Municipals were mostly steady Tuesday in mixed trading, once again largely ignoring moves to lower yields in U.S. Treasuries, while equities sold off ahead of corporate earnings.
The large new-issue calendar got underway with the largest competitive deal of the week coming from Washington with $1.32 billion of general obligation bonds, which saw slightly wider spreads, but in line with recent market moves. In the negotiated market, gilt-edged Columbus, Ohio priced $424 million of GOs and investors saw a sizable GO deal from the City and County of San Francisco.
Muni-UST ratios rose and were at 86% in five years, 97% in 10 years and 106% in 30, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the five at 87%, the 10 at 98% and the 30 at 108% at a 4 p.m. read.
In the competitive market, Washington (Aaa/AA+/AA+/) sold $448.565 million of various purpose general obligation refunding bonds, Series R-2022C Bid Group 2, to BofA Securities. Bonds in 7/2027 with a 4% coupon yield 2.60% (+15 Bloomberg BVAL), 4s of 2032 at 3.00% (+33) and 4s of 2037 at 3.41% (+65), callable in 7/1/2032.
The state sold $407.730 million of various purpose general obligation refunding bonds, Series R-2022C Bid Group 1, to BofA Securities. Bonds in 7/2022 with a 5% coupon yield 1.30% (+12) and 5s of 2026 at 2.50% (+11), noncall.
The state also sold $279.475 million of motor vehicle fuel tax general obligation bonds, Series R-2022D Bid Group 1, to BofA Securities. Bonds in 7/2022 with a 5% coupon yield 1.30% (+12) and 4s of 2027 at 2.63% (+18), noncall.
The state sold $217.090 million of motor vehicle fuel tax general obligation bonds, Series R-2022D Bid Group 2, to BofA Securities. Bonds in 7/2028 with a 4% coupon yield 2.67% (+19), 4s of 2032 at 3.02% (+35), 4s of 2037 at 3.40% (+64) and 4s of 2042 at 3.50% (+64), callable in 7/1/2032.
Washington last sold GOs competitively on February 8 in three deals. The first, $199.125 million, went to BofA Securities with maturities from 2/2023 to 2032, with 5s of 2023 at 0.65%, 5s of 2027 at 1.24% (+4 BVAL), and 5s of 2032 at 1.54% (+8). The second, $281.23 million of GOs to J.P. Morgan Securities, matured from 2/2033 to 2041, with 5s of 2037 at 1.79% (+23) and 5s of 2041 at 1.93% (+24). The third, $269.135 million of GOs sold to BofA, saw bonds mature from 2/2042 to 2047 with 5s of 2042 at 1.93% (+23) and 5s of 2047 at 2.04% (+24).
In the negotiated primary Tuesday, BofA Securities priced for Columbus, Ohio $424.40 million of general obligation bonds. The first series, $246.69 million of various purpose unlimited tax GOs with 5s of 4/2023 at 1.94%, 5s of 2027 at 2.48%, 5s of 2032 at 2.82%, 5s of 2037 at 3.05%, 5s of 2042 at 3.18%, callable 4/1/2032. The second tranche, $50 million of limited tax GOs, saw 5s of 2023 at 1.94%, 5s of 2027 at 2.48%, 5s of 2032 at 2.82% and 4s of 2037 at 3.30%, callable 4/1/2023. The last tranche, $43.86 million of taxable unlimited tax GOs, priced at par: 2.542% in 2023, 3.227% in 2027, 3.722% in 2032, 4.172% in 2037 and 4.272% in 2040, callable 4/1/2032.
Wells Fargo Bank priced for the City and County of San Francisco, California, (Aaa/AAA/AA+/) $327.290 million of general obligation refunding bonds, Series 2022-R1. Bonds in 6/2023 with a 5% coupon yield 1.96%, 5s of 2027 at 2.48%, 5s of 2032 at 2.79% and 5s of 2034 at 2.93%, callable 6/15/2032.
Jefferies priced for the Pennsylvania Housing Finance Agency (Aa1/AA+//) $222.475 million of social non-alternative minimum tax single-family mortgage revenue bonds, Series 2022-139. Bonds in 10/2022 at 1.80% par, 5s of 4/2027 at 2.95%, 5s of 10/2027 at 3.00%, 5s of 4/2030 at 3.25%, 5s of 10/2030 at 3.30%, 4s of 10/2037 at par, 4.15s of 10/2042 at par, 4.25s of 10/2047 at 4.22% and 4.25s of 10/2052 at 3.42%, callable 10/1/2031.
Wells Fargo Bank priced for the Public Facilities Financing Authority of the City of San Diego, California, (/AA/AA/) $168.255 million of subordinated sewer revenue bonds, Series 2022A. Bonds in 5/2023 with a 5% coupon yield 1.96%, 5s of 2027 at 2.54%, 5s of 2032 at 2.89%, 5s of 2037 at 3.21%, 5s of 2042 at 3.34%, 5s of 2047 at 3.46% and 5s of 2052 at 3.52%, callable 5/15/2032.
The larger new-issue calendar this week is putting market reception and appetite for product to the test ahead of the Federal Open Market Committee meeting in May, said Jeff Lipton, managing director of credit research at Oppenheimer Inc.
As the municipal bond market has been repriced, even the most dubious investor must pay attention to opportunity, Lipton said Many market investors regarded the asset class with suspicion during the low rate, wider spreads and rich ratio days of 2021, he noted.
But with relative cheapness, wider spreads and outperformance, he said better value is now available, and all of this is set against a very solid and resilient credit background.
“Nevertheless, stability and conviction remain conspicuously absent from market dynamics and while a course reversal is likely to come, further dislocation can be expected with still-heavy bid wanted lists and negative fund flows characterizing sentiment,” he said.
Although a higher funds rate will have a stronger impact on shorter-tenor munis, resulting in a flattening curve bias, he said actual muni yield behavior that was seen during previous tightening cycles would appear to be less influenced by a higher funds rate than market fears might suggest. Throughout the tightening process, overall yield advances were much smaller than the aggregate increase in the funds rate.
Lipton said higher rates would result in higher coupons on new issuances with higher tax-exempt cash flow, which might balance price erosion on lower-coupon bonds.
“We would also point out that muni performance is not necessarily poor during Fed tightening campaigns, and in fact, returns can be positive,” he said. “If our expectations for easing inflationary pressure and normalized market volatility come to fruition, then the prognosis for munis would seem favorable, with a stronger demand profile and an enduring period of net positive fund flows.”
Extended volatility has resulted in a longer-than-expected period of mutual fund outflows, totaling $25.8 billion so far this year, according to Refinitiv Lipper. While relative value ratios should not be viewed in isolation, today’s substantially lower levels, which now stand at 97% for the 10-year benchmark and 107% for the 30-year benchmark, deserve special attention, Lipton noted.
“We can understand investor hesitation as outsized volatility ensues and muni valuations continue to grow cheaper by the day,” said Lipton. “However, it is a daunting task to identify an end, even though we believe there is one in sight.”
Market technicals would need to alter, with net supply reversing to negative and flows, at the very least, showing a slowing pace of outflows and certainty that a return to net positive flows is on the horizon, according to Lipton.
Municipals have been less concerned with 3% coupons, benchmarks and evaluation spread to benchmarks in recent weeks to benchmarks already exceeding 3% for intermediate and long maturities, said Matt Fabian, a partner at Municipal Market Analytics.
“This has triggered related de minimus repricing penalties for 2% and 3% coupons, being realized in hundreds of new customer sell trades, as opposed to just being implied in evaluations,” he said.
As a result, he said offers may capitulate to the bid side and use whatever liquidity is available, implying some forced selling that occurred last week.
Reinforcing that idea is bids wanteds exceeded $8 billion last week and just shy of $1.95 billion Monday. Outside of March and April 2020, the last time daily bids wanteds were over $1 billion for about half the month was October, November and December 2018.
And with tax bills due soon and mutual fund outflows increasing, this is also plausible. The Investment Company Institute’s actual weekly nadir for 2022 was -$7.2 billion for the week ending April 13 and an estimated ICI of -$5.0 billion for last week for a total of -$45.3 billion year-to-date. This is slightly below the -$45.7 billion witnessed in the six terrible weeks of 2020, Fabian noted.
He said the recent wave of de minimus repricings and apparent surge in offered-side capitulation will have negative effects for April statements, worsening customer mood and fighting against what are now accurate value assessments in high-grade tax-exempt paper.
“To the upside, more Street assessments suggest value at present; this is probably good advice for investors able and willing to ride out near-term volatility,” he said.
Maryland 5s of 2023 at 2.04%-2.01%. NYC TFA 5s of 2023 at 2.14%-2.02%. California 5s of 2024 at 2.40%-2.38%. Maryland Department of Transportation 5s of 2024 at 2.35%-2.33%.
Anne Arundel County, Maryland 5s of 2026 at 2.45%. Charleston County, South Carolina 5s of 2026 at 2.39%-2.38%.
North Carolina 5s of 2029 at 2.51%-2.44% versus 2.55% on 4/21 and 2.45% on 4/18. New York City 5s of 2029 at 2.91%. Maryland 5s of 2030 at 2.70%. California 5s of 2031 at 2.87%-2.86% versus 2.86%-2.91% on 4/25 and 2.92%-2.88% on 4/21.
LA DWP 5s of 2040 at 3.29%-3.28%.
LA DWP 5s of 2051 at 3.43% versus 3.38% on 4/19, 3.23% on 4/14 and 3.09% on 4/11. San Diego County, California 5s of 2051 at 3.65% versus 3.45% on 4/19 and 3.34% on 4/14.
Refinitiv MMD’s scale was unchanged at the 3 p.m. read: the one-year at 1.94% and 2.20% in two years. The five-year at 2.41%, the 10-year at 2.68% and the 30-year at 3.03%.
The ICE municipal yield curve was little changed: 1.95% in 2023 and 2.25% in 2024. The five-year at 2.42%, the 10-year was at 2.68% and the 30-year yield was at 3.10% at 4 p.m.
The IHS Markit municipal curve was also unchanged: 1.96% in 2023 and 2.21% in 2024. The five-year at 2.43%, the 10-year was at 2.65% and the 30-year yield was at 3.03% at 4 p.m.
Bloomberg BVAL was bumped up to one basis point: 1.93% (-1) in 2023 and 2.18% (-1) in 2024. The five-year at 2.44% (unch), the 10-year at 2.66% (-1) and the 30-year at 2.98% (unch) at the close.
Treasury yields fell.
The two-year UST was yielding 2.514% (-12), the three-year was at 2.690% (-12), five-year at 2.770% (-9), the seven-year 2.783% (-9), the 10-year yielding 2.748% (-8), the 20-year at 3.033% (-5) and the 30-year Treasury was yielding 2.847% (-4) at the close.
Fed on track, despite GDP
The first read of first-quarter GDP on Thursday will likely show a big drop in growth, with most economists expecting a number in the 1% range but some forecasting hardly any growth at all.
This should not deter the Federal Open Market Committee from lifting the fed funds target range by a half-point at its May 3-4 meeting.
Indeed, Jake Remley, senior portfolio manager at Income Research + Management, noted, “momentum in the 1Q GDP forecast revisions has turned decidedly south,” with the Street “cautioning to the downside as they work through the tea leaves of the oil shock, supply chain disruptions, and China COVID lockdowns.”
And while he agrees growth is likely to come in around 1%, such a read “suggests to the Fed that stagflation risks are not to be taken lightly, especially considering the year-over-year GDP price index is expected to print north of 7%.”
With the threat of recession perhaps “the biggest story facing the economy in the second half of 2022,” Remley said, “stagflation is the Fed’s worst nightmare.”
Should the U.S. face stagflation, he continued, it would force the Fed to “tame inflation by suppressing already waning growth.”
And while a 50-basis-point rate hike is all but guaranteed, Remley noted, “the Fed has already exercised restraint by not conducting an emergency intra-meeting hike or putting an even bigger hike on the table for May.”
He sees quantitative tightening as “the wildcard to watch for next week.”
John Farawell, head of municipal trading at Roosevelt & Cross, is focused on the GDP price index, which is expected in the 7% range. “Will the market closely watch this number, or will this be discounted due to projected weakness in world and U.S. economies?” he asked.
Noting the “flight-to-quality in the bond market” last week, Farawell pointed to the 10-year bond, which was at “a 2.93% yield and as of this time we are now at a 2.73% — quite a drop when you hear of the Fed’s May rate rise projection.”
While the Fed will continue to rely on incoming data, he said, “world issues will surely make moves more difficult.”
Still after “extraordinary fiscal and monetary policy largesse” boosted economic growth, Veneta Dimitrova, senior U.S. economist at Ned Davis Research, said, “a slower pace of expansion this year is practically assured since fiscal stimulus has ended and the Fed is gearing up for an aggressive rate hiking cycle and quantitative tightening.”
But despite the slowing growth, she said, don’t expect a recession this year. “Risks of recession increase for 2023 or later,” Dimitrova said. “If inflation remains stubbornly high and does not make sufficient progress toward the Fed’s target, particularly if exogenous shocks continue to hammer the economy, the risk of stagflation will rise.”
Still, growth in the first quarter should “be quite weak,” she said, given the reasons offered previously and “some lingering Omicron effects early in the quarter and the initial impact of the Russia/Ukraine war in late February/March (with the associated effect on commodity prices and supply chains).”
Clues about future trends, Dimitrova noted, could come from “consumer spending and inventories.”
Pent-up demand for services as COVID restrictions are eased could shift consumer spending away from goods, she said. “We don’t expect a swift increase in the share of services spending and a reversal in the share of durables spending back to pre-pandemic levels, but a move in that direction would be encouraging about future trends.”
Also of note is whether the spike in energy and other commodity prices fueled “a pullback in consumer discretionary spending,” as suggested in the March retail sales report.
And the big contribution to GDP that inventory investment provided in the fourth quarter of 2021 is “unlikely to be repeated in Q1 2022 because of uncertainty about future demand and renewed supply chain worries due to the Russia/Ukraine war and COVID lockdowns in China,” Dimitrova said.
As such, “final sales (which exclude inventories) may give a better sense of the strength of demand.”
But, the bottom line is, a soft Q1 GDP read “is unlikely to dissuade the Fed from raising rates aggressively next week,” she said, “as the Fed’s focus at the moment is on reining in inflation. But if growth slows materially later in the year and inflation moves faster than projected toward target, they may slow the pace of tightening.”
“Irrespective of the perceived weakness in the headline print, the economy remains strong going into the current quarter, with job gains and waning omicron restrictions expected to drive stronger personal consumption activity,” said Marvin Loh, senior macro strategist at State Street Global Markets. “Recent retail sales activity indicates that inflation is impacting those most sensitive to rising gas and food cost, which will prove a headwind going into 2H:22 absent a decline in those prices.”
But with inflation still “well above target,” he said, “We expect the Fed will raise rates by 50 bps next week, and the market will continue to price a series of additional 50 bps moves unless the Fed aggressively pushes back.”
For that to happen, Loh said, demand will have to slow noticeably, with the jobs market stabilizing, or starting to contract. Since monetary policy works “with a significant lag, the Fed will likely get towards a 2% funds rate by the early fall, before we think that inflation base effects and waning demand may cause a short pause to reassess the impact of its series of aggressive hikes.”
In data released Tuesday, durable goods orders grew 0.8% in March, as aircraft orders fell. “Core durable goods shipments, which feed directly into real GDP growth, rose a more tepid 0.2%, the same as we saw in February,” said Grant Thornton Chief Economist Diane Swonk. “In response, business investment is expected to slow in the first quarter from the rapid pace of the fourth quarter. Orders suggest those gains could be stronger in the second quarter.”
While core orders were strong, she said, “shipments were not as strong and do not alter our estimate that real GDP growth essentially flatlined in the first quarter.”
Also released Tuesday, consumer confidence dipped in April, the Conference Board said, with its index slipping to 107.3 from 107.6 in March, while the present situation index dropped to 152.6 from 153.8 and the expectations index grew to 77.2 from 76.7.
“Purchasing intentions are down overall from recent levels as interest rates have begun rising,” said Lynn Franco, senior director of economic indicators at the think tank. “Meanwhile, concerns about inflation retreated from an all-time high in March but remained elevated. Looking ahead, inflation and the war in Ukraine will continue to pose downside risks to confidence and may further curb consumer spending this year.”
But consumers remain uncertain, according to Wells Fargo Securities Senior Economist Tim Quinlan and Economic Analyst Sara Cotsakis. “Consumers do not know what to make of the crosscurrents in today’s economy,” they said. “Inflation is bad, the job market is good, COVID feels like less of a threat but supply chain problems persist. No wonder most of the major gauges in today’s consumer confidence report were little changed.”
Expectations for job increases in a half year were down slightly, they noted. “As the Federal Reserve embraces monetary policy tightening in a bid to cool inflation, eyes will be on the reaction of the labor market.”
Also, new home sales dropped 8.6% in March to a seasonally adjusted annual rate of 763,000, while the median price of a home grew to $436,700, up 21.4% from last March.
“While housing market activity is likely to moderate as the Fed raises rates and financial conditions tighten further, expectations of a sustained increase in home prices and favorable underlying demographics should support home prices,” said Berenberg Capital Markets Chief Economist for the U.S. Americas and Asia Mickey Levy.
The expected increasing cost of housing, especially rents, is “likely to exert upward pressure on household wage demands and inflationary expectations, and may prompt some to cut back on discretionary expenditure,” he said.
Primary to come:
The Regents of the University of California (Aa3/AA-/AA-/) is set to price Wednesday $3 billion of medical center pooled revenue bonds, consisting of $1.3 billion of bonds, 2022 Series P and $1.7 billion of taxable bonds, 2022 Series Q. Barclays Capital.
The Michigan Finance Authority (Aa3/AA//) is set to price Thursday $1.181 billion of Beaumont-Spectrum Consolidation hospital revenue refunding bonds, Series 2022, consisting of $1.089 billion of Series 1 and $91.530 million of Series 3. Morgan Stanley.
The Hampton Roads Transportation Accountability Commission, Virginia, (Aa2/AA//) is set to price Wednesday $421.575 million of Hampton Roads Transportation Fund senior-lien revenue bonds, Series 2022A, serials 2023-2042, terms 2047, 2052 and 2057. Wells Fargo Bank.
The Beaumont-Spectrum Consolidation, Michigan, (Aa3/AA/) is set to price Thursday $300 million of taxable corporate CUSIP bonds, Series 2022. Morgan Stanley.
The Oregon Facilities Authority (A1/A+//) is set to price Wednesday $289.560 million of Legacy Health Project revenue bonds, consisting of $99.340 million of tax-exempt bonds, 2022 Series A, term 2052; $101.355 million of taxable bonds, 2022 Series B, term 2052; and $88.885 million of tax-exempt bonds, 2022 Series C, serial 2030. RBC Capital Markets.
Gilbert, Arizona, (Aaa/AAA//) is set to price Wednesday $199.785 million of general obligation bonds, Series 2022, serials 2024-2042. Wells Fargo Bank.
The Northwest Independent School District, Texas, (Aaa//AAA/) is set to price Wednesday $193.985 million of unlimited tax school building bonds, Series 2022, serials 2023 and 2026-2047, insured by the Permanent School Fund Guarantee Program. RBC Capital Markets.
The Rhode Island Student Loan Authority (/AA//) is set to price Thursday $105.670 million of senior education loan revenue bonds, consisting of $64.850 million of alternative minimum tax bonds, 2022 Series A, serials 2026-2031 and 2041 and $40.820 million of taxable bonds, Series 2022-1, serials 2025-2029 and 2041. RBC Capital Markets.
Clark County, Nevada, is set to sell $200 million of indexed fuel tax and subordinate motor vehicle fuel tax highway revenue bonds, Series 2022, at 11:30 a.m. eastern Wednesday.