Municipal bonds were slightly weaker Wednesday, but the U.S. Treasury 10-year sold off and equities lost more ground as investors took heed of the FOMC's acknowledgement that it has started the taper discussion, although actual tapering "is a ways off."
Secondary municipal trading was quiet and few primary deals were priced as all eyes were on the Fed. The UST 10-year rose to 1.58% near the close, up from 1.49% Tuesday, as the Federal Open Market Committee participants began the tapering discussion, which will continue in upcoming meetings. Their projections now expect two rate hikes in 2023, but for now they kept rates at the zero lower bound and committed to still buy $120 billion in securities a month.
“The Treasury market was not fully expecting the timing being pushed up from 2024 to 2022 in terms of lift-off,” Kevin Flanagan, head of fixed income strategy at WisdomTree, said.
John Farawell, executive vice president of Roosevelt & Cross, said he was “a bit surprised” by the “hawkish language,” and noted bond market volatility since the statement and SEP were released. “We are seeing a flattening of the yield curve and my best guess is that the Treasury market is going to continue to drift higher.”
Triple-A benchmarks were little changed after the release, but a softer tone was felt 10 years and in. Thursday's municipal market may lag the movements in Treasuries as it is wont to do.
"I think a lot of investors went into today with the thought that rates would hold for now so the news today didn't really affect the muni market head on," a New York trader said. "If you look at the fundamentals — the fund flows, the reopenings across the country — the muni market already is too strong to move drastically on Fed news that is itself somewhat expected. Munis know what to expect from state and local governments. It's going to take a very big selloff in UST to move munis in a substantial way."
The Investment Company Institute on Wednesday reported $2.533 billion of inflows into municipal bond mutual funds for the week ending June 9, up from $1.089 billion the week prior and the largest since February. Exchange-traded funds saw $759 million of inflows, up from $286 million the week prior.
Refinitiv Lipper's total Thursday will be telling for how investors went into this week after a $2.5 billion inflow last week.
Municipal to UST ratios fell to 57% in 10 years while the 30-year was at 64%, according to Refinitiv MMD. ICE Data Services had the 10-year muni-to-Treasury ratio at 58% and the 30-year ratio stood at 66%.
The primary was quiet Wednesday as most new-issues were scheduled to price after the FOMC. Several large deals from the $800 million-plus negotiated Port of Seattle deal to a competitive GO deal from New Mexico await investors in a higher-rate environment Thursday.
“I think deals that we have been involved with have gone OK, and some have had to get cheaper to make sure we get them placed,” Jock Wright, managing director of municipal underwriting at Raymond James in New York said Wednesday. For instance, the firm did a $200 million Santa Monica/Malibu, California, School District general obligation deal that was priced two to five basis points cheaper than the original pricing between 10 and 15 years.
“We had to get creative with couponing and bifurcation, but the name Santa Monica/Malibu is a good location of the Los Angeles coast and a strong credit,” as a Aa1 by Moody’s Investors Service and AA-plus from Standard & Poor’s.
On Tuesday, Jefferies LLC priced $1.858 billion of taxable and tax-exempt state personal income tax general purpose revenue bonds for the Dormitory of the State of New York (/AA+/AA+/). The taxables, priced at par to yield 0.167% in 2022, 1.187% in 2026, 2.152% in 2031 and 2.202% in 2034. The exempts saw 3s of 2022 at 0.07%, 4s of 2023 at 0.10%, 5s of 2024 at 0.17% and 5s of 2025 at 0.29%.
Secondary trading and scales
High-grade municipals were held steady on Wednesday, according to Refinitiv MMD's AAA. Short yields were steady at 0.06% and 0.08% in 2021 and 2022. The yield on the 10-year remained at 0.89% while the yield on the 30-year sat at 1.41%.
The ICE AAA municipal yield curve showed short maturities rise one basis point in 2022 to 0.05% and 0.09% in 2023. The 10-year maturity rose one basis point to 0.91% and the 30-year yield was one basis point higher at 1.44%.
The IHS Markit municipal analytics AAA curve showed short yields one higher at 0.07% and 0.10% in 2021 and 2022, respectively, with the 10-year steady at 0.88% and the 30-year yield steady at 1.42%.
Bloomberg BVAL AAA curve showed short yields at 0.06% and 0.08% in 2021 and 2022, with the 10-year two basis points higher at 0.89% and the 30-year yield steady at 1.42%.
In late trading, the 10-year Treasury was yielding 1.50% and the 30-year Treasury was yielding 2.20%. Equities were off near the close, with the Dow Jones losing 264 points, the S&P 500 down 0.39% and the Nasdaq lost 0.06%.
Muni CUSIP requests on the rise
The aggregate total of municipal CUSIP requests including municipal bonds, long-term and short-term notes, and commercial paper rose 5.0% in May versus April totals, according to CUSIP Global Services.
On an annualized basis, municipal CUSIP identifier request volumes were up 7.9% through May. For municipal bonds specifically, there was a 7.6% increase in request volumes month-over-month and a 17% increase on a year-over-year basis
“Though we’re starting to see some volatility in corporate request volume as the prospect of a Fed taper looms, there is still a great deal of debt and capital markets activity taking place — particularly in the municipal sector,” said Gerard Faulkner, direct of operations for CUSIP Global Services. “The next several months will be an important indicator of the continued liquidity of the markets in a possible rising rate environment.”
CUSIP identifier requests for the broad category of U.S. and Canadian corporate equity and debt declined 24.8% in May from April. The monthly decrease was driven largely by U.S. corporate debt and equity identifier requests, which declined by 18.5% and 7.8%, respectively.
FOMC holds rates zero lower bound
Wednesday's FOMC statement repeated it will continue purchasing the $120 billion in securities, “until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.”
The SEP showed no members expect a change in rates this year. Next year, five participants expect one rate hike, while two expect two 25-basis-point raises. There are more diverse views in 2023, with five members seeing the rate staying at a range between zero and 0.25%, two expecting one hike, three each expecting two three and four hikes, and two seeing rates rising to between 1.50% and 1.75%.
In his post-meeting press conference, Federal Reserve Board Chair Jerome Powell said the panel discussed tapering, and will continue to talk about it in future meetings, but no timeline was set.
“You can call this meeting as the one where we started talking about, talking about tapering, if you want,” Powell said, adding while “the economy has made progress since November, we are still far from our goals.”
When asked, Powell said tapering will be “orderly, methodical and transparent,” and will be announced far in advance of its start. But, he added, “we’re a way away from meeting substantial further progress.”
Luke Tilley, senior vice president and chief economist at Wilmington Trust, expects tapering later this year, or early next year, with “specific details on the criteria that must be met for tapering to start or some expected timeline,” determined at the Jackson Hole symposium in August.
While the SEP showed a majority of participants expected as many as two rate hikes in 2023, suggesting “a more hawkish Fed on the margin,” Tilley said.
But these are just projections, he noted, and “can only be viewed as insight into the committee members’ current leanings and not as being helpful for what might end up happening in the future.”
Indeed, Tilley said, since the Fed began releasing the projections in 2012, “there has only been one calendar year where the FOMC ended up following the interest rate path indicated by the projections, which was in 2016.” They were close in 2017, but for the longer-term predictions, he said, “the FOMC has been far less prescient, owing to the challenges of forecasting the economy.”
"The statement doesn’t even venture into talking about talking about tapering and the inflation shock is still described as largely transitory, but the shift in the 2023 interest rate projections suggests an easing in concerns about downside risks,” said Brian Coulton, Fitch chief economist. “There is an explicit recognition that the vaccination program has reduced the risks to the economy from the health crisis.”
“The SEP was where the fireworks really took place,” said Garrett Melson, portfolio strategist at Natixis Investment Managers. “Some of these shifts are somewhat of a headscratcher,” he said. “Changes in the dots do seem to deviate from the company line Powell has pushed forward stressing that the checklist is nowhere near complete for rate hikes to commence and will likely take quite some time.”
But, it’s the voters’ voices that matter most, Melson noted, and those are not public. “Listen to the voting members and governors. Their voices and dots matter most and are likely still skewed to the downside on rate expectations. Powell will likely continue to guide fellow FOMC members along that company line.”
As for taper, he said, “this is simply the beginning of a long conversation that markets a very slow pivot towards beginning that taper. In our opinion the Fed is now calendar dependent and no longer data dependent on the taper timeline. It will happen when it happens, but that time likely isn’t until 2022.”
Bruce Monrad, chairman of Northeast Investors Trust, said the SEP shows “while the Fed Chairman controls the meeting agenda and the press conference, the other members of the FOMC do have a voice.”
“For the Federal Reserve to completely ignore the very real inflation we all can see might have caused investors to fear for the credibility of the committee,” Rhys Williams, chief investment officer at Spouting Rock Asset Management, said. “It will change nothing in terms of quantitative easing or interest rates for this year. If anything, this Federal Reserve was accused of being too ‘new era’ by ignoring inflation and thinking only about employment.”
Economic indicators
Housing starts rose to 1.572 million in May on a seasonally adjusted annual basis, up from a revised 1.517 million in April, first reported as 1.569 million. Housing permits totaled 1.681 million in May, down from an unrevised 1.733 million in April.
Economists polled by IFR Markets expected 1.630 million starts and 1.740 million permits.
Year-over-year, starts are up 50.3% and permits increased 34.9%.
“Lumber prices and shortages of other materials climbed even higher in May, restraining activity for builders and remodelers.,” according to Yelena Maleyev, economist at Grant Thornton. “Lumber prices have come off the highs but remain 275% above pre-pandemic levels.”
“America is facing a massive housing shortage due to multiple years of underproduction in relation to population growth,” said National Association of Realtors Chief Economist Lawrence Yun. “Expect both rents and home prices to outpace overall consumer price inflation in the upcoming years.”
Separately, import prices jumped 1.1% in May after an upwardly revised 0.8% gain in April, originally reported as an 0.7% increase, while exports soared 2.2% following an upwardly revised 1.1% climb the prior month, first reported as a 0.8% jump.
Economists estimated prices to rise 0.7% for imports and 0.6% for exports.
Also released Wednesday, the New York area service sector gained to a record pace, according to the Federal Reserve Bank of New York’s June business leaders survey.
The general business activity index hit a new high of 43.2 in June eclipsing the previous record of 38.8 set in May.
The business climate index climbed to positive 1.0 from negative 8.5, showing “firms viewed the business climate as about normal, for the first time in well over a year,” according to the report.
The wages index inched up to 38.2 from 37.3, indicating “ongoing significant wage growth.”
The prices paid index jumped to 71.2 from 62.7 and the prices received index climbed to 25.8 from 18.8.
Primary market still to come
The
The Oklahoma Municipal Power Authority (/A/A/) is set to price on Thursday $261.1 million of taxable power supply system revenue refunding bonds, serials 2025-2047. BofA Securities is lead underwriter.
The Santa Monica-Malibu Unified School District SFID No. 1 (Aa1/AA+//) is to price on Thursday $194 million of general obligation bonds, election of 2018. Raymond James & Associates, Inc. is head underwriter.
Lee County, Florida, (A2//A/A+) is set to price on Thursday $140.8 million of AMT airport revenue refunding bonds. BofA Securities is head underwriter.
The Los Rios Community College District (Aa2/AA//), California, put on the day-to-day calendar $130 million of general obligation bonds, serials 2022-2035. UBS Financial Services Inc. is lead underwriter.
Forsyth County, North Carolina, (Aa1/AA+/AA+/) is set to price on Thursday $125.2 million of taxable limited obligation bonds. PNC Capital Markets LLC is head underwriter.
The Philadelphia Authority for Industrial Development (Aa2/AA//) Is set to price on Thursday $125 million of Children's Hospital of Philadelphia Project hospital revenue refunding bonds. J.P. Morgan Securities LLC will run the books.
On Thursday, New Mexico is selling $307.665 million of Series 2021A severance tax bonds. Fiscal Strategies Group and Public Resources Advisory Group are the financial advisors. Rodey, Dickason and Sherman & Howard are the bond counsel.
The University of Illinois is set to sell $137.48 million of taxable facility systems revenue bonds at 11:30 a.m. eastern.
