Dearth of supply ‘saving grace’ for munis

Triple-A benchmark yields fell further Friday, as U.S. Treasuries were better in a continued flight-to-safety bid, while equities ended in the red again.

Traders and managers reported a firm tone and trading showed it on Friday ahead of next week’s lower new-issue calendar.

“It’s pretty quiet,” a New York trader said on Friday afternoon, pointing to the anticipation of $4.98 billion in municipal volume next week, which he said is considerably low compared to recent months.

“It seems like the market is pretty firm, but we don’t have a real big calendar next week,” he said. “People are trying to position bonds if they can.”

The one saving grace this year is that supply has been relatively modest; otherwise, tax-exempts would have underperformed much worse, according to a Barclays PLC report.

The new-issue calendar for the holiday-shortened week is $4.98 billion, with $3.633 billion of negotiated deals and $1.347 billion of competitive loans.

The largest deal of the week comes from the Virginia Small Business Financing Authority with $1.109 billion. Other notable deals include $412 million from the Nature Conservancy, Virginia, $236.975 million of taxable general obligation refunding bonds from Wisconsin, and $367.07 million from the District of Columbia Water and Sewer Authority.

Oakland, California; Gwinnett County School District, Georgia; Anchorage, Alaska and Columbus, Georgia lead the competitive calendar.

Howard Mackey, managing director at NW Financial, Hoboken, N.J., noted that the market was continuing its firmness on the heels of Thursday’s improvement in yields.

“We had an up day because [Refinitiv] MMD yesterday improved, after several previous corrections,” he said. .

Mackey said investors still expect yields to rise further.

There are also concerns about potential spread widening, according to Mackey.
“Spreads seem to have caught up with the market, but if there is more downdraft from [benchmark yields] and if the adjustments are not enough, spreads will increase across the market,” he said.

But that’s not all bad news.

“If new issues are priced to reflect the market at the time they will get done because people still have ample cash available and demand for tax-exempt paper,” he said.

Spring redemption season will arrive as investors still have a lot of existing cash available — and even more cash coming in from coupon and maturity payments — but the strength of rollovers will depend on the prognosis of Fed action in the following month, according to Mackey.

“Typically, that puts more cash into the system, which will increase demand, but it depends on the tone of the market at the time,” Mackey said.

“If sentiment reflects tightening, the investment market will require spread and price adjustment to reflect a weaker market,even if they have cash on hand,” he said.

“We have seen some of that happen recently,” he said, adding “people are concerned if they buy bonds now and they will be available at 10 to 15 basis points cheaper in two weeks, they are not going to just buy bonds to put cash to work.”

Relative value has improved though. The municipal to UST ratio five-year was at 77%, 85% in 10 and 90% in 30, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the five at 74%, the 10 at 87% and the 30 at 92% at a 3 p.m. read.

Regardless of what rates do, Barclays said tax-exempts have underperformed Treasuries, demonstrating the muni market’s weakness.

Fund outflows and rate volatility have not encouraged risk-taking, said Barclays strategists Mikhail Foux, Clare Pickering and Mayur Patel.

Another source of pressure points for investors is low-coupon debt. Nearly 70% of the 2% debt — totaling over $30 billion and largely issued in the last one to two years — has fallen below the de minimis threshold. This is a significant reversal from last summer, when few municipal bonds traded below these levels, according to Barclays strategists.

“At this point, very few, if any, 3% bonds are trading below de minimis, but many are trading close enough, which should also put pressure on prices,” they said. “As more and more low-coupon debt comes under pressure, and there is nearly $500 billion outstanding, there might be some forced liquidations by investors; that is the main risk we see for munis near-term.”

Taxable municipals are performing quite well in contrast, outperforming corporates this year and trading at the highest level relative to the corporate index since the COVID crisis, they said.

On the one hand, taxables have once again demonstrated their defensive tendencies, which all crossover investors should be aware of. On the other hand, they are rather rich, and their upward potential is currently clearly constrained, Barclays said.

Unless the corporate market improves and the spread differential between these two market groups narrows, Barclays said investors should be cautious and maybe wait for a better entry moment.

Secondary trading
Wake County, North Carolina 5s of 2023 at 0.83% versus 0.81% on Tuesday. Massachusetts 5s of 2023 at 0.95% versus 0.99% Thursday. NYC TFA 5s of 2024 at 1.26%-1.21%.

Virginia 4s of 2030 at 1.71%-1.70%. California 5s of 2030 at 1.75%-1.72%. Charleston, South Carolina 4s of 2031 at 1.68% versus 1.75% Thursday.

Washington 5s of 2035 at 1.85% versus 1.96%-1.95% Wednesday. Connecticut 5s of 2036 at 2.00%-1.99% versus 2.10%-2.07% Wednesday. NYC TFA 5s of 2037 at 2.10% versus 2.17%-2.16% Thursday.

Washington 5s of 2046 at 2.20% versus 2.29%-2.28% Wednesday. Triborough Bridge and Tunnel Authority 5s of 2051 at 2.45%-2.44%. NYC Municipal Water Finance Authority 5s of 2052 at 2.36%-2.35% versus 2.41%-2.40% Thursday.

AAA scales
Refinitiv MMD’s scale was bumped up to three basis points at the 3 p.m. read: the one-year at 0.84% (unch) and 1.11% (unch) in two years. The five-year at 1.41% (unch), the 10-year at 1.65% (-2) and the 30-year at 2.02% (-3).

The ICE municipal yield curve was bumped: 0.84% (-1) in 2023 and 1.14% (-1) in 2024. The five-year at 1.36% (-3), the 10-year was at 1.68% (-3) and the 30-year yield was at 2.08% (unch) in a 3:30 p.m. read.

The IHS Markit municipal curve was also bumped: 0.83% (unch) in 2023 and 1.10% (unch) in 2024. The five-year at 1.42% (-3), the 10-year at 1.67% (-3) and the 30-year at 2.06% (-3) at a 3 p.m. read.

Bloomberg BVAL was bumped: 0.85% (unch) in 2023 and 1.08% (-1) in 2024. The five-year at 1.41% (-1), the 10-year at 1.65% (-2) and the 30-year at 2.02% (-2) at a 3:30 p.m. read.

Treasuries strengthened while equities fell.

The two-year UST was yielding 1.473% (flat), the five-year was yielding 1.818% (-2), the 10-year yielding 1.924% (-4), and the 30-year Treasury was yielding 2.242% (-6) near the close. The Dow Jones Industrial Average lost 168 points or 0.52%, the S&P was down 0.52% while the Nasdaq lost 0.96% near the close.

Fed, Fed Fed
The market is closely watching the Federal Reserve, with two officials on Friday reaffirming a March rate hike.

Federal Reserve Bank of Chicago President Charles Evans said, “the current stance of monetary policy is wrong-footed and needs substantial adjustment.” Inflationary pressures, while mostly resulting from supply-side issues related to the pandemic, he said, “clearly have widened in the broader economy to a degree that requires a substantial repositioning of monetary policy.”

Meanwhile, Federal Reserve Bank of New York President John Williams said inflation above 2% means “it is time to start the process of steadily moving the target range back to more normal levels.” He expects a March rate hike.

After March, however, things are less clear. Peter Berezin, chief global strategist at BCA Research, expects the Fed to raise rates to a neutral level, which the Fed sees as 2%, by early 2023. Inflation waning will allow the Fed to hold rates next year, they said.

“Unfortunately, the respite from rate hikes will not last,” he added. “The neutral rate of interest is around 3%-to-4%, significantly higher than what either the Fed or investors believe.”

Late next year, the “wage-price spiral will intensify,” Berezin said, “setting the stage for the second and more painful round of tightening.”

Indeed, January economic data “keeps the pressure on the Fed to hike the fed funds rate at a quicker pace than they assumed at the December FOMC meeting,” said Scott Anderson, chief economist at Bank of the West.

The Fed will raise rates five times this year, a quarter point each time, he said.

Morgan Stanley expects six increases in March, May, June, July, September and December, with quantitative tightening announce in June. Next year, Morgan Stanley expects rate hikes in March, June, September and December.

“Kicking off the tightening cycle with a 50 bp rate hike would certainly send a strong and decisive message about the Fed’s intent to bring inflation down,” they said, “yet we ultimately think that policymakers can ultimately achieve the same effect by guiding for more rate hikes across the cycle. Therefore we look for some significant changes coming in the March SEP.”

Of course, in his monetary policy report to Congress, Fed Chair Jerome Powell can “align expectations for the upcoming March meeting, and whether or not he chooses to leave open the option to surprise with a 50 bp hike.”

In data released Friday, the January Leading Economic Index declined 0.3% after a 0.7% gain in December, while the coincident index rose 0.5% and the lagging index gained 0.7%.

“Most of the softness can be chalked up to jobless claims experiencing their first monthly increase in a year,” noted Wells Fargo Securities Senior Economist Tim Quinlan and Economic Analyst Sara Cotsakis, “but we do not see this print as a significant warning sign in the labor force, as the level of claims remains historically low.”

“Despite this month’s decline and a deceleration in the LEI’s six-month growth rate, widespread strengths among the leading indicators still point to continued, albeit slower, economic growth into the spring,” said Ataman Ozyildirim, senior director of economic research at The Conference Board. “However, labor shortages, inflation, and the potential of new COVID-19 variants pose risks to growth in the near term.”

Separately, existing home sales grew 6.7% in January to a seasonally adjusted 6.50 million annual rate. Year-over-year sales slipped 2.3%.

“Buyers were likely anticipating further rate increases and locking-in at the low rates, and investors added to overall demand with all-cash offers,” said National Association of Realtors Chief Economist Lawrence Yun. “Consequently, housing prices continue to move solidly higher.”

Inventory fell to 860,000 units, a 1.6-month supply. Median home price was $350,300, down from $354,600 in December, but 15.4% higher than a year ago.

Primary to come:
Virginia Small Business Financing Authority (Baa1///BBB) is set to price Thursday $1.109 billion of federally taxable subordinate lien revenue refunding notes, Series 2022, and tax-exempt, alternative minimum tax senior lien revenue and refunding bonds, Series 2022. J.P. Morgan Securities.

The Nature Conservancy, Virginia (Aa2///) is set to price Thursday $412 million of taxable green corporate CUSIP bonds, consisting of $350 million of Series 2022A and $62 million of Series 2022B. J.P. Morgan Securities.

Wisconsin (Aa1/AA+//AAA) is set to price daily $236.975 million of taxable general obligation refunding bonds of 2022, Series 2, serials 2023-2032 and 2037. UBS Financial Services.

The District of Columbia Water and Sewer Authority (Aa2/AA+/AA/) is set to price Thursday $367.07 million, consisting of $78.765 million of green public utility subordinate lien bonds, Series 2022B; $99.370 million of public utility subordinate lien bonds, Series 2022C-1; and $188.935 million of federally taxable public utility subordinate lien revenue and revenue refunding bonds, Series 2022D. Goldman Sachs & Co.

State of New York Mortgage Agency (Aa1///) is set to price Thursday $171.695 million of social homeowner mortgage revenue bonds, consisting of $115.02 million of non-alternative minimum tax bonds, Series 242, serials 2027-2034, terms 2037, 2042, 2047 and 2052; $18.27 million of alternative minimum tax bonds, Series 243, serials 2022-2027; and $38.405 million of non-alternative minimum tax bonds, Series 244, terms 2037 and 2041. RBC Capital Markets.

Duneland School Building Corp., Indiana (/AA+//) is set to price Thursday $167.22 million of ad valorem property tax mortgage bonds, Series 2022, serials 2023-2042, insured by Indiana State Aid Intercept Program. Raymond James & Associates.

Wisconsin (Aa1/AA+//AAA/) is set $125.62 million of forward-delivery general obligation refunding bonds of 2023, Series 1, serials 2024 and 2027-2028. UBS Financial Services.

Liberty Hill Independent School District, Texas (Aaa///) is set to price Thursday $121.37 million of unlimited tax school building bonds, Series 2022, serials 2023-2056, insured by Permanent School Fund Guarantee Program. Raymond James & Associates.

Arizona Industrial Development Authority is set to price daily $113.4 million of senior federally taxable sustainability-linked revenue bonds, Series 2022A. Goldman Sachs & Co.

Georgetown Independent School District, Texas (Aaa/AAA//) is set to price daily $103.88 million of taxable unlimited tax refunding bonds, Series 2022-A, insured by Permanent School Fund Guarantee Program. FHN Financial Capital Markets.

Columbus, Georgia (Aa2/AA+//) is set to sell $130.075 million of general obligation sales tax bonds, Series 2022, at 10:30 a.m. eastern Tuesday.

Anchorage, Alaska (/SP-1+//) is set to sell $150 million of 2022 general obligation tax anticipation notes, at 11 a.m. eastern Wednesday.

Oakland, California is set to sell $20.14 million of taxable general obligation bonds (Measure KK), Series 2022C-2, at 11:30 a.m. eastern Thursday.

Oakland, California is set to sell $192.175 million of tax-exempt general obligation bonds (Measure KK), Series 2022C-1, at 11:30 a.m. Thursday.

Gwinnett County School District, Georgia is set to sell $35 million of general obligation sales tax bonds, Series 2022A, at 11 a.m. Thursday.

Gwinnett County School District, Georgia is set to sell $230 million of general obligation sales tax bonds, Series 2022B, at 11 a.m. Thursday.