Municipals were weaker again on Monday as the aftermath of Friday’s selloff continued to target the 10-year range of the yield curve amid the imminent arrival of more than $11 billion of new deals in the last week of the quarter.
The high-grade scale saw cuts of as much as four basis points in the nine- to 11-year range. The 10-year and 30-year yields rose to 1.04% and 1.60%, respectively, according to Refinitiv Municipal Market Data.
Yet the market felt more fragile than the triple-A scales indicated, according to one New York trader.
“The market is off around four basis points, but it feels much weaker,” he said, saying overall trading was light on Monday heading into the last week of the month and quarter.
“It’s definitely weaker today, with cuts across the board,” agreed a New York underwriter. “The 10-year is off four basis points after being steady, steady, steady forever — now all of a sudden it’s a weaker market.”
“This is a follow up to the Fed message on Thursday that triggered Friday’s selloff,” the underwriter continued. “Once the market heard the Fed talking about the possibility of tapering, that moved the market to the opinion we were going to higher rates.”
On Friday, triple-A benchmark yields rose two to three basis points, moving the municipal 10-year to 1% on both Refinitiv MMD and ICE Data Services scales — the first time since June 29.
It was a shock to market watchers, after weeks of non-activity in both municipals and Treasuries.
“When Treasuries hit 1.50%, it gave us a little surprise, but it’s back down to around 1.47%,” the underwriter commented before the end of trading on Monday.
The benchmark U.S. Treasury bond ended Monday at 1.48% in 10-years, at 70% ratio to municipals, and 1.99% in 30 years, at an 80% ratio to municipals — both one basis point weaker than Friday.
“Muni traders are very cautious following the lead of Treasury desks, where the 10-year UST is still close to 1.50%,” the trader said.
“Munis are weaker and the percentages are not great, and there’s no supply pressure,” the underwriter said.
The secondary market activity on Monday, meanwhile, saw a brisk amount of bid-wanted lists and more offerings than usual due to the weakness — but the climate is a little cloudy, according to the underwriter.
“With the weakness they want to sell,” the underwriter said. “But, we don’t really have much of a new-issue calendar to give us a feel for what is really out there,” he added.
Overall trading was light, he said.
Still, the underwriter said demand remains unabated as the total potential volume for the final week of the quarter is estimated at $11.398 billion, with $9.434 billion of negotiated deals and $1.964 billion of competitive loans.
Tax-exempt issuance makes up $5.65 billion of that total, as Hawaii comes with $1.9 billion of taxables and the Golden State Tobacco Securitization Corp. also brings $1.8 billion of taxables.
The trader said the taxable municipal market will see pressure this week from both the Hawaii and California deals, but the underwriter said the deals won’t provide enough supply — or pressure — to accommodate or impact the municipal market.
Even with the two billion-dollar deals on tap, the New York underwriter said it won’t be enough to quench the market’s thirst for new paper.
The $11.398 billion on tap should generate brisk demand, judging by the hearty appetite for last week’s primary market deals, according to buyside sources.
The supply-demand imbalance continues to keep yields compressed and an uptick in overseas volatility had little impact on the municipal market last week, according to Wesly Pate, portfolio manager at Income Research + Management.
“As the volatility picked up elsewhere it really did not make its way over to munis,” he said, calling the municipal impact “a small fraction” compared to other asset classes.
Meanwhile, the deals on last week’s calendar were highly sought after, many of them oversubscribed, according to Pate, whose privately owned, independent, fixed-income investment management firm serves institutional and private clients and has $90.3 billion in assets under management.
“No part of the market struggled to get done,” he said, noting that lower-rated securities in some sectors, such as hospitals, are getting strong demand as they are trading at higher spreads.
While supply picks up this week, demand is still heavy.
Overall, volume pales in comparison to demand, and that is contributing to a steady yield compression in municipals, according to Pate.
“Issuance has been quite low and picks up here and there, but even the weeks where we see the demand continue to outpace supply by a large margin, it continues to push overall yield ratios lower,” he said.
Even if issuance trends increased significantly, the market could “readily absorb” an increase in supply going forward, according to Pate, who focuses on portfolio construction and sector analysis, and contributes to the investment decision-making process, specifically for private clients and taxable institutional portfolios.
“The market would welcome supply and that highlights how technical supply has been and highlights the flight-to-quality and flight to safe haven, and we continue to view the muni market in that context,” he added.
Although there is significant cash on the sidelines — with inflows still strong — demand will continue to be hearty in the fourth quarter, Pate said.
“It’s not unheard of that cash can be on the sidelines and flowing into asset classes as overall money supply continues to grow,” which is happening at an “astounding rate,” he said.
“There seems to be nothing in place to stop the overall level of money supply growth,” he added.
As the fourth quarter nears, Pate expects a continuation of the compression trade across all fixed income markets, including municipals.
The spread between lower- and higher-rated securities will remain compressed, he said. As a result, Pate cautions against seeking out yield by dipping in credit quality.
Lower-quality credits, like Chicago general obligation bonds, that had materially wider spreads levels and were typically the best performers for incremental yield, have lost that advantage in the current market climate, according to Pate.
“Credit spreads are tight and compressed,” he said, suggesting that investors who reach for yield by declining in credit quality are making a “negative, asymmetric trade.”
Instead, he recommends gaining yield through finding longer callable bonds with 4% to 5% coupons, or buying housing bonds, which offer slightly better value and higher spreads.
“That’s a much better trade than going down on the credit spectrum,” he said.
Regarding future issuance levels, Pate said the market has come to live with the supply-demand imbalance, but he is still keeping an eye on potential shifts that could occur with newly-introduced legislation, such as the reintroduction of direct-pay bonds, called Qualified Infrastructure Bonds in legislation being debated in Washington.
Other potential impacts, such as debt ceiling negotiations, should also have a light impact on munis going forward, according to Pate.
“We are trading one source of potential volatility for another,” he said, but added, “we will see a more muted and dampened impact in munis than what we will see in other asset classes.”
“If the debt ceiling really creates incremental concern about volatility the overall amount spilled into munis will be rather muted,” he said, pointing to the decoupling of munis from Treasuries and other asset classes.
“Munis march to the beat of their own drum and that is highlighted by rather low levels of supply that continue to bode well and keep overall mark to market concerns at bay,” he said.
More of the same on taper
Two Federal Open Market Committee voters seemed to echo Federal Reserve Board Chair Jerome Powell’s comments, suggesting the labor market could “soon” hit the substantial further progress target that would allow the panel to cut back on its asset purchases.
“Employment is still a bit short of the mark on what I consider to be substantial further progress,” Fed Gov. Lael Brainard told the National Association for Business Economics. “But if progress continues as I hope, it may soon meet the mark.”
Perhaps most interesting thing about her remarks was a comment on the September employment report, which could be the key to a taper announcement. “As a result of Delta, the September labor report may be weaker and less informative of underlying economic momentum than I had hoped,” she said.
If the September report disappoints, taper may be pushed back.
Similarly, Federal Reserve Bank of New York President John Williams also told the Economic Club of New York, “Assuming the economy continues to improve as I anticipate, a moderation in the pace of asset purchases may soon be warranted.”
But Federal Reserve Bank of Chicago President Charles Evans, speaking to NABE, questioned whether the current price pressure will be sufficient to lift inflation expectations and “satisfy the overshooting criteria contemplated by the FOMC.”
“Many have said yes, but I’m not so sure,” he said. “I am going to argue that the inflation we’ve seen to date does not yet satisfy the FOMC’s overshooting criterion. Instead, we should be focused on producing sustainable inflation that aligns longer-run inflation expectations with our 2% goal.”
But, he doubts the current price pressures will push up expectations. “I do not think the supply-side-induced transitory surge in inflation we are seeing today will be enough to do the trick. I expect that we will need a period of sustained, monetary-policy-induced overshooting of 2% inflation to boost long-run inflation expectations enough to deliver on our mandated goals. Of course, I could be wrong about that, and I will be attuned to alternative data developments.”
After COVID, he said he worries inflation will be too low in 2023 and 2024. “If the rising debt load is boosting r-star [the natural rate of interest], why is the 10-year Treasury rate so low?” he asked. “Markets see that debt coming, but pricing remains calm. So I don’t see fiscal deficits as providing monetary policy with more space.”
As for liftoff, both employment and inflation goals must be met, Evans said, “by itself, a low unemployment rate would not dictate a change in policy rates. If not associated with an undesirable rate of inflation, I would be hard-pressed to be convinced that some kind of labor market dysfunctionality, such as widespread unproductive churning, would offset the benefits that low unemployment brings to American households. For me, I still expect the key dual mandate issue governing liftoff will be inflation — and whether we are on the way to a sustainable level of inflation high enough to offset the downward bias created by the [effective lower bound.]”
Also, Federal Reserve Bank of Boston President Eric Rosengren, who was planning to retire in June 2022, will instead leave on Sept. 30 as a kidney condition has worsened. He will be replaced on an interim basis by Kenneth C. Montgomery, the bank’s first vice president and chief operating officer.
The bank said given Rosengren’s plans to retire next year, “preparations were well under way for conducting the search for the bank’s next president.”
Later in the day, the Federal Reserve Bank of Dallas announced its president Rob Kaplan will retire effective Oct. 8.
Both men recently said they’d sell individual stock holdings by the end of September after conflict of interest questions were raised. Rosengren was invested in real estate investment trusts and disclosed buys and sells, despite warning about the risks of commercial real estate.
Kaplan, meanwhile, made some $1 million-plus deals last year, according to reports.
In data released Monday, durable goods orders soared 1.8% in August after an upwardly revised 0.5% gain in July, first reported as a 0.1% decline.
Economists polled by IFR Markets expected a 0.7% gain.
The headline number was boosted by a 77.9% jump in orders for aircraft.
Those orders “can take years to fill,” noted Grant Thornton Chief Economist Diane Swonk.
But, she noted, “Business investment is on track to post stronger gains than during the second quarter. Orders and shipments posted double-digit increases compared to a year ago.”
The growth in “aircraft orders was largely expected,” said Wells Fargo Securities Senior Economist Tim Quinlan and Economist Shannon Seery, but even without those orders, “there were modest gains.”
“Signs of stronger business spending were evident in a 1.3% gain in electrical equipment and a 1.4% gain in computers and communications equipment orders,” they said.
Separately, the Dallas Fed’s manufacturing survey showed “solid expansion continued,” according to Emily Kerr, the Bank’s senior business economist. This despite “the vast majority of firms not[ing] supply-chain disruptions or delays.”
The survey also suggested “prices continued to increase strongly in September, for both raw materials and finished goods,” while employment gained and workweeks edged higher.
The triple-A benchmark scales were little unchanged to weaker on Monday.
According to Refinitiv MMD, short yields were steady at 0.11% and at 0.14% in 2022 and 2023. The yield on the 10-year rose four basis points to 1.04% while the yield on the 30-year moved up to 1.60%.
The 10-year muni-to-Treasury ratio was calculated at 70.3% while the 30-year muni-to-Treasury ratio stood at 80.3%, according to MMD.
The ICE municipal yield curve showed bonds unchanged in 2022 at 0.12% and steady at 0.16% in 2023. The 10-year maturity rose three basis points to 1.03% and the 30-year yield increased four basis points to 1.59%.
The 10-year muni-to-Treasury ratio was calculated at 70% while the 30-year muni-to-Treasury ratio stood at 80%, according to ICE.
The IHS Markit municipal analytics curve showed short yields at 0.11% and 0.16% in 2022 and 2023, respectively. The 10-year yield was at 1.02% and the 30-year yield at 1.59%.
In late trading, Treasuries were weaker as equities traded mixed.
The 10-year Treasury was yielding 1.48% and the 30-year Treasury was yielding 1.99%. The Dow Jones Industrial Average rose 0.34%, the S&P 500 decreased 0.09% while the Nasdaq dropped 0.34%.
Primary to come
Hawaii (Aa2/AA+/AA//) is set to price Wednesday $1.9 billion of taxable generation obligation bonds and taxable general obligation refunding bonds, consisting of: $600 million of Series GD, $200 million of Series GE, $27.4 million of Series GF, $86.6 million of Series GG, $141.8 million of Series GH, $108 million of Series GI and $736.225 of Series GJ. BofA Securities.
The Golden State Tobacco Securitization Corp. (Aa3/A+/AA-//) is set to price Thursday $1.843 billion enhanced tobacco settlement asset-backed bonds, Series 2021B (federally taxable), serials 2022-2030, terms 2034, 2042 and 2046. Jefferies LLC.
The California Housing Finance Agency (/AA+///) is set to price $497.548 million of municipal certificates, Series 2021-2 Class X certificates (social certificates), evidencing beneficial interests in credit enhanced custody receipts, serial 2035. Citigroup Global Markets Inc.
The California Housing Finance Agency (/AA+///) is also set to price $497.548 million of municipal certificates, Series 2021-2 Class A Certificates (social certificates), evidencing beneficial interests in credit enhanced custody receipts, serial 2035. Citigroup Global Markets Inc.
Riverside County Infrastructure Financing Authority (/AA-//) is set to price Tuesday $452.42 million of taxable lease revenue refunding bonds, Series 2021B, serials 2022-2036, terms 2041 and 2045. Loop Capital Markets.
Texas Water Development Board (/AAA/AAA/) is set to price Thursday $430.36 million of state water implementation revenue fund revenue bonds, Series 2021 (Master Trust), serials 2022-2056. Wells Fargo Corporate & Investment Banking.
Municipal Electric Authority of Georgia (A2/A-/BBB+/) is set to price Thursday $196.04 million, consisting of $137.52 million of project one subordinated bonds, Series 2021A, serials 2023 and 2029-2041, terms 2046 and 2051 and $58.52 million of general resolution projects subordinated bonds, Series 2021A, serials 2023-2036. Barclays Capital Inc.
Municipal Electric Authority of Georgia (A2/A-/BBB+/) is set to price Thursday $132.575 million, Taxable Series 2021B, consisting of $104.58 million of project one subordinated bonds, taxable series 2021B, serials 2023-2036 and $27.995 million of general resolution projects subordinated bonds, Series 2021B, serials 2023-2031. Barclays Capital Inc.
Corona, California, (/AA+//) is set to price Wednesday $276.84 million of 2021 taxable pension obligation bonds, serials 2022-2034. Stifel, Nicolaus & Company, Inc.
Philadelphia (A1/A+/A+/) is set to price Wednesday $229.275 million of water and wastewater revenue bonds, Series 2021C, serials 2023-2027 and 2029-2041 and terms 2046 and 2051. Ramirez & Co., Inc.
Maryland Health and Higher Educational Facilities Authority (Baa3////) is set to price $213.36 million of revenue bonds, Adventist HealthCare Issue Series 2021B & C, consisting of $143.285 million of Series B and $70.075 million of Series C. Ziegler.
Department of Transportation of Maryland (Aa1/AAA/AA+/) is set to price Thursday $196.32 million of forward delivery consolidated transportation bonds, refunding series 2022A and refunding series 2022B (forward delivery), consisting of $52.565 million of Series 2022A and $143.755 million of Series 2022B. J.P. Morgan Securities LLC.
Piedmont Municipal Power Agency (A3/A-/A-/) is set to price Thursday $183.26 million of electric revenue bonds, refunding series 2021B and 2021C, consisting of $93.05 million, Series 21B, serials 2027-2034 and $90.21 million, Series 21C, serials 2027-2034. Wells Fargo Corporate & Investment Banking.
Ohio (A2/A//) is set to price Wednesday $154.85 million of hospital revenue bonds, Series 2021A (University Hospitals Health System). BofA Securities.
CSCDA Community Improvement Authority (non-rated) is set to price Wednesday $135.555 million of essential housing revenue bonds, consisting of $95.315 million, Series 2021A, serial 2056 and $40.24 million, Series 2021B, serial 2046. Citigroup Global Markets Inc.
The Museum of Fine Arts in Houston (Aa1/AAA///) is set to price Tuesday $100 million of taxable bonds, Series A, due 9/1/2051. J.P. Morgan Securities LLC.
Mather Foundation (/A+///) is set to price Tuesday $100 million of taxable bonds, Series 2021 (Green Bonds). J.P. Morgan Securities LLC.
The Washington Suburban Sanitary District is set to sell $350 million of consolidated public improvement bonds of 2021 and consolidated public improvement bonds of 2021 green bonds at 10:30 a.m. eastern Tuesday.
The Maryland Department of Transportation (Aa1/AAA/AA+) is set to sell $138.415 million of consolidated transportation bonds, refunding series 2021B at 11 a.m. Wednesday.
The Maryland Department of Transportation (Aa1/AAA/AA+) is set to sell $295 million of consolidated transportation bonds, Series 2021A at 10:30 a.m. Wednesday.
New Castle County, Delaware, (Aaa/AAA/AAA) is set to sell $87.305 million of general obligation bonds, Series 2021A at 10:45 a.m. Thursday and $206.7 million of general obligation bonds, Series 2021B (federally taxable) at 11:15 a.m. Thursday.
Greenville County (/A-1+//) is set to sell $152.43 million of general obligation bonds, Series 2021B at 11 a.m. Thursday.