Municipals saw more cuts on the short end of the curve following a slightly weaker U.S. Treasury market while equities ended in the black ahead of Tuesday's consumer price index report and the two-day Federal Open Market Committee meeting.
The one-year triple-A muni ended the session higher than the two- and five-year muni. U.S. Treasuries yields rose up to four on the short end.
Muni to UST ratios fell out long. The three-year muni-UST ratio was at 58%, the five-year at 65%, the 10-year at 69% and the 30-year at 97%, according to Refinitiv MMD's 3 p.m. read. ICE Data Services had the three at 60%, the five at 65%, the 10 at 72% and the 30 at 97% at a 4 p.m. read.
"As we start to close out 2022, we should start to see secondary trading slow down as traders start to take off for the holidays," said Jason Wong, vice president of municipals at AmeriVet Securities. Last week, secondary trading totaled around $56.8 billion.
Bids-wanted totaled around $8.633 billion, slightly higher than the prior week's total of $8.22 billion, according to Bloomberg.
Spreads fell for the week once more with 10-year notes falling by 7.5 basis points to 2.57% "marking the sixth straight week of falling yields as we try to end the year on a high note after a year of record losses," he said.
With yields falling again, munis outperformed USTs again with "10-year ratios now yielding 72.34% versus 76.29%."
"One month ago, those ratios were at 80.63% as this is a sign that many investors are coming back to the muni market," he said.
Since
For the third time since August, investors added money to mutual funds, seeing
"This is only the tenth weekly inflow we have had this year as investors have had a mass exodus out of fixed income funds due to higher yields as the Fed rose rates to combat record high inflation," he said.
"We have seen 10-year yields decline to 2.57% from its peak of 3.39% in mid-October; this decline in rates has been positive news for investors as munis had been down almost 13% for the year but have crawled back in recent weeks to be down by only 8%," he said. "The decline in rates in the last month and a half has been driven mainly by light supply with just $4.4 billion in the 30-day supply, as well as inflation being in check, and December being a strong month for cash reinvestment."
All eyes on FOMC
The December Federal Open Market Committee meeting, combined with the release of inflation data, "will test the good cheer currently prevailing in the bond market," said MSCI Research strategists Andy Sparks, Tamas Hanis and Edina Szirma.
"A 50bp hike is widely expected given high inflation and a tight jobs market, but the market is pricing in a recession, and falling Treasury yields and a weakening dollar are undermining the Fed's efforts to dampen price pressures," said James Knightley, ING's Chief International Economist. "A hawkish Fed message will likely fall on deaf ears unless the data start proving the central bank right."
Last month's consumer price index "showed unexpectedly low inflation and triggered one of the sharpest rallies of the past several years," as the 10-year UST fell by almost 60 basis points through Dec. 6. The surprisingly strong November employment report "had a relatively modest impact on yields, suggesting that the market's focus is more on inflation than on the strength of the labor market," MSCI Research strategists said.
The market has confidence that "the Fed can successfully drive inflation much lower than the current 7.7% rate of the past year," they said.
They noted, "market-implied inflation by June 2023 is below 3% and by December 2024 is near the Fed's inflation target of 2%."
In line with these expectations, "current market pricing shows the Fed raising the federal-funds rate to 5% over the next three meetings, followed by a pause and then cutting rates by the fourth quarter of 2023," they said.
However, "the way forward is still uncertain and depends on the stickiness of inflation, appropriateness of the rate policy to address it and how much economic damage monetary tightening could cause," they said.
Over the past two years, the Fed and market pricing have consistently undershot inflation.
Further, as Chair Jerome Powell has reiterated "monthly inflation can be very volatile and may be misinterpreted," MSCI Research strategists note.
"The CPI release may help confirm last month's inflation report or show it to be an anomaly," they said. "Either way, the FOMC meeting taking place after the release of the inflation data will provide investors with insights into how the Fed is viewing inflation trends..
Secondary trading
New York City 5s of 2023 at 2.54%. California 5s of 2023 at 2.45%. Georgia 5s of 2024 at 2.45%-2.44%. Maryland 5s of 2025 at 2.46%-2.41%.
New York Dorm PITs 5s of 2030 at 2.63% versus 2.70% Friday. California 5s of 2030 at 2.52%. Florida BOE PECO 5s of 2033 at 2.83% versus 2.75% Thursday. Mecklenburg County, North Carolina, 5s of 2034 at 2.67%-2.65% versus 2.65%-2.63% Friday.
District of Columbia income tax 5s of 2036 at 3.05%-3.04%. New York City TFA 5s of 2037 at 3.30% versus 3.34% Friday.Washington 5s of 2040 at 3.44%.
Washington 5s of 2042 at 3.56%-3.55%. New York City TFA 5s of 2044 at 3.82% versus 3.86%-3.84% Thursday. San Jose Financing Authority green waters 5s of 2047 at 3.54%-3.53% versus 3.70% original.
AAA scales
Refinitiv MMD's scale was cut two basis points at one- and two-years: the one-year at 2.51% (+2) and 2.46% (+2) in two years. The five-year at 2.47% (unch), the 10-year at 2.51% (unch) and the 30-year at 3.46% (unch).
The ICE AAA yield curve was cut on the short end: 2.50% (+7) in 2023 and 2.46% (+2) in 2024. The five-year at 2.49% (+2), the 10-year was at 2.60% (flat) and the 30-year yield was at 3.48% (-2) at 4 p.m.
The IHS Markit municipal curve saw one to two basis point cuts: 2.49% (+2) in 2023 and 2.46% (+2) in 2024. The five-year was at 2.49% (+1), the 10-year was at 2.53% (+1) and the 30-year yield was at 3.45% (+1) at a 4 p.m. read.
Bloomberg BVAL was weaker on the front end: 2.50% (+1) in 2023 and 2.48% (1) in 2024. The five-year at 2.48% (unch), the 10-year at 2.57% (unch) and the 30-year at 3.45% (unch) at 4 p.m.
Treasuries saw losses.
The two-year UST was yielding 4.390% (+4), the three-year was at 4.142% (+4), the five-year at 3.795% (+3), the seven-year 3.727% (+3), the 10-year yielding 3.610% (+3), the 20-year at 3.818% (+1) and the 30-year Treasury was yielding 3.572% (+1) at the close.
FOMC preview
This week's Federal Open Market Committee meeting will see the Fed rising interest rates once more for the seventh meeting in a row.
The consensus is the FOMC will hike rates 50 basis points after four consecutive rate hikes of 75 basis points.
The Fed is very likely to hike 50bps in December "as they have made this policy course quite clear," Appleton Partners said in a Monday report.
"After a barrage of 75 bps hikes over the past four FOMC meetings," Wells Fargo looks for the committee to "tighten policy at a slower pace in December and raise the fed funds target range 50 bps to 4.25-4.50%."
"While the Fed will move at a more typical pace, they will still be raising interest rates now and into 2023," said Bankrate.com chief financial analyst Greg McBride. "The ultimate stopping point is unknown, as is how long rates will stay at that eventual destination."
"Much is being made that the Federal Reserve is slowing the pace of their rate hikes, presumably at this meeting," McBride said.
"But the 0.75% pace that had prevailed for the last [four] meetings was the outlier — a step that hadn't previously been taken in 28 years but was employed [four] meetings consecutively given the urgency of the task of getting inflation under control," he said. "The months ahead will see the Fed raising interest rates at a more customary pace."
The downshift in the pace of tightening, Wells Fargo strategists said, follows signs that inflation is finally beginning to ease.
"All three of the major U.S. inflation indices came in cooler than expected in October," Wells Fargo strategists said. "That said, the November employment report showed that the labor market remains very tight, which argues for another rate hike in excess of only 25 bps."
While the recent moderation in price growth is encouraging, they said, "it is merely an initial step in what is still likely to be a difficult journey in returning inflation to the Fed's 2% target on a sustained basis." They noted that "policymakers appear weary of reading too much into a single month's data given inflation has proved more persistent than expected this past year."
Wells Fargo strategists said the post-meeting statement and the quarterly update to the Summary of Economic Projections "are both likely to signal that the tightening cycle is far from over as a result."
"The statement will continue to highlight elevated inflation and participants will still see the balance of risks to the upside," Morgan Stanley strategists said. "On balance these changes will allow Chair Powell to justify the step down in pace while maintaining the Fed's commitment to fighting inflation."
The Fed will enter 2023 just "50bp shy of where it sees the likely peak and it will seek more flexibility in its approach," according to Morgan Stanley strategists.
In the statement, "ongoing increases" could be replace with "some further increase," which is "intended to be interpreted as plural or singular," they said. The Chair will then have the opportunity in the Q&A to underscore that there is more work to be done, they added.
Morgan Stanley strategists expect to see the policy rate peaking at 4.625% in February.
"Despite continued high readings, our expectation remains firm that job gains slow meaningfully in the prints ahead," they said. "Thereafter, we continue to see the Fed holding rates steady until December 2023, when it begins to normalize policy in steady 25bp increments."
Primary to come:
The Pennsylvania Economic Development Financing Authority (Baa2//BBB-/) is set to price Tuesday $1.882 billion of tax-exempt AMT Penndot Major Bridges Package One Project private activity revenue bonds, serials 2029-2033, terms 2034, 2035, 2036, 2037, 2038, 2039, 2040, 2041, 2042, 2047, 2052, 2057 and 2062. Wells Fargo Bank.
The Idaho Housing and Finance Association (Aa1///) is set to price Thursday $253.615 million of taxable single-family mortgage bonds, 2022 Series A, serials 2023-2035, terms 2038, 2043, 2048 and 2053. Barclays Capital.
Competitive:
The Clearview Regional High School District Board of Education, New Jersey (/AA//) is set to sell $59.094 million of school bonds, Series 2022, at 11 a.m. eastern Wednesday.
