Municipals were mostly steady Monday in light trading, with some slight weakness on the long end, while U.S. Treasuries were little changed and equities ended mixed.
Triple-A benchmark yields rose a basis point or two in spots while UST were little moved from Friday’s levels. The municipal to UST ratio five-year was at 66%, 75% in 10 and 84% in 30, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the five at 65%, the 10 at 78% and the 30 at 84% at a 3:30 p.m. read.
The dislocation of tax-exempt munis from Treasury bonds the last week of January week was too tempting to ignore, as munis surged and outperformed Treasury bonds by a wide margin last week, said Peter Block, managing director of credit strategy at Ramirez & Co.
“The good news is that a resistance level emerged at this time,” Block said. “The bad news is that last week’s outperformance was likely the proverbial ‘dead cat bounce’ as retail support wanes considerably, spooked by rising interest rates and negative returns.”
While the municipal market saw outflows of $2.9 billion, the most since March 2020, Justin Hoogendoorn, head of strategy and analytics at HilltopSecurities, noted flows have steadied in recent days, and January and February are normally favorable months for flow and performance from a seasonal standpoint, he said.
The positive seasonal patterns are partially due to heavy reinvestment proceeds that come into the market during this period, with about $45 billion to be reinvested from cash flows in January and February. He said funds should be rich with cash, making it less likely they will need to liquidate bonds to fulfill cash demands from investors.
Hoogendoorn said institutional accounts are filling the demand gap in mutual funds and exchange-traded funds. Higher returns are luring successful banks and insurance companies off the sidelines, with typical tax rates ranging from 21% to 29.6%, and diverting demand away from the taxable municipal area.
He said these two patterns signal that, while there may be some short-term weakness, the asset class’s biggest underperformance is likely in the rearview mirror.
Investor bids wanted in competition remained elevated at nearly 65% above average, according to Block.
“The high relative value of exempts last week created trading throughput of nearly 50% above average as [Refinitiv] MMD experienced bumps across the curve by an average of -7.7 basis points, led by -11 basis points in the 30-year spot to 1.84%,” Block said. “MMD 2s30s was -10 flatter at 96 basis points. SIFMA finally broke loose at 5-plus basis points to a whopping 0.11%.”
Muni-UST ratios reverted to fair across the curve on last week’s outperformance by an average of -10.4 ratios across the curve, he said. The 10-year spot was -12.1 ratios to 75.5% and the 30-year spot was -10.8 ratios to 83.3%.
Block said following last week’s outperformance of an average of -10.4 ratios throughout the curve, muni-UST ratios have reverted to fair across the curve. The 10-year spot had a ratio of -12.1 to 75.5%, while the 30-year spot had a ratio of -10.8 to 83.3%. Spreads are likewise tight compared to historical levels, but they are wider for sub-5% coupons on broad market names. He expects munis to continue to underperform for a few more weeks as markets remain volatile and investors reassess their muni holdings.
Month-to-date returns are back in the black, according to the Bloomberg Municipal Indices, with the main municipal index at positive 0.47%, high-yield at positive 0.71% and the Municipal Impact Index at positive 0.64%. Taxable munis are still showing losses at negative 1.18%.
This week’s supply is $5.7 billion, with $4.5 billion, or 79.9%, tax-exempt, headed by Washington, Port of Portland, Oregon, and Ohio issues. Year-to-date gross supply is $40 billion, up 8% from the previous year. Thirty-day visible supply is $9.32 billion, while Bloomberg data shows net negative supply at $16.19 billion.
In the primary market, BofA Securities priced for Indiana Finance Authority (Aa2/AA+/AA+//) $341.26 million of lease appropriation refunding bonds, Series 2022A. Bonds maturing in 2/2023 with a 5% coupon yields 0.74%, 5s of 2027 at 1.42%, 5s of 2032 at 1.87% and 4s of 2037 at 2.2%, callable 2/1/2032.
California 4s of 2032 at 0.72%. Washington 5s of 2023 at 0.76%. Maryland 5s of 2023 at 0.79%. Ohio Water Development Authority 5s of 2024 at 1%-0.97%.
Massachusetts 5s of 2026 at 1.22% versus 1.20% Friday. North Carolina 5s of 2027 at 1.23%. Ohio common schools 5s of 2028 at 1.24% versus 1.26% Friday.
Triborough Bridge and Tunnel 5s of 2031 at 1.69%. NYC TFA 5s of 2032 at 1.59%-1.58% versus 1.58% Thursday. California 5s of 2032 at 1.62%-1.61%. Ohio 5s of 2034 at 1.66%-1.65%. Cincinnati, Ohio 5s of 2034 at 1.60%. Ohio 5s of 2035 at 1.68%-1.67%.
LA DPW 5s of 2040 at 1.83%. California 5s of 2041 at 1.86%-1.84% versus 1.98% on 1/28. Georgia road and tollway 3s of 2050 at 2.68%-2.67%.
Refinitiv MMD’s scale saw one to two basis point cuts at the 3 p.m. read: the one-year at 0.61% (unch) and 0.88% (unch) in two years. The five-year at 1.16% (unch), the 10-year at 1.44% (unch) and the 30-year at 1.86% (+2).
The ICE municipal yield curve saw a basis point cut in spots: 0.58% (unch) in 2023 and 0.90% (unch) in 2024. The five-year at 1.15% (unch), the 10-year was at 1.48% (+1) and the 30-year yield was at 1.86% (+1) in a 4 p.m. read.
The IHS Markit municipal curve was little changed: 0.62% (unch) in 2023 and 0.85% (unch) in 2024. The five-year at 1.17% (unch), the 10-year at 1.44% (+2) and the 30-year at 1.86% (+2) at a 4 p.m. read.
Bloomberg BVAL was cut one basis point: 0.66% (+1) in 2023 and 0.87% (unch) in 2024. The five-year at 1.21% (+1), the 10-year at 1.46% (+1) and the 30-year at 1.85% (+1) at a 4 p.m. read.
Treasury yields were little changed.
The two-year UST was yielding 1.293%, the five-year was yielding 1.761%, the 10-year yielding 1.913%, the 20-year at 2.2281% and the 30-year Treasury was yielding 2.221% at the close.
Inflation is expected to continue at elevated levels at least through the first half of the year. The consumer price index will be released this week, and John Hancock Investment Management expects the year-over-year headline number to rise to 7.3%, with the core up 5.9% on an annualized basis, in line with other forecasts.
“The U.S. aggregate bond index has now reached the same drawdown (peak-to-trough decline) as the 2013 taper tantrum at -4.90%,” said John Hancock Investment Management’s co-chief investment strategists Emily Roland and Matt Miskin. “Bond yields have risen significantly with the U.S. aggregate bond index now with a yield of 2.27% and investment grade corporate bonds now yielding 2.96%. We have not received much (if any) yield/income yet for the year, which should eventually help offset some of the recent price declines.”
As a result, they suggest “a modest underweight to duration in a fixed-income portfolio,” since “later in the year the perfect storm that has developed for high-quality bonds (rising oil prices, hawkish surprises of central bank, and economic data accelerating) will pass.”
As the year continues, the growth environment will normalize, Roland and Miskin said, with fewer “hawkish surprises.” This will “eventually help reduce the volatility in higher-quality bonds.”
Liquidity will tighten this year, said Padhraic Garvey, ING regional head of research, which will be “the tipping point for another lurch higher in market rates.”
And then? Garvey says, “macro factors beyond the Omicron-impacted turn of the year are robust and should pull rates higher. This will be muted by buyers of bonds that continue to show up as a supportive factor on the flows front. Weak data in the current quarter will provide a short-term excuse to buy bonds, although the market should look through this.”
Still, inflation will cause the Fed to act, as early as next month. Grant Thornton Chief Economist Diane Swonk expects five 25 basis point hikes this year, but one of those may become a 50 basis point increase instead.
“Why the urgency?” she asks. Inflation is a global issue these days and “has far exceeded the expectations of central bankers at home and abroad,” she said. Additionally inflation is at risk of “becoming entrenched and baked into wage gains, much like we saw in the 1970s when stagflation occurred.”
The Fed can’t let that happen, Swonk said, since “it has already suffered a blow to its credibility by letting inflation persist this long.”
If growth is below forecast this year, she said, recession could come in 2023. And while the Fed is ready to address inflation by raising rates, “the challenge is knowing when to stop,” she said. “The Fed has no history of achieving a soft landing when it was combating a surge in inflation. A recession may be inevitable.”
Separately, The Conference Board’s employment trends index dipped in January. “It appears that the Omicron variant did not impact job growth as much as initially feared,” said Frank Steemers, the think tank’s senior economist. “Solid job growth is likely to continue over the next months.”
Primary to come:
The Port of Portland, Oregon (/AA-//) is set to price Tuesday $511.35 million of alternative tax minimum Portland International Airport revenue bonds, Series Twenty-Eight, serials 2023-2042, terms 2047 and 2052. Jefferies.
Ohio (Aa1/AA+/AA+/) is set to price Thursday $426.755 of taxable general obligation refunding bonds, consisting of: $181.905 million of infrastructure improvement bonds, Series 2022A, serials 2023-2037; $32.33 million of conservation projects bonds, Series 2022A, serials 2023-2032; and $212.52 million of common schools bonds, Series 2022A, serials 2023-2037. Loop Capital Markets.
Orange County Health Facilities Authority, California (A2/A+//) is set to price Tuesday $326.755 million of hospital revenue bonds, Series 2022. Morgan Stanley & Co.
Ohio (Aa3/A+/A+/) is set to price Tuesday $311.92 million of forward delivery turnpike junior lien revenue refunding bonds, 2022 Series A, serials 2024-2033 and 2038-2039, issued by Ohio Turnpike and Infrastructure Commission. Citigroup Global Markets.
Greater Orlando Aviation Authority (Aa3/AA-/AA-/AA-) is set to price Tuesday $285.9 million of airport facilities revenue bonds, consisting of $182.66 million of alternative minimum tax bonds, Series 2022A, serials 2023-2042, terms 2047 and 2052; $62.955 million of taxable bonds, Series 2022B, serials 2029-2030, term 2052; $8.73 million of alternative minimum tax refunding bonds, Series 2022C, serials 2023-2028; $20.045 million of non-alternative minimum tax refunding bonds, Series 2022D, serials 2023-2032; and $11.51 million of taxable refunding bonds, Series 2022E, serials 2023-2032. Wells Fargo Bank.
Arlington Independent School District, Texas (Aaa/AAA//) is set to price Tuesday $195.035 million of unlimited tax school building and refunding bonds, Series 2022, serials 2023-2042, term 2047, insured by Permanent School Fund Guarantee Program. Siebert Williams Shank & Co.
San Diego County Water Authority Financing Agency (Aa2/AAA/AA+/) is set to price Tuesday $170 million of water revenue bonds, Series 2022A, serials 2023-2042, terms 2047 and 2052. Loop Capital Markets.
Norwich, Connecticut (/AA//) is set to price Thursday $145 million of general obligation bonds, Issue of 2022. Piper Sandler & Co.
Arizona Industrial Development Authority is set to price Tuesday $118.545 million of taxable senior sustainability-linked revenue bonds, Series 2021A. Goldman Sachs & Co.
New York City Municipal Water Finance Authority is set to price Tuesday $100 million of water and sewer system second general resolution revenue bonds, Adjustable Rate Fiscal 2022 Series DD, term 2033. Jefferies.
Las Vegas Valley Water District is set to sell $33.66 million of limited tax general obligation water refunding bonds, Series 2022B, at 10:45 a.m. eastern Tuesday.
Las Vegas Valley Water District is set to sell $259.11 million of limited tax general obligation water refunding bonds, Series 2022C, at 10:15 a.m. Tuesday.
Washington (Aaa/AA+/AA+/) is set to sell $200.645 million of various purpose general obligation bonds, Series 2022C – Bid Group 1, at 10:30 a.m. Tuesday.
Washington (Aaa/AA+/AA+/) is set to sell $265.475 million of various purpose general obligation bonds, Series 2022C – Bid Group 3, at 11:30 a.m. Tuesday.
Washington (Aaa/AA+/AA+/) is set to sell $277.42 million of various purpose general obligation bonds, Series 2022C – Bid Group 2, at 11 a.m. Tuesday.
The University System of Maryland is set to sell $23.95 million of auxiliary facility and tuition revenue bonds, 2022 Refunding Series B, at 10:45 a.m. eastern Thursday.
The University System of Maryland is set to sell $97.64 million of auxiliary facility and tuition revenue bonds, 2022 Series A, at 10:30 a.m. Thursday.