Municipals were weaker Wednesday with the largest losses on the front end, leading to muni to UST ratios rising slightly there as a result of a firmer U.S. Treasury curve 10 years and in, while equities rallied after the Federal Open Market Committee kept rates unchanged.
Treasury bonds rallied after the announcement as the market interpreted the FOMC's statement and the Summary of Economic Projections as "dovish," said Christian Hoffmann, portfolio manager at Thornburg Investment Management.
"The immediate market reaction is the relief we were expecting," said Senior Portfolio Manager/Vice President at Sit Investment Associates Bryce Doty. "Investors were worrying the Fed was going to pull back from rate cuts this year, so keeping three rate cuts on the table naturally pushes stocks higher and bonds yields lower."
The Fed, he said, can be "tough on inflation" while cutting rates, "given that the real fed funds rate will still be considered very restrictive."
UST yields fell seven to eight basis points on the short end while muni yields rose as much as 10 on the short end.
The two-year muni-to-Treasury ratio Wednesday was at 61%, the three-year at 61%, the five-year at 58%, the 10-year at 58% and the 30-year at 82%, according to Refinitiv Municipal Market Data's 3 p.m. EST read. ICE Data Services had the two-year at 61%, the three-year at 59%, the five-year at 58%, the 10-year at 59% and the 30-year at 81% at 3:30 p.m.
Despite the underperformance Wednesday munis were still outperforming USTs as of returns posted in the morning. Munis are returning 0.27% month-to-date, while USTs are returning negative 0.13%.
Investment grades are returning negative 0.11% year-to-date, while USTs are in the red at negative 1.72%, according to Bloomberg data.
The Investment Company Institute reported larger inflows into municipal bond mutual funds for the week ending March 13, with investors adding $815 million to funds following $956 million the week prior.
This marks 10 straight weeks of inflows.
ICI reported exchange-traded funds saw inflows of $102 million following $622 million of inflows the week prior.
Meanwhile, LSEG Lipper reports inflows for three straight weeks, while high-yield has seen inflows for 10 consecutive weeks.
Strong issuance in January and February has led to a 35% increase in new-issue supply, which has been "met with heavy pent-up demand against a backdrop of a relatively stable muni rate environment," according to Jeff Lipton, managing director of credit research at Oppenheimer. March month-to-date returns are "respectable" as demand outstrips supply, he said.
The supply/demand imbalance appears "to shift some of the focus away from the frothy ratios tethered to the 2024 muni market, and [separately managed accounts] are generally more fixated on quality portfolio construction than on relative value," he said.
If there is "appreciably" rate volatility, Lipton said there could be "visible cheapening in ratios with potentially compelling entry points."
Muni bond prices could also be cheapened by "selling pressure to cover April tax liabilities … thus creating opportunities before the onset of reduced summer supply," he said.
"Fund flows to remain intermittently positive given that lower rates are on the horizon and that the extended duration trade could offer value," Lipton said.
March has also seen several large deals come to market and even more on the horizon.
In the primary market Wednesday, Jefferies held a one-day retail order for the New York State Environmental Facilities Corp. (Aaa/AAA/AAA/) with $722.505 million of New York City Municipal Water Finance Authority Projects — Second Resolution State Clean Water and Drinking Water Revolving Funds subordinated SRF revenue bonds, Series 2024 A, with 5s of 20255 at 3.03%, 5s of 2029 at 2.56%, 5s of 2034 at 2.65%, 5s of 2039 at 3.10%, 5s of 2044at 3.53% and 5s of 2049 at 3.85%, callable 6/15/2034.
"The balance of March may continue to be better-than-expected, particularly given existing demand and decent reinvestment needs over the next 30 days," Lipton said.
The 30-day Bond Buyer visible supply jumped up to $10.394 billion Wednesday.
AAA scales
Refinitiv MMD's scale was cut two to five basis points: The one-year was at 3.07% (+5) and 2.84% (+5) in two years. The five-year was at 2.47% (+2), the 10-year at 2.47% (+2) and the 30-year at 3.65% (+2) at 3 p.m.
The ICE AAA yield curve was cut one to four basis points: 3.10% (+4) in 2025 and 2.86% (+3) in 2026. The five-year was at 2.51% (+1), the 10-year was at 2.50% (+1) and the 30-year was at 3.59% (+2) at 3:30 p.m.
The S&P Global Market Intelligence municipal curve was cut two to five basis points: The one-year was at 3.06% (+5) in 2025 and 2.84% (+5) in 2026. The five-year was at 2.50% (+2), the 10-year was at 2.49% (+2) and the 30-year yield was at 3.62% (+2), according to a 3 p.m. read.
Bloomberg BVAL saw large cuts on the front end: 3.05% (+10) in 2025 and 2.87% (+7) in 2026. The five-year at 2.45% (+2), the 10-year at 2.46% (+2) and the 30-year at 3.63% (+2) at 3:30 p.m.
Treasuries were firmer 10 years and in.
The two-year UST was yielding 4.610% (-7), the three-year was at 4.398% (-8), the five-year at 4.245% (-5), the 10-year at 4.266% (-3), the 20-year at 4.536% (flat) and the 30-year at 4.445% (+1) at the close.
FOMC
The Federal Open Market Committee still expects three 25 basis point rate cuts this year from the current 5.25% to 5.50% level, despite raising growth estimates and inflation projections.
Inflation, the FOMC said, "remains elevated," and the SEP now forecasts core personal consumption expenditures rising 2.6% this year, up from its 2.4% estimate three months ago. The estimate of gross domestic product this year soared to 2.1% from the prior estimate of 1.4%.
While the dot plot still calls for 75 basis points of easing this year, it was based on 10 of 19 officials expecting three cuts; one fewer and the panel would have been projecting just two cuts. In 2025, projections now suggest three reductions, one fewer than the expectations released in December.
In his press conference, Fed Chair Jerome Powell said, the last two months of inflation data "haven't really changed the overall story, which is that of inflation moving down gradually on a sometimes bumpy road to 2%."
The numbers haven't "added to anyone's confidence that we're moving closer to that point," he added.
He wouldn't comment about whether the next two meetings are in play. "The committee wants to see more data that gives us higher confidence inflation is moving down to 2%," and right now they don't have that confidence. Powell said inflation will be the data that is most important to the Fed.
Strong hiring alone wouldn't be a reason to delay rate cuts, Powell said.
"Stickiness in the disinflation process will keep the Fed cautious before starting its easing cycle," said Swiss Re Chief Economist Americas Thomas Holzheu.
"Economic resiliency and inflation stubbornness are chipping away at the Fed's appetite for easing, but not enough to derail rate cuts later this year," according to Michael Gregory, BMO deputy chief economist. "However, timing is still very much in the air."
"The latest economic data and Fed communications reinforces our view of 75 basis points of cuts this year starting in late Q2," he said. "We think the current balance of risks tilts toward fewer rate cuts given ongoing strength in the economy, with Q1 GDP growth tracking at about 2% and inflation run rates still in the range of 3-4%."
Luis Alvarado, global fixed-income strategist at Wells Fargo Investment Institute, said, "the FOMC is still priced for a too-optimistic outcome regarding future Fed rate cuts in 2025. As the disinflation base effect wears off, we think it will prove difficult for inflation to move quickly toward the Fed's 2.0% inflation target."
Noting the post-meeting statement was "barely tweaked," Doug Tommasone, senior portfolio manager of fixed income at Fiduciary Trust International, said, "the Fed did not let two months of tricky seasonal inflation prints overrule preceding six months of faster progress."
"The Fed seems increasingly confident that trend levels of growth are still enough to bring inflation back to 2%, albeit not as quickly as their prior more precarious GDP forecasts," he said. "Perhaps unsurprisingly, this greater faith in growth comes at the expense of risks to inflation, which were broadly balanced in December, as being weighted to the upside."
Increasing the longer-term policy rate to 2.6% from 2.5% "is both negligible and noteworthy," said Whitney Watson, global co-head and co-chief investment officer of Fixed Income and Liquidity Solutions within Goldman Sachs Asset Management. "It is negligible because market expectations are already much higher, but noteworthy as it reinforces the market's recent perception that the rate-cutting cycle may be shallower than initially anticipated."
"The median rate cuts implied by the dot plot remained at three for 2024, which is a positive as many investors had feared a reduction to only 2 expected cuts," noted Jay Hatfield, CEO at Infrastructure Capital Advisors. "We believe that the release is bullish as the stable view on rate cuts indicate that participants recognize at some level that recent increases in inflation were primarily due to mismeasurement of shelter inflation due to archaic BLS methodology and due to other volatile components, such as financial services inflation and airline fares."
"Without changes in current data, the likely result will be only one cut or none at all," Thornburg's Hoffmann said. On the flip side, a significant downdraft in data could push cuts closer to five or six."
While the Fed tries to avoid politics, "making big changes to monetary policy into a contentious election could present troubling optics," he said.
The rate cut projections are "modestly dovish," said ING Chief International Economist James Knightley. "With growth and inflation projections revised stronger, the Fed believes that the risk is that interest rates will be higher than previously thought over the longer term."
Negotiated calendar to come
The New Jersey Educational Facilities Authority (A1/AA//) is set to price Thursday $160.065 million of Assured Guaranty-insured Montclair State University Issue revenue refunding bonds, Series 2024 A. Goldman Sachs.
