Triple-A benchmarks were weaker amid an active primary market, but outperformed larger losses in UST, which saw yields rise 11 to 13 basis points on the short end, flattening the curve. Equities rallied.
Another day of selling pressure in the secondary market, coupled with a larger new-issue market, saw the 10-year triple-A surpass 3% on certain scales while the one-year sits firmly above 2%. In the primary, New York City priced general obligation bonds for retail with the 10-year spread at plus-60 basis points, gilt-edged Prince George's County sold GOs with wider spreads, and Princeton priced $300 million exempts in a challenging market.
Municipal to UST ratios were still elevated at 89% in five years, 102% in 10 years and 107% in 30, according to Refinitiv MMD's 3 p.m. read. ICE Data Services had the five at 87%, the 10 at 99% and the 30 at 107% at a 4 p.m. read.
In the primary, BofA Securities held a one-day retail order for
Ramirez & Co. priced for the New Jersey Educational Facilities Authority (Aaa/AAA//) $300 million of
In the competitive, Prince George’s County, Maryland, (Aaa/AAA/AAA/) sold $273.610 million of general obligation bonds to J.P. Morgan, with 5s of 2023 at 2.07%, 5s of 2027 at 2.65%, 5s of 2032 at 3.17%, 5s of 2037 at 3.41% and 5s of 2042 at 3.54%.
Fort Worth, Texas, (Aa3//AA/) sold $130.770 million of general purpose refunding and improvement bonds to Jefferies, with 5s of 3/2032 at 2.00%, 5s of 2027 at 2.85%, 5s of 2032 at 3.34%, 4s of 2038 at 4.13% and 4.125s of 2042 at 4.27%, callable 3/1/2031.
On the buy-side, weakness, outflows, supply issues, and poor liquidity are making life challenging for municipal bond investors, according to Howard Mackey, managing director of municipal bonds at NW Financial in Hoboken, N.J.
“The market has been very weak for a few weeks, and steadily declining, and last week the slide continued,” Mackey said on Monday.
Both the bid side in the secondary and the new-issue market is suffering, he said, noting that "from what we are hearing, the bid response is weak in the secondary market, and spreads continue to widen even on high-grade paper."
In addition, volume is lacking. “There’s just not a lot of activity, and refundings have gone away because of the dramatic rise in interest rates,” he said.
“To raise cash institutional investors and [separately managed accounts], in particular, have had to sell bonds,” but in the weak market, Mackey said.
Adding to the challenging market is the summer reinvestment's arrival in June.
“We have slowed down so much, but the summer season probably will not help the market at this point,” Mackey said.
“For new-issues where some money is available, institutional buyers require higher rates and higher spreads to the MMD than we have seen in the last few months,” Mackey said, noting that new issues have to be “priced accordingly” to sell.
That trend has also occurred in the taxable muni market where refundings have dried up because rates were high, Mackey added.
A lot depends on what happens at the next Federal Open Market Committee meeting in June, Mackey said.
“It’s not a rosy picture and the Fed has pretty much been driving the market more so than the inflationary news,” he said. “Supply chain issues and the war are not the key issues for fixed-income investors. It’s really how the Fed is going to react.”
While rising rates are "more attractive to new bond buyers, it has unnerved investors who were fully invested before the Fed pivot," said UBS strategists Thomas McLoughlin, Kathleen McNamara, Theodore Galgano, Alina Golant, Jeannine Lennon and David Perlman.
They noted that "mutual fund flows tend to influence prices in the broader municipal market and this year has been no exception."
Yields, though, are more attractive to income buyers and "the ratio to municipals to taxable alternatives makes tax-exempt bonds now appear very attractive to crossover investors," the UBS strategists said. They still anticipate market technicals to improve next month, "which may provide an impetus for fund outflows to moderate and less market turbulence."
"Tax-exempt bonds have posted losses for four straight months and the price weakness has now extended into the first half of May," they said. "On a year-to-date basis, munis have registered total return losses that closely align with those seen on an index of U.S. Treasury securities (-10%)."
"Persistent mutual fund outflows, which have undermined the ability of portfolio managers to become active buyers" has aggravated the negative performance, they said.
The Investment Company Institute has reported net cash outflows from muni mutual funds for 16 consecutive weeks, totaling roughly $58.9 billion.
This has placed downward pressure on prices, UBS said. They expect outflows will continue until "Treasury market volatility subsides and buyers take notice of better absolute yields and relative values now available in the tax-exempt market."
Secondary trading
Minnesota 5s of 2023 at 2.03%. Maryland 5s of 2024 at 2.39%. Maryland 5s of 2026 at 2.60%. Georgia 5s of 2026 at 2.47%.
California 5s of 2028 at 2.91%-2.89%. Delaware 5s of 2031 at 3.00%. Boston 5s of 2034 at 3.10%-3.09%.
University of North Carolina at Chapel Hill 5s of 2035 at 3.31%-3.30%. Los Angeles DWP 5s of 2036 at 3.51%-3.50% versus 3.33% Wednesday. LA DWP 5s of 2051 at 3.93%-3.86%. They opened the month on 5/4 at 3.66%-3.65%.
AAA scales
Refinitiv MMD’s scale was cut two to five basis points five years and out at the 3 p.m. read: the one-year at 1.99% and 2.31% in two years. The five-year at 2.60% (+2), the 10-year at 3.02% (+3) and the 30-year at 3.37% (+5).
The ICE municipal yield curve saw one to four basis point cuts: 2.02% (unch) in 2023 and 2.37% (+1) in 2024. The five-year at 2.59% (+2), the 10-year was at 2.92% (+3) and the 30-year yield was at 3.39% (+4) at a 4 p.m. read.
The IHS Markit municipal curve saw cuts: 2.02% (unch) in 2023 and 2.32% (unch) in 2024. The five-year at 2.63% (unch), the 10-year was at 3.03% (+5) and the 30-year yield was at 3.37% (+5) at 4 p.m.
Bloomberg BVAL saw one to six basis point cuts: 2.02% (+1) in 2023 and 2.30% (+1) in 2024. The five-year at 2.66% (+3), the 10-year at 2.95% (+4) and the 30-year at 3.29% (+6) at a 4 p.m. read.
Treasuries sold off.
The two-year UST was yielding 2.704% (+13), the three-year was at 2.897% (+15), five-year at 2.964% (+13), the seven-year 3.009% (+12), the 10-year yielding 2.983% (+9), the 20-year at 3.3.87% (+7) and the 30-year Treasury was yielding 3.181% (+8) at the close.
Economy still strong
Retail sales and good earnings reports suggest consumers are still spending, which may mean that despite inflation and an economic slowdown recession may be avoided, analysts said.
“A solid retail sales report and key earnings from Home Depot and Walmart painted a picture of a strong U.S. consumer that could probably tolerate rising food and energy prices a little while longer,” said Edward Moya, senior market analyst at OANDA. “The problem with a strong consumer outlook is that it also means the Fed tightening won’t have to ease up anytime soon.”
This positive consumer news likely won’t alter the plans for a 50-basis-point rate hike at the next Federal Open Market Committee meeting, he said.
The report showed strength, noted Grant Thornton Chief Economist Diane Swonk, which “only reinforces the Fed’s resolve to raise rates rapidly,” since the Fed is actively attempting to slow inflation.
“There are no doves left at the Fed,” she said, with many officials noting unemployment will have to rise to beat down inflation this year and next. “Today’s retail sales report will only reinforce the argument for more aggressive rate hikes,” Swonk said. “Powell would not take 75 basis points off the table in a recent interview on monetary policy.”
Also released Tuesday, April industrial production rose 1.1%. “Supply chains are not fixed and could worsen in coming months and the labor market is still tight, but for now the industry is returning to some semblance of normal,” said Wells Fargo Securities Senior Economist Tim Quinlan and Economist Shannon Seery.
“Continued strength in production in the face of persistent supply issues is still encouraging and demonstrates increased activity amid an easing of some constraints,” they said.
Also released Tuesday, the National Association of Home Builders/Wells Fargo Housing Market Index dropped to 69 in May from 77 in April, suggesting a slowing housing market as rising mortgage costs, more expensive building material prices, low inventory and consistent demand make homes less affordable.
“The housing market was among the largest winners from ultra-low rates; it is now among the most vulnerable to a correction with rates rising,” said Swonk and Grant Thornton Economist Yelena Maleyev. “Not surprisingly, markets that saw the greatest in-migration and housing appreciation during the pandemic experienced the hottest inflation. Cooling those markets is key to taming inflation.”
Recession is not looming, said Nick Reece, senior analyst and portfolio manager at Merk Investments LLC. “Incoming economic data shows deceleration but the overall picture is still historically inconsistent with imminent recession,” he said.
The data he looks for includes inversion in the 10-year/30-month yield curve, which hasn’t happened. Also, the 10-year/2-year has steepened as interest rates climbed, he said, “rather than steepening with falling interest rates (which is typically the recession warning sign). “
But the 10/2 likely will flatten and eventually invert before recession, Reece said.
“In general, the data suggests we remain in an ongoing, albeit mild, expansion,” he said. “While recession risk is definitely elevated, the evidence is not beyond a reasonable doubt that the economy will go into recession over the next six months. More medium-term (i.e., 6-24 months), I think a soft-landing or mild recession remain more likely than a major recession.”
Primary to come:
Illinois (Baa1/BBB+/BBB+/) is set to price Wednesday $1.7 billion of general obligation bonds consisting of $925 million of Series 2022A, serials 2023-2042; term 2047; and $775.125 million of refunding bonds, Series 2022B, serials 2023-2037. Citigroup Global Markets Inc.
Memphis, Tennessee, (Aa2/AA//) is on the day-to-day calendar with $229.605 million of taxable general improvement refunding bonds, Series 2022B. J.P. Morgan Securities LLC.
The Florida Housing Finance Corp. (Aaa///) is set to price on Wednesday $135 million of homeowner mortgage revenue social bonds, 2022 Series 2. Morgan Stanley & Co. LLC.
The Indiana Finance Authority (Aa3/AA//) Is set to price on Thursday $134.355 million of CWA Authority Project first lien wastewater utility refunding revenue forward delivery bonds, Series 2022A, serials 2022-2042. Citigroup Global Markets Inc.
The Ohio Housing Finance Agency (Aaa///) is set to price on Thursday $130 million of mortgage-backed securities program residential mortgage revenue social bonds, 2022 Series B. J.P. Morgan Securities LLC.
The Maryland Department of Housing and Community Development residential revenue social bonds, Series 2022A, serials 2030, terms 2037, 2042, 2047, 2052. RBC Capital Markets.
The West Virginia Economic Development Authority (Baa1/A-/A-/) is set to price on Wednesday $104.375 million of Appalachian Power Company — Amos Project solid waste disposal facilities revenue bonds, remarketing, consisting of $45.375 million of Series 2009A, serial 2042, and $50 million of Series 2009B, serial 2042. KeyBanc Capital Markets.
Competitive:
St. Louis, Missouri, (/AA//) is set to sell $114.475 million of convention center revenue bonds at 11 a.m. eastern Wednesday. Serials 2034-2047.
Gary Siegel contributed to this report.
