Municipals were mostly steady Wednesday, the primary again the focus with new deals seeing bumps in repricings, while U.S. Treasuries made gains after Fed Chairman Jerome Powell said scaling back asset purchases was not on the table yet.
Triple-A benchmarks did see some strength on the short end, moving yields lower by a basis point, while out longer there was slight pressure on levels. The long bond is at 1.35% on almost every benchmark, a mere seven basis points higher than the August 2020 low of 1.28%. The 30-year triple-A muni yields the same as the 30-year UST near the close.
A key demand component in the market again flexed its muscles with another round of $2 billion-plus fund inflows.
The Investment Company Institute reported $2.367 billion of inflows into municipal bond mutual funds for the week ending July 7, up from the $1.980 billion a week prior. It is the 18th consecutive week of inflows marking $52.5-plus billion year-to-date.
Exchange-traded funds jumped up to $490 million of inflows from $294 million a week prior.
Municipal-to-UST ratios rose Wednesday with the 10-year at 62% and the 30-year at 68%, according to Refinitiv MMD. ICE Data Services had the 10-year muni-to-Treasury ratio at 63% and the 30-year at 68%.
In the primary, Loop Capital Markets priced and repriced for institutions $580 million of New York City Transitional Finance Authority (Aa3/AA/AA/) building aid revenue refunding bonds, Fiscal 2022 Series S-1, Subseries S-1A. The short end was bumped by two to three basis points from retail scales. Bonds in 2022 with 3% and 5% coupons yield 0.10% (-3), 3s and 5s of 2026 at 0.74% (-2), 5s of 2031 at 1.07%, 4s of 2036 at 1.43% and 3s of 2041 at 1.83%.
The TFA also sold $226.6 million of taxable building aid revenue bonds to J.P. Morgan Securities LLC. Details were not yet available.
Citigroup Global Markets Inc. priced and repriced for the Maryland Department of Transportation (A1//A/) $193 million of special transportation project revenue bonds (Baltimore/Washington International Thurgood Marshall Airport), Series 2021B (qualified airport bonds-AMT). Bonds in 2026 with a 5% coupon yield 0.66%, 5s of 2031 at 1.29%, 5s of 2036 at 1.53%, 4s of 2041 at 1.80%, 5s of 2046 at 1.80% and 4s of 2051 at 1.98%.
In the competitive market, Santa Clara County, California, (/AAA/AA+/) sold $350 million of taxable general obligation bonds to Morgan Stanley & Co. LLC. Bonds in 2022 with a 2% coupon yield 0.15%, 2s of 2026 at 0.95%, bonds in 2031 at par at 1.73%, 2s of 2036 at 2.10%, 2.5s of 2040 at 2.35% and bonds in 2047 priced at par at 2.87%.
San Jose, California, (Aa1/AA+/AAA/) sold $200 million of general obligation bonds to BofA Securities. Bonds in 2022 with a 5% coupon yield 0.05%, 5s of 2026 at 0.40%, 5s of 2031 at 0.82%, 5s of 2036 at 1.00%, 5s of 2041 at 1.15%, 5s of 2046 at 1.28% and 5s of 2051 at 1.33%.
New Hampshire sold $123 million of Series 2021 C exempts to BofA Securities. Bonds in 2022 with a 5% coupon yield 0.10%, 5s of 2026 at 0.38%, 5s of 2031 at 0.87%, 3s of 2036 at 1.61%, 2s of 2041 at 1.90%, 2s of 2046 at $98.500, and 2s of 2050 at $97.500.
Informa: Money market muni funds fall $62M
Tax-exempt municipal money market fund assets fell by $62.7 million, lowering their total to $93.45 billion for the week ending July 13, according to the Money Fund Report, a publication of Informa Financial Intelligence.
The average seven-day simple yield for the 162 tax-free and municipal money-market funds remained at 0.01% from the previous week.
Taxable money-fund assets declined by $5.89 billion in the week ended July 13, bringing total net assets to $4.354 trillion. The average, seven-day simple yield for the 764 taxable reporting funds remained at 0.01% from the prior week.
Overall, the combined total net assets of the 926 reporting money funds fell $5.95 billion in the week ended July 13.
Secondary trading and scales
Trading showed short end strength with West Virginia 5s of 2022 at 0.08%. North Carolina 5s of 2022 at 0.07%.
New York City TFA 5s of 2027 at 0.62% versus 0.65% Tuesday. Prince George’s County, Maryland, 5s of 2029 at 0.74%-0.73%, the same as Tuesday.
Ohio 5s of 2030 at 0.87%.
Arlington County, Virginia, 5s of 2032 at 0.96% versus 0.95% Tuesday. Hennepin County 5s of 2036 at 1.03%. New York City TFA 4s of 2039 at 1.40%-1.39%.
Los Angeles Department of Water and Power 5s of 2041 at 1.22%-1.20%, the same as Tuesday. Georgia 3s of 2041 traded at 1.35% then 1.46% later in the day.
Fairfax County, Virginia, 4s of 2046 at 1.49% versus 1.46% original levels.
New York UDC 5s of 2047 at 1.54%. Howard County, Maryland, 3s of 2049 at 1.83%-1.90%, another high-grade trade moving to higher yields.
New York City water 5s of 2048 at 1.52%-1.50% versus 1.42% Thursday.
According to Refinitiv MMD, short yields fell one basis point to 0.07% in 2022 and 0.11% in 2023. The yield on the 10-year sat at 0.84% while the yield on the 30-year rose two basis points to 1.35%.
The ICE municipal yield curve showed bonds fall one basis point to 0.07% in 2022 and to 0.11% in 2023. The 10-year maturity held at 0.86% and the 30-year yield at 1.35%.
The IHS Markit municipal analytics curve showed short yields at 0.07% and 0.10% in 2022 and 2023, respectively, with the 10-year steady at 0.84%, and the 30-year yield also unmoved at 1.35%.
Bloomberg BVAL saw short yields steady at 0.10% and 0.12% while the 10-year was at 0.85% and the 30-year sat at 1.36%.
Treasuries made gains and equities were mixed after earlier losses in the day. The 10-year Treasury was yielding 1.355% and the 30-year Treasury was yielding 1.984% near the close. The Dow Jones Industrial Average rose 44 points or 0.13%, the S&P 500 was up 0.12% while the Nasdaq lost 0.22%.
Economy
Reaching “substantial further progress” toward its maximum-employment and price-stability goals, which will allow the Federal Reserve to cut back on asset purchases “is still a ways off,” Federal Reserve Board Chair Jerome Powell repeated Wednesday.
Testifying before the House Financial Services Committee, where many members expressed concern about inflation, Powell said price pressures are transitory and the economy will continue to need accommodation even when the pandemic ends and the labor market rebounds. Preemptive action would harm the economy.
“Conditions in the labor market have continued to improve, but there is still a long way to go,” the chair said in prepared remarks. “Inflation has increased notably and will likely remain elevated in coming months before moderating.”
But, he said, it’s base effects, bottlenecks and price increases in sectors recovering from pandemic-related price drops last year that have “led to especially rapid price increases for some goods and services, which should partially reverse as the effects of the bottlenecks unwind.”
Responding to questions, Powell said it’s “difficult to be precise” about what constitutes substantial further progress, but he again vowed to give plenty of advance notice before tapering asset purchases.
The spike in inflation, he said, is related to a “small group of goods and services tied to the reopening” and while it’s been higher than expected, it is still in line with the Fed’s expectations of long-term 2% inflation.
While the Fed continues to monitor inflation, Powell said, “if we were to see inflation was remaining materially higher — above our target over a period of time — we would absolutely change our policy as appropriate.”
Despite the pledge to offer lots of notice before tapering, Powell said, there’s “nothing to prevent us from doing the right thing at the right time,” but he added, “it would be very surprising if we have to move very quickly.”
One House member pointed out that inflation has been above 2% for four months and asked the chair how long is “some time?” as it relates to inflation being over 2%. Powell responded, “The question will be where does this leave us in six months when inflation comes down,” a question that can’t be answered definitively now.
And, he added, inflation has been “higher and a little more persistent than we hoped” as a result of a “perfect storm of high demand and low supply,” which should fade over time.
The chair also defended the purchase of mortgage-backed securities, saying they have “only a modestly greater effect on housing” than Treasury purchases. The Fed will determine “the timing and composition” of purchases as “part of the taper conversation.
Separately, the economy showed “moderate to robust growth,” according to the Beige Book, but prices were an issue.
“Prices increased at an above-average pace, as seven Districts reported strong price growth and the rest saw moderate gains,” according to the report. “Pricing pressures were broad-based and grew more acute in the hospitality sector, as the reopening of hotels and restaurants confronted limited supplies of materials and workers. Construction costs remained high, but lumber prices reportedly eased a bit.”
Only some respondents see price pressures as transitory, while the majority expect more inflationary pressure in the coming months.
Most Districts saw “either slight or modest job gains,” with the others terming employment gains as “moderate or strong.” Labor demand was “healthy” and widespread especially in low-skilled positions. “Wages increased at a moderate pace on average, and low-wage workers enjoyed above-average pay increases,” according to the report.
Also released Wednesday, the producer price index gained 1.0% in June, after an unrevised gain of 0.8% in May and the core grew 1.0%, following an unrevised 0.7% climb in May. Year-over-year PPI rose 7.3% and the core grew 5.6%.
Economists polled by IFR Markets expected the headline number and the core to each rise 0.5% in the month and 6.7% and 5.1% for the annual growth, respectively.
The takeaway from the report is the same as from Tuesday’s consumer price index, said Steve Sosnick, chief strategist at Interactive Brokers. “While there should have been much to concern bond and stock investors, they have chosen to largely overlook the concerning parts.”
While economists had to parse the report to pick out “transitory inflation,” he said, “the Fed is unlikely to change its accommodative stance anytime soon. The data-dependent Fed told us that for today at least we shouldn’t worry about the data.”
“These figures, along with the CPI data released yesterday, mean that inflation is certainly surging at the moment, but I’m not sure this should be a cause for long-term concern,” said Jacob Channel, senior economic analyst for LendingTree.
Gary Schlossberg, global strategist, Wells Fargo Investment Institute, believes inflationary pressures in the coming months will “keep the pressure” on the Fed to respond. “If the Fed does hold its ground, then the risk is that the market takes matters into its own hand by boosting longer-term rates as inflation expectations rise.”
Channel, however, said the “consensus” of economists is inflation will be transitory, as the Fed suggests.
