Municipals were weaker in spots in secondary trading Wednesday as $688 million of New York City general obligation bonds priced in the primary, while U.S. Treasuries were firmer and equities ended mixed.
The three-year muni-UST ratio was at 62%, the five-year at 62%, the 10-year at 65% and the 30-year at 91%, according to Refinitiv MMD's 3 p.m. ET read. ICE Data Services had the three at 63%, the five at 62%, the 10 at 66% and the 30 at 90% at 4 p.m.
"Pressure on rates is buildings," said Kim Olsan, senior vice president of municipal bond trading at FHN Financial. "Of 13 sessions so far in February, eight have brought a rise in yields, leaving the 10-year MMD spot within 10 basis points of a full retracement to this year's yield high and the 30-year essentially fully retraced."
Erratic trading spreads "have developed and impacted bidders' ability to discern fair value," she said. "The spread disparity speaks to the granular nature of current trading sessions with some buyers having weaker or stronger opinions on fair credit spreads."
Depending on specific program needs, "usual spread relationships have been flipped upside down," she noted.
"Trade examples include Texas PSF-backed school 5% bonds due in 2032 trading +39/MMD vs. a +32/MMD trade in a AA-rated hospital with the same structure and Washington GO (Aaa/AA+) 5s due 2044 (callable 2032) at +40/MMD as compared to Aa1/AA+ Salt River (Arizona)utility 5s due 2042 (callable 2033) at +42/MMD," Olsan said. "The gap between short- and long-dated calls is growing —Aa1/AA+ rated University Utah 5s due 2041 (callable 2032) traded +37/MMD vs. Aa2/AA Arizona State University 5s due 2042 (callable 2026) were sold at +65/MMD. "
Relative value "has shown a material correction, albeit with work left to do," she said.
Values have risen about 10 percentage points between 2024 and 2028 maturities from the lows earlier in the month, settling in the low-60% range, she said. Intermediate high grades, she noted, "carry ratios in the upper-60% area, off from the sub-60% range a few weeks ago."
"Where emerging value is becoming evident is in the AA-rated categories, with spreads separating from pure AAA names," according to Olsan.
While it is difficult to generalize, she said, "the inversion inside 10 years is impacting bidsides as buyers attempt to bring a more normalized slope back into play."
"Tax-exempt benchmark yields corrected sharply last week, responding to both U.S. Treasury bond losses and inflationary data," said Matt Fabian, a partner at Municipal Market Analytics. The front end saw the worst of it "ahead of now more likely Fed hikes and thus diminished performance expectations from this part of the curve," he said.
"This was, in effect, a municipal market reversion to the trend already being set by USTs, which have seen weaker prices since the start of this month," he noted.
Munis have "been outperforming USTs because of fund inflows that exacerbated tax-exempt product scarcity in the primary and secondary markets and forced related yields and ratios to unattractive levels for non-fund buyers," said Fabian.
Inflows continued with the Investment Company Institute reporting investors added $931 million to mutual funds in the week ending Feb. 15, after $2.194 billion of inflows the previous week.
Exchange-traded funds saw outflows of $160 million after $498 million of outflows the week prior, per ICI data.
But last week, with fund flows slowing, "more trepidation over rates, and a larger calendar to be placed, dealers were forced to cut new issue prices to attract a broader consensus," Fabian said.
The University of California series, for example, "needed sharp (up to 24bps) yield hikes in the middle of its pricing to improve its distribution," he noted.
Still, Fabian said, "this was a market adjustment without secondary market selling pressure; in fact, last week's cumulative net customer demand (customer bought par minus sold par during the five trading days) was the highest since December 2021."
In other words, he said, "underwriters were mostly successful in cutting new issue prices to minimize unsold balances, although actual balances may have created sharp mark-to-market losses and could portend more cautious dealer positioning going forward."
In the primary market Wednesday, Siebert Williams Shank & Co. priced and repriced for New York City (Aa2/AA/AA/AA+/) $688.195 million of GOs with up to three basis points cuts. The first tranche, $574.045 million of GOs, Fiscal 2023 Series C, saw 5s of 8/2024 at 3.35% (unch), 5s of 2028 at 2.90% (+2), 5s of 2033 at 2.94% (unch) and 5s of 2034 at 3.02% (unch), callable 8/1/2033.
The second tranche, $114.150 million of GOs, Fiscal 2023 Series D, saw 5s of 8/2023 at 3.36% (unch) and 5s of 2027 at 2.94% (+3), noncall.
Piper Sandler & Co. priced for the Renton School District No. 403, Washington, (Aaa///) $299.345 million of unlimited tax general obligation bonds, Series 2023, with 5s of 12/2023 at 3.18%, 5s of 2027 at 2.77%, 5s of 2033 at 2.85%, 5s of 2038 at 3.63% and 4.25s of 2042 at 4.29%, callable 12/1/2032.
In the competitive market, the Texas A&M University Board of Regents (Aaa/AAA/AAA/) sold $245.595 million of permanent university fund bonds, Series 2023, to J.P. Morgan, with 5s of 7/2023 at 3.02%, 5s of 2028 at 2.70%, 5s of 2033 at 2.77%, 5s of 2038 at 3.48% and 5s of 2042 at 3.66%, callable 7/1/2032.
Waco, Texas, (Aa1/AA+//) sold $152.040 million of combination tax and revenue certificates of obligation, Series 2023A, to Jefferies, with 5s of 2/2024 at 3.15%, 5s of 2028 at 2.76%, 5s of 2033 at 2.83%, 4s of 2043 at 4.28%, 4s of 2048 at 4.37% and 4s of 2053 at 4.42%, callable 2/1/2033.
The city also sold $36.715 million of taxable combination tax and revenue certificates of obligation, Series 2023B, to PNC Capital Markets, with 6s of 2/2025 at 4.68%, 6s of 2028 at 4.47%, 4.75s of 2033 at par, 5s of 2043 at 5.10%, 5.125s of 2048 at 5.20% and 5.15s of 2053 at 5.25%, callable 2/1/2033.
Secondary trading
Washington 5s of 2024 at 3.07% versus 3.08%-3.05% original on Tuesday. California 5s of 2024 at 2.93% versus 3.07% Tuesday. Wisconsin 5s of 2025 at 3.02% versus 3.19%-3.16% Tuesday. NYC TFA 5s of 2025 at 3.05%.
Florida 5s of 2029 at 2.64%-2.60%. Maryland 5s of 2029 at 2.68%-2.67% versus 2.30%-2.31% on 2/14. Triborough Bridge and Tunnel Authority 5s of 2030 at 2.83%-2.81% versus 2.18%-2.14% on 2/2.
Indiana Finance Authority 5s of 2033 at 2.92%-2.90% versus 2.48% on 2/13 and 2.49% original on 2/9. LA DWP 5s of 2034 at 2.69%. NYC TFA 5s of 2034 at 2.98%-2.97%.
DC 5s of 2047 at 3.91% versus 3.93% Tuesday and 3.47%-3.46% on 2/9. LA DWP 5s of 2052 at 3.89%-3.88% versus 3.80% on 2/16 and 3.52% on 2/13. Illinois Finance Authority 5s of 2052 at 4.40%-4.35% versus 4.38% on 2/17 and 4.15%-4.17% on 2/14.
AAA scales
Refinitiv MMD's scale was cut up to four basis points. The one-year was at 3.05% (unch) and 2.93% (+4) in two years. The five-year was at 2.57% (unch), the 10-year at 2.55% (unch) and the 30-year at 3.56% (unch) at 3 p.m.
The ICE AAA yield curve was mixed: 3.12% (-4) in 2024 and 2.97% (+1) in 2025. The five-year was at 2.62% (+1), the 10-year was at 2.58% (flat) and the 30-year yield was at 3.59% (flat) at 4 p.m.
The IHS Markit municipal curve was cut up to four basis points: 3.04% (unch) in 2024 and 2.90% (+4) in 2025. The five-year was at 2.57% (+4), the 10-year was at 2.58% (unch) and the 30-year yield was at 3.58% (unch) at a 4 p.m. read.
Bloomberg BVAL was cut up to one basis points: 3.13% (+1) in 2024 and 2.84% (unch) in 2025. The five-year at 2.59% (+1), the 10-year at 2.60% (unch) and the 30-year at 3.59% (+1).
Treasuries were firmer.
The two-year UST was yielding 4.699% (-3), the three-year was at 4.431% (-1), the five-year at 4.161% (-1), the seven-year at 4.076% (-2), the 10-year at 3.926% (-3), the 20-year at 4.087% (-5) and the 30-year Treasury was yielding 3.925% (-5) at 4 p.m.
FOMC minutes
While the vote at the latest Federal Open Market Committee meeting was unanimous for a 25 basis point rate hike, "a few participants" wanted a half-point increase in the fed funds target rate, according to minutes of the meeting, released Wednesday
"A few participants stated that they favored raising the target range for the federal funds rate 50 basis points at this meeting or that they could have supported raising the target by that amount," the minutes of the Jan. 31-Feb. 1 meeting noted. "The participants favoring a 50-basis point increase noted that a larger increase would more quickly bring the target range close to the levels they believed would achieve a sufficiently restrictive stance, taking into account their views of the risks to achieving price stability in a timely way."
Yet, in the end, "almost all participants agreed" to a smaller 25 basis point hike, since "a further slowing in the pace of rate increases would better allow them to assess" progress toward the Fed's dual mandate goals.
Inflation data "showed a welcome reduction in the monthly pace of price increases," participants noted, but they need "substantially more evidence of progress across a broader range of prices" for them to be "confident that inflation was on a sustained downward path." Inflation remains "unacceptably high," they said.
"Regarding upside risks to inflation, participants cited a variety of factors, including the possibility that price pressures could prove to be more persistent than anticipated due to, for example, the labor market staying tight for longer than anticipated," the minutes said.
Steve Skancke, chief economic advisor at Keel Point, noted, "the FOMC observations about the economy as reported in the minutes" — modest gains in spending and production, with "robust" job gains and "elevated" inflation — "is no different today than it was on February 1."
But now, he said, "FOMC members have continued to press their forward guidance that rate increases are not over and that rates may need to be higher for longer."
And markets are paying attention, Skancke said, "which helps the Fed from having to raise rates as much [as] otherwise required to smother inflationary pressures."
Markets, he added, "will continue to gyrate until there is more definitive news on February job and wage growth and February CPI inflation numbers."
Morgan Stanley strategists said the minutes "sent a fairly balanced message, with continued focus on inflation and tightening, but also with the acknowledgment that risks to the economic outlook are becoming more evenly distributed."
The meeting was held prior to the release of the strong January employment report and inflation reports that showed higher-than-expected increases.
Jay Hatfield, CEO at Infrastructure Capital Advisors and portfolio manager of the InfraCap Equity Income ETF (ICAP), said, "We continue to believe that the Fed is far too bearish about inflation. The key driver of high inflation is loose monetary policy that almost always causes very high inflation in housing prices and rents."
Primary to come:
The Worthington City School District in Franklin County, Ohio, will sell $233.9 million of school facilities unlimited tax GO bonds in a Thursday offering. The bonds, rated Aa1 by Moody's and AA-plus by S&P, will be senior-managed by RBC Capital Markets.
A $140 million sale of Series 2023 GO bonds will be sold by David Douglas, Ore., School District No. 40 on Thursday. Insured by the Oregon School Bond Guaranty Act, the financing is rated AA-plus by S&P and consists of $89.3 million of Series A 2023 bonds and $50.9 million of Series 2023B. Piper Sandler & Co.
Competitive:
Huntsville, Alabama, meanwhile will price a four-pronged offering of GO warrants also on Thursday. The largest series is $66.3 million of Series 2023 A bonds, followed by $44.9 million Series 2023 D school warrants, $44.2 million Series 2023 C sewer warrants, and $26.5 million Series 2023 B warrants. All of the bonds mature serially from 2024 to 2043 and are rated Aaa by Moody's, A by S&P and AA by Fitch.
