Municipals were part of a wider fixed income market rally on Friday as high-grade yields were lower by as much as six basis points on the long end, buoyed by the stronger-than-expected October jobs data and upward revisions to nonfarm payrolls numbers for September and August.
The rally sustained lower rates, a flat yield curve and overall strength on the long end of the market on Friday ahead of a four-day abbreviated week, observed John Farawell, manager of municipal trading at Roosevelt & Cross.
“That number today was definitely bullish for bonds and makes people think the Fed has everything under control,” he said on Friday. Long yields were bumped as much as six basis points.
Generic, triple-A benchmark general obligation bonds were bumped one basis point from 2022 to 2028; two basis points in 2029; four basis points from 2030 to 2033; five basis points in 2034 and 2035, and six basis points from 2036 to 2051, according to Refinitiv/Municipal Market Data.
Meanwhile, the benchmark Treasury bond ended at 1.44% in 10 years and 1.88% in 30 years.
The municipal rally occurred with a backdrop of good news on the jobs front and ahead of more than $9 billion of potential new issuance next week.
The Bureau of Labor Statistics reported that October saw 531,000 non-farm payrolls jobs added — 81,000 above expectations. The unemployment rate also dipped 0.1 percentage point more than the 4.7% forecast.
“The solid number helped our market out” by allaying some market fears over the potential for stagflation, Farawell said.
The conditions are ripe for new supply, but next week’s $9.6 billion isn’t that much to write home about, according to Farawell.
Secondary activity was prompted by the “huge jump” in Treasury yields — which ended at 1.45%, after being at 1.60% in recent trading sessions — and seasonal factors, according to Farawell. Investors "were grabbing anything they could on the long end today,” he said.
Next week $9.6 billion is expected, comprised of $6.714 billion of negotiated deals and $2.885 billion of competitive loans. Taxables make up $2 billion with $7.6 billion of exempts.
Barclays strategists Mikhail Foux, Clare Pickering and Mayur Patel said muni yield curves have been flattening, but not as fast as the Treasury yield curve. The 20s30s part of the tax-exempt curve is especially steep when compared to the inverted UST 20s30s.
“We expect stronger performance to end the year, although at current levels the upside is likely capped, as MMD-UST ratios are far from cheap, although they are more attractive than they were in the first half of the year,” they said. “In our view, the muni market will likely trade sideways for a couple of weeks, until all uncertainties related to the Build Back Better plan are ironed out, but we will likely end 2021 on a strong note.”
ICE Data Services had the 5-year muni-to-UST ratio at 55%, the 10-year at 76% and the 30 at 84% at the close. Refinitiv MMD's 3 p.m. Eastern read had the 5-year municipal-to-UST ratio at 60%, the 10-year at 78% while the 30-year remained at 84%.
AAA scales
According to Refinitiv MMD, yields dipped by one basis point on the short end, to 0.16% in 2022 and 0.24% in 2023. The 10-year fell four to 1.13% and the yield on the 30-year fell six basis points to 1.58%.
The ICE municipal yield curve showed bonds down one basis point at 0.16% in 2022 and 0.24% in 2023. The 10-year maturity fell two to 1.12% and the 30-year yield fell two to 1.61%.
The IHS Markit municipal analytics curve showed short yields down one basis point to 0.14% in 2022 and at 0.21% in 2023. The 10-year yield fell five basis points to 1.11% and the 30-year yield declined by five basis points to 1.60%.
The 10-year Treasury was yielding 1.44% while the 30-year Treasury was yielding 1.88%. The Dow Jones Industrial Average rose 0.68%, the S&P was up 0.46% while the Nasdaq gained 0.26%.
Secondary trading
Georgia 5s of 2023 at 0.21%. Los Angeles DWP 5s of 2025 at 0.47%.
Activity outside of 10 years saw yields fall as much as six basis points.
Washington 5s of 2029 at 1.01% versus 1.06% Wednesday. California 5s of 2030 at 1.15%-1.14% versus 1.19%-1.18% on Thursday. Minnesota 5s of 2030 at 1.11%.
University of Texas 5s of 2030 at 1.10%-1.09% versus 1.14% Thursday.
Maryland 5s of 2031 at 1.14% versus 1.16% Thursday.
Michigan Trunkline 5s of 2033 at 1.31%-1.27%. Ohio water 5s of 2033 at 1.27%. Georgia 5s of 2035 at 1.34%-1.33%. Denver 5s of 2035 at 1.30%.
Arlington County, Virginia, 5s of 2038 at 1.35%. Ohio 5s of 2041 at 1.52%-1.51% versus 1.59%-1.58% Thursday.
New York City water 5s of 2048 at 1.81% versus 1.94%-1.93% a week ago.
Fed’s job not easy
Uncertainty makes the Federal Reserve’s job more difficult, said Federal Reserve Bank of Kansas City President Esther George.
“Monetary policy remains highly accommodative in an economy where inflation is elevated and labor markets have yet to fully recover,” she noted. “With both supply and demand factors clearly at play, the choices for policymakers will be complicated as uncertainty remains high for how temporary or persistent these frictions will prove to be.”
But she said time for “patience in the face of these inflation pressures has diminished.”
And the October employment report’s strength, along with upward revisions to the August and September payrolls numbers again raises the question of whether the Fed will have to speed up taper and raise rates aggressively.
“This report tilts slightly hawkish for the Fed in our view, possibly bringing rate hikes earlier on the margin,” Wilmington Trust Economists Luke Tilley and Rhea Thomas. They added everything depends on what the Fed uses to determine a full labor market recovery, which may be contingent on the participation rate.
“We currently expect the first hike to come in November or December of 2022,” Tilley and Thomas said, “but that can easily move earlier if inflation keeps up and the labor market tightens further.”
Since the Fed, in its post-Federal Open Market Committee meeting statement, allowed for a change in the pace of taper, if needed, “another gain in employment like this virtually guarantees that will happen in early 2022,” said Diane Swonk, chief economist at Grant Thornton. “The threshold for a liftoff in rates is much higher but could easily occur by mid-2022.”
Should the economy continue to pick up steam, she said, the Fed could announce a hastening of taper in December, she said. “We are now expecting three rate hikes in 2022.”
With Americans not working tapping into savings, many should return to the work force next year, easing the labor shortage, said Gad Levanon, head of the Labor Market Institute at The Conference Board. While it’s not the base case, the chances of labor shortages continuing in 2022 “are significantly increasing,” he said. “In that case, a wage-price spiral — where higher prices and rising wages feed each other, leading to faster increases in both — could have major economic implications.
“In such an environment, the Federal Reserve might be forced to raise interest rates significantly more than the two hikes markets are currently expecting.”
Wage growth and the voluntary quit levels suggest a tight labor market, noted Wells Fargo Securities Senior Economist Sarah House and Economist Michael Pugliese. “Other indicators that inform the Fed's view of maximum employment are still off the mark but are moving the right direction.”
They pointed to the unemployment rate, which fell to 4.6% in October from 4.8% in September, “is rapidly closing in on the FOMC's long-run estimate of 4.0%,” and the 104,000 workers who joined the labor force.
“Exits of older workers continue to look fairly sticky, but the participation rate among prime-age workers ticked up, driven by women ages 25-54,” they said.
Not everyone agreed. The Fed will maintain its “wait-and-see stance on interest rate hiking,” said Edward Moya, senior market analyst for the Americas at OANDA. And traders will “fixate” on the upcoming releases of consumer and producer price indexes.
“This was a strong labor market report, but it was far from perfect,” Moya said, noting the labor participation rate held at 61.6%. “It would have been nice to see the participation rate increase, which is why you should take the larger-than-expected dip with the unemployment rate with a grain of salt.”
Nonfarm payrolls grew 531,000 in October, economists polled by IFR Markets expected 412,500, with September’s gain revised up 312,000 from 194,000.
The “report does really move the needle in either direction on the ‘Great Resignation’ debate,” Wilmington Trust’s Tilley and Thomas said. “The labor force picked up just a bit but remains 3 million below pre-pandemic levels. That’s just a decline of 1.8% even though it feels like ‘no one is working’.”
Primary to come
In the upcoming negotiated market, Main Street Natural Gas (Aa2//AA-/) remains on the day-to-day calendar with $750 million of gas supply revenue bonds, Series 2021A, serials 2023-2031, term 2052. RBC Capital Markets.
The District of Columbia (Aaa/AA+/AA+/) is set to price Tuesday $654.815 million, consisting of $404.575 million of general obligation bonds, Series 2021D, serials 2024-2041, term 2046 and $250.24 million of general obligation refunding bonds, Series 2021E, serials 2023-2030 and 2033-2037. RBC Capital Markets.
Dallas Area Rapid Transit (Aa2/AA+//AAA) is set to price Tuesday $578.7 million of senior lien sales tax revenue refunding bonds, taxable series 2021A, serials 2022-2036, term 2048. RBC Capital Markets.
California Community Choice Financing Authority (A2///) is set to price $556.03 million of clean energy project revenue bonds, Series 2021A (green bonds — climate bond certified). Goldman Sachs & Co.
Connecticut (Aa3/AA-/AA-/AA+) is set to price Tuesday $500 million of special tax obligation bonds (transportation infrastructure purposes), 2021 Series D, serials 2022-2041. Raymond James & Associates.
Dallas Area Rapid Transit (Aa2/AA+//AAA) is set to price Tuesday $457.835 million of senior lien sales tax revenue improvement and refunding bonds, Series 2021B, serials 2040-2041, terms 2047 and 2051. Jefferies.
California Housing Finance Agency (/BBB///) is set to price Tuesday $349.265 million of municipal certificates, Series 2021-3 Class X (social certificates), serial 2036. and $349.265 million Series 2021-3 Class A (social certificates), serial 2036. Citigroup Global Markets.
Massachusetts (Aa1/AA/AA+//) is set to price Tuesday $302.495 million of general obligation refunding bonds, 2021 Series B, serials 2022-2025. Citigroup Global Markets.
Pennsylvania Turnpike Commission (A1//A+/AA-) is set to price Tuesday $275 million of turnpike revenue bonds, Series C OF 2021, serials 2022-2023, 2026-2032 and 2037-2041, terms 2046 and 2051. RBC Capital Markets.
American Municipal Power (A1/A//) is set to price Tuesday $258.245 million of AMP Fremont Energy Center Project revenue bonds, refunding series 2021A, serials 2023-2038. Citigroup Global Markets.
Pennsylvania Housing Finance Agency (Aa1/AA+//) is set to price Tuesday $253.605 million of single family mortgage revenue bonds, Series 2021-137 (non-AMT) (social bonds), serials 2022-2033, terms 2036, 2041, 2046 and 2051. RBC Capital Markets.
California Municipal Finance Authority Special Finance Agency is set to price Tuesday $194.87 million of essential housing revenue bonds, consisting of $103.31 million of Series 2021A-1 Senior Bonds, term 2056 and $91.56 million of Series 2021A-2 Junior Bonds (Solana at Grand), term 2045. Jefferies.
California Infrastructure and Economic Development Bank (Aaa/AAA//) is set to price Tuesday $181.09 million of refunding revenue bonds (The J. Paul Getty Trust), Series 2021B, consisting of $45.415 million, Series B-1, term 2047 and $135.675 million, Series B-2, term 2047. Jefferies.
Arizona Industrial Development Authority is set to price $177.97 million of revenue bonds (NewLife Forest Restoration Project), consisting of $110.045 million of senior federally taxable series 2021A (sustainability-linked bonds), term 2041 and $67.925 million of subordinate federally taxable series 2021B (sustainability-linked bonds), term 2046. Goldman Sachs & Co.
El Paso, Texas, (/AA/AA/) is set to price Tuesday $167.03 million, consisting of $78.105 million of general obligation bonds, Series 2021B, serials 2022-2025 and 2027-2041, term 2047 and $88.925 million of combination tax and revenue certificates of obligation, Series 2021C, serials 2022-2025 and 2027-2041, term 2047. Barclays Capital.
Oklahoma Capitol Improvement Authority (/AA-/AA-//) is set to price Wednesday $161.64 million of taxable Oklahoma State Regents for Higher Education Endowed Chairs Program Funding bonds (subject to annual appropriation). J.P. Morgan Securities.
The Board of Trustees of the University of Arkansas (Aa2///) is set to price Tuesday $149.73 million of taxable various facility revenue refunding bonds (Fayetteville Campus), serials 2022-2036, terms 2041 and 2043. Crews & Associates.
New York State Environmental Facilities Corp. (Aaa/AAA/AAA/) is set to price Tuesday $148.095 million of state revolving funds revenue green bonds, Series 2021B (2010 Master Financing Program). Goldman Sachs & Co.
The University Of North Carolina at Charlotte (Aa3/A+//) is set to price Wednesday $141.695 million of taxable general revenue refunding bonds, Series 2021B. Wells Fargo Corporate & Investment Banking.
Charlotte, North Carolina, (Aaa/AAA/AAA/) is set to price Tuesday $125.27 million of general obligation refunding bonds, Series 2021A, serials 2022-2041. PNC Capital Markets.
California Municipal Finance Authority Special Finance Agency is set to price Wednesday $121.23 million of essential housing revenue bonds, consisting of $81 million of Series 2021A-1 senior bonds and $40.23 million of Series 2021A-2 junior bonds (Latitude33). J.P. Morgan Securities.
Successor Agency to the Redevelopment Agency of the City and County of San Francisco (/AA///) is set to price $107.34 million of taxable third-lien tax allocation social bonds, 2021 Series A (affordable housing projects), serials 2023-2031, insured by Assured Guaranty Municipal Corp. Citigroup Global Markets.
San Antonio, Texas, (Aa2/A+/AA-/) is set to price $102 million of electric and gas systems, variable rate junior lien revenue refunding bonds, Series 2015B. Piper Sandler & Co.
Meanwhile, in the competitive market next week, California (//AA/) is set to sell $390.185 million of tax-exempt various purpose general obligation refunding bonds, (Bid Group B) at 11:30 a.m. eastern Tuesday.
California (//AA/) is set to sell $410.645 million of tax-exempt various purpose general obligation refunding bonds, (Bid Group C) at 12:15 p.m. Tuesday.
California (//AA/) is set to sell $449.59 million of taxable various purpose general obligation bonds and general obligation refunding bonds (Bid Group A) at 10:45 a.m. Tuesday.
South Broward Hospital District (Aa3/AA//) is set to sell $195.89 million of hospital revenue bonds, taxable series 2021A (South Broward Hospital District Obligated Group) at 11 a.m. Tuesday. The issuer is also set to sell $50 million of taxable hospital revenue bonds at 11:30 a.m. Tuesday.
Snohomish County, Washington, (Aa1/AA+//) is set to sell $125.78 million of limited tax general obligation and refunding bonds, 2021 Series B (federally taxable) taxable at 11:45 a.m. Tuesday. Snohomish is also set to sell $34.32 million of limited tax general obligation and refunding bonds, 2021, Series A at 11:15 a.m. Tuesday.
Wisconsin is set to sell $219.605 million of general obligation bonds of 2021, Series B at 10:30 a.m. Tuesday.
Jessica Lerner contributed to this article.
