%-2.25%.
Washington 5s of 2046 at 3.64%-3.63% versus 3.47%-3.48% Tuesday and 3.43% on 8/18.
Illinois Finance Authority 5s of 2051 at 4.22%-4.20% versus 3.88% on 8/16 and 3.88% on 8/9.
AAA scales
Refinitiv MMD's scale was unchanged 3 p.m. read: the one-year at 2.19% and 2.21% in two years. The five-year at 2.26%, the 10-year at 2.54% and the 30-year at 3.23%.
The ICE AAA yield curve was little changed: 2.21% (+1) in 2023 and 2.25% (+1) in 2024. The five-year at 2.28% (flat), the 10-year was at 2.62% (flat) and the 30-year yield was at 3.21% (flat) at a 4 p.m. read.
The IHS Markit municipal curve was unchanged: 2.19% in 2023 and 2.22% in 2024. The five-year was at 2.25%, the 10-year was at 2.53% and the 30-year yield was at 3.23% at a 3 p.m. read.
Bloomberg BVAL was unchanged: 2.23% in 2023 and 2.23% in 2024. The five-year at 2.23%, the 10-year at 2.53% and the 30-year at 3.24% at 4 p.m.
Treasuries were mixed.
The two-year UST was yielding 3.388% (+2), the three-year was at 3.392% (+3), the five-year at 3.201% (+5), the seven-year 3.143% (+3), the 10-year yielding 3.035% (+1), the 20-year at 3.434% (-3) and the 30-year Treasury was yielding 3.197% (-5) near the close.
Powell fallout
"Chair Powell threw cold water on the market's belief that the Fed will move to marginally restrictive policy and then pause," said Jeff Klingelhofer, co-head of investments at Thornburg Investment Management. "The Fed will not rest until they gain significant confidence that inflation is on a clear path back toward 2%, and at this time they're telling us this isn't the case."
Jason England, global bonds portfolio manager at Janus Henderson Investors, said the speech showed taming inflation is the Fed's top priority; the fed funds rate will have to get to a restrictive level — 3.5%-4.0% — and the "rate will need to stay higher until inflation is brought down to their 2% target thus cuts priced into the market for next year are premature."
Looking at the upcoming Summary of Economic Projections, Ed Al-Hussainy, senior rates strategist at Columbia Threadneedle, said, "The odds are that the dots will have to go higher than the 3.75% anticipated through 2023 at the July meeting."
In fact, Al-Hussainy expects the September dot plot to show rates "slightly above 4%. ... The front-end of the rate curve has to adjust in that direction as well."
Also, it's clear "that once they reach the desired terminal rate, it has to stay there for some time," he noted. "The longer you stay there, the more likely the front-end of curve bleeds into the long-end," Al-Hussainy said. "We're talking about quarters, not years, but the idea of rate cuts in the second half of 2023 are unlikely."
"This was a very clear push back on market expectations of a pivot from the Fed in 2023," said Brian Coulton, chief economist at Fitch Ratings.
After being surprised by the "intensity and duration of inflation pressures over the last 12 months, the Fed is now clearly determined to make sure high inflation does not become embedded," he said.
Coulton noted this means "taking rates above neutral through more outsize hikes in coming meetings and then holding them there for some time — likely through the whole of next year."
However, nowhere in his speech did Powell give any indication whether there will be a 50 or 75 basis point hike at the September meeting. That could be because it's a close decision. Speaking on CNBC Friday morning, Atlanta Fed President Raphael Bostic noted there would be more data before the next meeting, which could change his thinking, but for now "he's leaning toward a 50-basis-point hike."
Regardless, Janus' England noted 50 basis points is "still a substantial size hike so it should not be taken as a dovish pivot as there is more work to be done on inflation and they will keep at it until the job is done."
But Jeffrey Cleveland, principal and chief economist at Payden & Rygel, said, "Powell's words strongly hinted at another 75 bps rate rise." Given the economic situation, expect the Fed "to err on the side of being too hawkish rather than 'prematurely' pivoting."
The Fed will likely lift the fed funds "to at least 4%," he said and keep it at that level "for a bit so the Fed can reassess the growth and inflation backdrop before making the next move. Investors prematurely expecting a pivot is the notion Powell pushed back against on Friday."
Primary to come:
The Chicago O'Hare International Airport (/A+/A+/A+/) is set to price Tuesday $1.768 billion of general airport senior lien revenue and revenue refunding bonds, consisting of $1.115 billion of AMT bonds, Series 2022A; $145.930 million of non-AMT bonds, Series 2022B; $165.850 million of AMT bonds, Series 2022C and $341.090 million of non-AMT bonds, Series 2022D. J.P. Morgan Securities.
The Oklahoma Development Finance Authority (/AAA/AAA/) is set to price Tuesday $696.920 million of taxable Public Service Company of Oklahoma ratepayer-backed bonds, Series 2022, serials 2033 and 2044. RBC Capital Markets.
The New Jersey Housing and Mortgage Finance Agency (Aa2/AA//) is set to price Wednesday $315.730 million of non-AMT social single family housing revenue bonds, 2022 Series I, serials 2023-2034, terms 2037, 2042, 2046 and 2053. Citigroup Global Markets.
The San Antonio Housing Trust Public Facilities Corp., Texas, (Aa2/AA+/AA/) is set to price Tuesday $284.765 million of lease revenue refunding and improvement bonds, Series 2022. Piper Sandler & Co.
Washington County, Ohio, is set to price Tuesday $279.760 million of Memorial Health System Obligated Group hospital facilities revenue bonds, Series 2022. Piper Sandler & Co.
The South Jersey Transportation Authority (Baa2/BBB+/BBB+/) is set to price Wednesday $225 million of transportation system revenue bonds, 2022 Series A, serials 2036-2042, terms 2047 and 2052. Citigroup Global Markets.
Manatee County, Florida, (Aa1//AA+/) is set to sell Tuesday $212.025 million of revenue improvement and refunding bonds, Series 2022, serials 2023-2042, terms 2047 and 2052. Wells Fargo Bank.
The Great Lakes Water Authority, Michigan, is set to price Tuesday $208.570 million of sewage disposal system revenue bonds, consisting of $101.495 million of senior lien bonds (A1/AA-/A+/), Series 2022A, serials 2025-2042, terms 2047 and 2052; $96.445 million of second lien bonds (A2/A+/A/), Series 2022B, serials 2025-2042, terms 2047 and 2052 and $10.630 million of refunding senior lien bonds (A1/AA-/A+/), Series 2022C, serial 2023. Siebert Williams Shank & Co.
The authority is also set to price Tuesday $205.465 million of water supply system revenue bonds, consisting of $121.845 million of senior lien bonds (A1/AA-/A+/), Series 2022A, serials 2025-2042, terms 2047 and 2052 and $83.620 million of second lien bonds (A2/A+/A/), Series 2022B, serials 2025-2042, terms 2047 and 2052. Siebert Williams Shank & Co.
The Palm Beach County School Board, Florida, (Aa3//AA-/) is set to price Tuesday $187.130 million of certificates of participation, Series 2022B, serials 2023-2034 and 2040. Citigroup Global Markets.
The North Orange County Community College District, California, (Aa1/AA+//) is set to sell Tuesday $150 million of Election of 2014 general obligation bonds, Series C. Piper Sandler & Co.
The Las Vegas Convention and Visitors Authority, Nevada, (Aa3/A//) is set to price Wednesday $150 million of convention center expansion and renovation revenue bonds, consisting of $135.460 million of tax-exempts, Series 2022B, serials 2026-2038, term 2049 and $14.540 million of taxables, Series 2022C, serials 2023-2025. RBC Capital Markets.
Laredo, Texas, (Aa3///) is set to sell Tuesday $118.585 million of waterworks and sewer system revenue bonds, New Series 2022, serials 2023-2024,2027-2042, terms 2047 and 2052. Huntington Securities.
Competitive:
The Arlington Heights School District No. 25, Illinois, is set to sell $58.880 million of general obligation school bonds, Series 2022, at 11 a.m. eastern Tuesday.
