Municipal bonds improved by two to five basis points, with the biggest moves out longer as an active and diverse primary re-priced to lower yields and stronger U.S. Treasuries helped the tone.
Refinitiv Lipper reported $2-plus billion of infows into municipal bond mutual funds, with high-yield alone adding $821 million, furthering the market's strength.
“That is helping the market and supporting the new levels we are seeing in the primary and secondary market,” a New York trader said.
Triple-A benchmarks were lower by two to five basis points, with the 10-year just above 1% on Refinitiv MMD, ICE Data Services and at 1% on IHS Markit, while Bloomberg BVAL's 10-year fell below the threshold to 0.99%.
Thursday’s market had a “good tone and is gapping higher with a lot of demand out there right now,” the trader said. “The firmness in the Treasury market has supported what's going on in our marketplace.”
Potential tax law changes are also driving investors toward the municipal market. New York credits were trading tighter again on news that high-income earners will see their taxes rise in Gov. Andrew Cuomo's
New York City GOs, 5s of 2026, traded at 0.70%. New York Dormitory Authority personal income tax 5s of 2029 traded at 1.10%. New York Urban Development Corp. 5s of 2035 traded at 1.52%. New York UDC 5s of 2038 traded at 1.69%-168% versus 1.75%-1.74% Tuesday. New York City Transitional Finance Authority 4s of 2038 traded at 1.88%-1.82% versus 1.95% Tuesday and 2.02% original yield. New York City waters, 5s of 2050, traded at 1.94%-1.93% versus 1.97%-1.96% Wednesday.
“I think that given the fact that taxes don't seem to be going down any time soon and supply is relatively manageable, that puts us in a pretty good place here,” he said.
That is especially true given the lack of supply in the municipal market lately and what is looking to be a lighter week ahead.
“We haven't seen supply pick up,” he said. “Some reports say we will start to see some more taxable supply with the new infrastructure plan, but details on that won’t come out for a couple of months.”
Municipal to UST ratios fell to 63% in 10 years and 71% in 30 on Wednesday, according to Refinitiv MMD, while ICE Data Services showed ratios at 63% in 10 years and 72% in 30.
In the primary, BofA Securities priced $611.8 million of water and sewer system revenue bonds for Miami-Dade County, Florida (Aa3/AA-/A+/). Bonds in 2030 with a 5% coupon yield 1.16%, 5s of 2031 1.24%, 3s of 2036 1.87%, 4s of 2041 1.91%, 4s of 2046 2.04%, 3s of 2051 2.45% and 4s of 2051 2.14%.
California (Aa2/AA-/AA/) sold $392 million of taxable various purpose general obligation to Morgan Stanley & Co. LLC and $241 million of taxable GOs to Wells Fargo Securities and $61 million of taxables to Wells Fargo Securities. All bullet maturities. The first mature in 2028 with a 1.70% coupon and yield 1.59%. The second mature in 2031 with a 5% coupon and yield 1.999%. The third mature in 2028 at with a 3% coupon and yield 1.65% and 2029 with a 3% coupon at 1.999%.
Goldman Sachs & Co. re-priced to lower yields by as much as 12 basis points $598.2 million of subordinated sales tax refunding sustainability bonds for the The Massachusetts Bay Transportation Authority (Aa3/AA//). The first series, $547.4 million, callable in 7/1/2031, 5s of 2021 yield 0.06% (-3 bps), 5s of 2026 0.53% (-9), 5s of 2031 1.19% (-9), 4s of 2036 1.64% (-12), 4s of 2040 1.83% (-5), 2.5s of 2046 2.54% and 4s of 2051 2.07% (-5). The second series, $56 million, callable in 7/1/2029, 5s of 2041 yield 1.63% (-6) and 5s of 2042 1.66% (-7).
Goldman also priced $50 million of taxables for the MBTA. Bonds priced at par; 2025 at 0.99%, 2026 1.24%, 2031 2.235% and 2034 at 2.535%.
Refinitiv Lipper reports $2.1B inflow
In the week ended April 7, weekly reporting tax-exempt mutual funds saw $2.122 billion of inflows. It followed an inflow of $160.973 million in the previous week.
Exchange-traded muni funds reported inflows of $350.027 million, after inflows of $217.887 million in the previous week. Ex-ETFs, muni funds saw inflows of $1.772 billion after outflows of $56.924 million in the prior week.
The four-week moving average remained positive at $1.036 billion, after being in the green at $778.254 million in the previous week.
Long-term muni bond funds had inflows of $1.676 billion in the latest week after inflows of $179.444 million in the previous week. Intermediate-term funds had inflows of $259.233 million after inflows of $107.101 million in the prior week.
National funds had inflows of $1.976 billion after inflows of $273.688 million while high-yield muni funds reported inflows of $820.790 million in the latest week, after inflows of $253.564 million the previous week.
Secondary market
Trading was strong all day. Anne Arundel County, Maryland 5s of 2022 traded at 0.10%-0.09%. Texas transportation 5s of 2022 at 0.10%. Guilford, North Carolina 5s of 2022 at 0.08%.
Georgia GOs 5s of 2026 at 0.50%. Ohio GOs at 0.56%. Cal 5s of 2027 at 0.71%. Dallas ISD 5 of 2027 at 0.61% versus 0.63% original. Baltimore County, Maryland 5s of 2027 at 0.66%. North Carolina 5s of 2028 at 0.80%. Forsyth 4s of 2027 at 0.64%-0.63% versus 0.65% original.
Washington 5s of 2038 at 1.41%. Washington 5s of 2042 at 1.58%.
High-grade municipals were stronger on Refinitiv MMD’s AAA benchmark scale, with short yields steady at 0.07% in 2022 and 0.13% in 2023. The yield on the 10-year fell five basis points to 1.03% and five basis points on the 30-year to 1.66%.
The ICE AAA municipal yield curve showed short maturities fall one basis point to 0.07% in 2022 and one basis point to 0.11% in 2023. The 10-year maturity fell four to 1.04% while the 30-year fell five basis points to 1.66%.
The IHS Markit municipal analytics AAA curve showed yields at 0.07% in 2022 and 0.12% in 2023, the 10-year at 1.00%, three lower, and the 30-year at 1.63%, four lower.
The Bloomberg BVAL AAA curve showed yields at 0.06% in 2022 and 0.10% in 2023, both one basis point lower, while the 10-year fell three basis points to 0.99%, and the 30-year yield fell five to 1.65%.
The three-month Treasury note was yielding 0.03%, the 10-year Treasury was yielding 1.63% and the 30-year Treasury was yielding 2.32%. The Dow was up 57 points, the S&P 500 rose 0.42% and the Nasdaq gained 1.03%.
Powell on inflation
Hiccups, such as the blockage in the Suez Canal, or recent supply chain issues could cause transitory inflation, Federal Reserve Chair Jerome Powell said Thursday, but the Fed only worries about persistent inflation, where prices rise “year after year after year.”
“The nature of a bottleneck is that it will be resolved,” Powell said on a livestream of the International Monetary Fund’s debate on global economy. “Supply chains will adapt and become more efficient.”
These incidents raise demand in the short-term, and lift “prices momentarily but we do not expect it to continue persistently,” he said. And, should the Fed err and the price gains are “persistently above 2%, we would react,” Powell said. “That is our job.”
Of course, the Fed does not believe that is the likely outcome, he reiterated. But, “if the need arises, we have the tools to guide inflation back down to 2%,” he said, by increasing the fed funds rate target.
Fiscal support and vaccinations have helped the economy, Powell said, although there is “still 20% unemployment in the bottom tier of waged employees.”
Kristalina Georgieva, managing director of the IMF said, “Vaccines will be most important for recovery, more important than any fiscal or monetary policy.”
“Chairman Powell reiterated that the Fed will wait to see actual, not just forecasted, progress in the economy before the Fed begins to taper,” said Scott Ruesterholz, portfolio manager at Insight Investment.
But despite the chair’s insistence that inflation will be short-lived, he added, “While the central case is that the rise in inflation proves temporary given the still-sizable output gap, there is considerable uncertainty around this forecast, given the level of excess savings and fiscal stimulus that will be hitting the economy as it reopens.”
And that puts the Fed at risk of being behind the curve, as the inflation outlook remains “extremely uncertain.” Yet, Powell’s words “make clear the Fed will risk acting too late rather than acting too soon and choking off the expansion prematurely.”
Patience was preached by Federal Reserve Bank of Minneapolis President Neel Kashkari, who added he is not worried about inflation and is “comfortable” with the Fed’s new framework.
“We are gonna watch the labor market, inflation and inflation expectations but the key is we not going to shortcut the economy, just because we think inflation is around the corner,” Kashkari said at an event hosted by the Economic Club of New York on Thursday.
“In the past, we preemptively made changes because we thought inflation was around the corner and it wasn't,” he said. “And the American people paid the price for our shortcomings.”
When asked if the 2% inflation target is too low, Kashkari said he has not seen “any evidence” of support for a 3% or 4% target.
“How could we raise our target before we even reach it?”
Indicators
In economic data, initial jobless claims climbed to 744,000 on a seasonally adjusted annual basis in the week ended April 3 from a revised 728,000 a week earlier, the Labor Department reported Thursday.
The March 27 read was first reported as 719,000. Economists estimated 650,000 claims in the week.
“The recent rise in claims stands in contrast to almost all other readings of the labor market at present,” according to Sarah House, senior economist at Wells Fargo Securities. “There is little to suggest that the labor market recovery is once again stalling, let alone backsliding, as recent claims figures hint.”
Continued claims decreased to 3.734 million in the week ended March 27 from a downwardly revised 3.750 million a week earlier, initially reported as 3.794 million.
This is the lowest read since 3.094 million in the week ended March 21, 2020.
The four-week moving average rose to 723,750 in the week ended April 3 from an upwardly revised 721,250 a week earlier, first reported as 719,000.
“The increase over the past two weeks was enough to nudge the four-week average up for the first time since January of this year,” House said. “For all the issues surrounding claims filings this past year, their recalcitrance is a reminder that the labor market is far from fully healed.”
With more vaccinations and “ample policy support,” claims should drop in the near future.
“As seasonal adjustments, reopening, and the recent stimulus package begin to more heavily impact the data, we need to get used to this volatility,” Insight’s Ruesterholz, said. “These distortions increase the noise and uncertainty.”
Lynne Funk and Chip Barnett contributed to this report.
