Municipals were stronger on Thursday with yields falling another two to five basis points on triple-A yield curves and new-issues fared well while Refinitiv Lipper reported $2.9 billion of outflows, marking the largest negative flows in nearly two years.
The last time outflows were above $2 billion was on April 8, 2020 when they hit $2.3 billion and prior to that was
Triple-A benchmark yields fell two to five basis points while UST were weaker on the day by three to four. Ratios fell again as a result. The municipal to UST ratio five-year was at 70%, 78% in 10 and 85% in 30, according to Refinitiv MMD's 3 p.m. read. ICE Data Services had the five at 67%, the 10 at 79% and the 30 at 84%.
In the primary market Thursday, Siebert Williams Shank & Co. priced and repriced for New York City Municipal Water Finance Authority (Aa1/AA+/AA+//) $500 million of water and sewer system second general resolution revenue bonds, Fiscal 2022 Series CC, with three to eight basis point bumps from a preliminary pricing wire. The first tranche, $250 million of Fiscal 2022 Subseries CC-1, saw bonds maturing in 6/2052 with a 5% coupon yield 2.18% (-3) and 4s of 2052 at 2.38% (-3), callable 12/15/2031.
The second tranche, $150 million of Fiscal 2022 Subseries CC-2, saw bonds maturing in 6/2026 with a 5% coupon yields 1.10% (-7), 5s of 2027 at 1.18% (-8) and 5s of 2035 at 1.70% (-5), callable 12/15/2031.
A block of New York City waters, 5s of 2031, traded at 1.54% versus 1.72% Friday. Long New York City waters, 5s of 2048 traded at 2.04% versus 2.09%-2.08% Wednesday.
Ramirez & Co. priced for Triborough Bridge and Tunnel Authority (/AA+/AA+/AA+) $595.33 million of payroll mobility tax senior lien bonds, Series 2022A. Bonds maturing in 5/2040 with a 4% coupon yields 2.24%, 4s of 2042 at 2.28%, 5s of 2047 at 2.19%, 5s of 2052 at 2.67% and 5s of 2057 at 2.34%, callable 5/15/2032.
J.P. Morgan Securities priced for Virginia Small Business Financing Authority (/BBB-/BBB/) $638.285 million of tax-exempt, alternative minimum tax senior-lien revenue refunding bonds, 95 Express Lanes LLC Project, Series 2022. Bonds maturing in 1/2032 with a 5% coupon yield 2.35%, 5s of 7/2032 at 2.39%, 5s of 1/2037 at 2.62%, 5s of 7/2037 at 2.62%, 4s of 1/2042 at 2.93% and 4s of 1/2048 at 3%, callable 1/1/2032.
In the competitive markets, Hampton, Virginia, (Aa1/AA+/AA+/) sold $115.615 million of general obligation public improvement bonds to Morgan Stanley & Co. Bonds in 9/2023 with a 5% coupon yield 0.73%, 5s of 2027 at 1.25%, 5s of 2032 at 1.52%, 3s of 2037 at 2.05%, and 3s of 2042 at 2.23%, callable in 9/1/2032.
A large flattening of the UST and muni yield curves have occurred since the beginning of the year.
The average double-A rated two-year municipal bond yields 0.97% and the 10-year municipal bond yields 1.66%. This is an increase from 0.26% and 1.18% at the beginning of the year. The 10-year muni is currently at the same level as it was before the COVID outbreak on Jan. 1, 2020, noted Matt Bernardi, vice president of Bernardi Securities.
“Investor anxiety and today’s market volatility is underpinned by the fear that inflation and higher rates, induced by the Fed, will slow the economy,” Bernardi said. “The Fed’s wind down of bond buying and communications about rate hikes, has mostly impacted the front end of the yield curve.”
Bernardi said long-term yields have not risen in lockstep with short-term rates. This is due, in part, to short-term rates being significantly impacted by Fed policy, and recent Fed communications have indicated that short-term rates would likely rise in the near future.
He said the spread between the 2-year and 10-year Treasury is unusually low relative to past economic cycles.
“In the current environment we are finding attractive valuations within tax-exempt and taxable municipal bonds,” he said.
He expects this ratio to trade between 70% to 80% and feels that a big increase is a buy signal for municipals in comparison to other high-grade fixed-income asset classes.
Given a favorable credit background for the typical municipality, continuous government stimulus and strong investor demand for tax-exempt assets, Bernardi said the ratio is projected to remain constant. As nominal rates rise, he expects investor demand to rise even more, boosting current day ratios.
A limited supply forecast is another technical reason that current ratios should be maintained, he said. Refinancing bond issuance will become more challenging as interest rates rise and this will restrict the supply of new issues and support current ratios, potentially even lowering them.
Mutual funds see large outflows
In the week ended Feb. 2, weekly reporting tax-exempt mutual funds saw $2.906 billion of outflows, Refinitiv Lipper said Thursday. It followed an outflow of $1.432 billion in the previous week.
Exchange-traded muni funds reported inflows of $62.53 million, after outflows of $209.02 million in the previous week. Ex-ETFs, muni funds saw outflows of $2.969 billion after $1.223 billion of outflows in the prior week.
The four-week moving average fell to negative $1.087 billion from negative $149.964 million in the previous week.
Long-term muni bond funds had outflows of $1.982 billion in the latest week after outflows $760.347 million in the previous week. Intermediate-term funds had outflows of $294.395 million after $157.818 million of outflows in the prior week.
National funds had outflows of $2.968 billion after $1.291 billion of outflows the previous week while high-yield muni funds reported $1.456 billion of outflows after $453.999 million of outflows the week prior.
Secondary trading
New York State Urban Development Corp. 5s of 2023 at 0.61%. Minnesota 5s of 2023 at 0.72%. To show how far yields have risen, this bond was priced at 0.11% in September. Fairfax County, Virginia 5s of 2024 at 0.95%-0.93%.
California 5s of 2027 at 1.26%. Alexandria, Virginia 5s of 2027 at 1.21% versus 1.22% Wednesday.Frederick County, Maryland 5s of 2028 at 1.32%.
New York City Municipal Water Finance Authority 5s of 2031 at 1.54%. New York City Transitional Finance Authority 5s of 2032 at 1.58%. Maryland 5s of 2033 at 1.46%-1.45% versus 1.54%-1.53% Wednesday and 1.57% Friday. Georgia 4s of 2033 at 1.46%-1.45% versus 1.55% Tuesday.
Washington 5s of 2036 at 1.66%. California 5s of 2037 at 1.65%. University of North Carolina at Chapel Hill 5s of 2037 at 1.55%. California 5s of 2041 at 1.76% versus 1.83%-1.81% Wednesday.
LA DWP 5s of 2046 at 1.91% versus 1.97%-1.93% Wednesday. New York City Transitional Finance Authority 5s of 2047 at 2.05%. New York City Municipal Water Finance Authority 5s of 2048 at 2.04%.
AAA scales
Refinitiv MMD's scale was bumped two basis points the 3 p.m. read: the one-year at 0.61% (-2) and 0.88% (-1) in two years. The five-year at 1.17% (-2), the 10-year at 1.43% (-2) and the 30-year at 1.82% (-2).
The ICE municipal yield curve saw one to six basis point bumps: 0.57% (-3) in 2023 and 0.86% (-5) in 2024. The five-year at 1.11% (-5), the 10-year was at 1.44% (-5) and the 30-year yield was at 1.80% (-4) in a 4 p.m. read.
The IHS Markit municipal curve was bumped two to out longer: 0.63% (-2) in 2023 and 0.86% (-2) in 2024. The five-year at 1.18% (-3), the 10-year at 1.42% (-3) and the 30-year at 1.84% (-3) at a 4 p.m. read.
Bloomberg BVAL was bumped one to three basis points: 0.65% (unch) in 2023 and 0.87% (unch) in 2024. The five-year at 1.19% (-2), the 10-year at 1.44% (-2) and the 30-year at 1.83% (-2) at a 4 p.m. read.
Treasuries were slightly weaker and equities sold off.
The two-year UST was yielding 1.119%, the five-year was yielding 1.670%, the 10-year yielding 1.833%, the 20-year at 2.209% and the 30-year Treasury was yielding 2.154% at the close. The Dow Jones Industrial Average lost 518 points or 1.45%, the S&P was down 2.44% while the Nasdaq lost 3.47% at the close.
Economy
Economists are rushing to trim predictions for the employment report, with most expecting a loss related to Omicron, but certain it won’t delay the expected March liftoff.
“Omicron took a larger-than-expected bite out of the labor market in January with workers out sick and hiring plans put on ice,” said Morgan Stanley in a report. “We forecast a net payroll loss of 215,000, but strong household survey gains should help the Fed look through the headline as a one-off.”
Several Federal Reserve officials, including Federal Reserve Bank of Philadelphia President Patrick Harker and Federal Reserve Bank of St. Louis President James Bullard, said this week they expect a bad report. But, Fed officials, especially Chair Jerome Powell, have said in the past that they are not swayed by one report, especially when there’s an explanation as to why the report may be an outlier.
Indeed, Mark Hamrick, senior economic analyst at Bankrate, noted, "January hiring may well be the weakest in a year as the Omicron wave sidelined millions of workers.”
Life during a pandemic leads to a “high degree of volatility and uncertainty,” he said. “If we continue to see more encouraging signs with COVID, it would be reasonable to expect the economic recovery will gather momentum again."
The Fed has enjoyed “a free lunch,” said Jeff Klingelhofer, co-head of investments and portfolio manager at Thornburg Investment Management, “whereby they can stimulate and overstimulate the market without having to face the unfortunate consequence of excess and easy monetary policy leading to high and sustained inflation. But of course, the tides have shifted today.”
Much of the inflation as transitory, he said, but the Fed will soon “begin withdrawing its excess monetary policy, but over a relatively prolonged period.”
A bigger than expected 6.6% gain in nonfarm productivity, coupled with a smaller than expected 0.3% rise in unit labor costs offered a pleasant surprise, but with labor costs up more than 3% in the past 12 months, “cost pressures are still running ahead of the Fed's 2% inflation target, even net of productivity growth,” said Wells Fargo Securities Senior Economist Sarah House.
Productivity gains will be less volatile in the coming year, she said. Given the issues with labor shortages, “businesses should continue to keenly eye labor-saving/enhancing investment given ongoing hiring difficulties,” House added. “The bump to productivity should help limit the extent to which higher labor costs are passed on to prices and offer a relief valve to current inflation pressures.”
The ISM services PMI slipped to 59.9 in January from 62.3 in December, while the business activity index declined to 59.9 from 68.3, and prices eased to a still elevated 82.3 from 83.9, while employment slipped to 52.3 from 54.7, its lowest read since December 2020.
The index signaled the slowest rate of growth since February 2021, said Scott Anderson, chief economist at Bank of the West, “suggesting the rapidly-spreading Omicron variant is limiting service sector activity.”
The decline to an 11-month low “reflects how a lack of available workers and persistent supply shortages are weighing on firms' ability to keep up with activity in the service sector despite what is still a strong, if somewhat moderating, demand environment,” said Wells Fargo Securities Senior Economist Tim Quinlan and Economist Shannon Seery.
Also released Thursday, initial jobless claims slid to a seasonally adjusted 238,000 annual rate from 261,000 a week earlier.
Lynne Funk contributed to this report.
