Munis, USTs steady as market takes a breather

Bonds

Triple-A benchmark yields were little changed for the first session in a week, as U.S. Treasuries were flat and equities were also little moved in either direction as all markets seemed to take a mid-week break from the volatility.

The municipal to UST ratio five-year was at 75%, 84% in 10 and 89% in 30, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the five at 74%, the 10 at 85% and the 30 at 90% at a 4 p.m. read.

The Investment Company Institute on Wednesday reported $993 million of outflows from municipal bond mutual funds in the week ending Feb. 9, down from $4.263 billion of outflows in the previous week.

ICI also said exchange-traded funds saw inflows at $701 million in the week ending Feb. 9 after $13 million of outflows the week prior.

There have been 33 trading sessions so far this year and the 10-year AAA Refinitiv MMD benchmark has posted a daily improvement in just three of those days, noted Kim Olsan, senior vice president at FHN Financial. The yield opened 2022 at 1.04% and is now 1.71%, a move representing 64% of its 2022 low.

“While that dramatic a change in such a short time has typically been credit-related, this time the change is more due to macro events,” she said. “Just where the selloff stabilizes and finds a better equilibrium isn’t known yet, but better vantage points for buyers have mostly certainly developed.”

The negative correction in municipal bond prices over the past week and a half has municipals in the red.

The Bloomberg Municipal Index is at negative 0.81% for the month and negative 3.53% year to date, while high-yield sits at negative 0.72% for February and negative 3.50% through 2022. Taxable munis saw losses of 2.30% so far in February and 4.77% for the year while the Municipal Impact Index has seen losses of 1.00 this month and 4.37% in 2022.

“Muni trading liquidity remains at issue, with strong volatility creating uncertainty about price discovery and putting some distance between bids and covers,” said Matt Fabian, a partner at Municipal Market Analytics in a weekly Outlook report. ,

Net buying pressure has increased, with demand focused at the front end of the curve, where nominal yields are high enough to warrant acquisitions by both separately managed accounts and formerly fee-constrained traditional high-grade managers, he said.

“But while buyers are emerging, sporadically, up front, lower demand at the long end reflects the threat of de minimus-related price cuts amid the prevalence of lower coupon, more aggressive structured issued in the last two years,” he said. “While the Fed is raising rates and longer Treasuries remain unsteady, this will be a difficult area to stabilize prior to de minimus losses occurring.”

Olsan also noted that short maturities are faring better based on a flight-to-option trade, “riding out 1-2 year durations while the Fed is in tightening mode.”

“Now that 2023/2024 yields are behind 1% and ratios have increased to 75% or higher, a deeper pool of buyers has developed,” she said.

In the primary market Wednesday, Wells Fargo Banks priced for Pennsylvania Housing Finance Authority (Aa1/AA+//) $207.76 million of social non-alternative minimum tax single family mortgage revenue bonds, Series 2022-138A. Bonds in 10/2022 with a 5% coupon yield 0.84%, 5s of 4/2027 at 1.80%, 5s of 10/2027 at 1.84%, 2.625s of 4/2032 at par, 2.65s of 10/2032 at par, 2.9s of 10/2037 at par, 3s of 4/2042 at par and 3s of 10/2052 at 2.33%, callable 10/1/2032.

BofA Securities priced for Reed College, Oregon (Aa2/AA-//) $125 million of taxable fixed rate bonds, Series 2022A. Bonds in 7/2052 with a 3.872% coupon yield at par, callable 1/1/2052.

In the competitive market, Delaware (Aaa/AAA/AAA/) sold $255.03 million of general obligation bonds, Series 2022, to Jefferies. Bonds in 3/2023 with a 5% coupon yield 0.86%, 5s of 2027 at 1.45%, 5s of 2032 at 1.71%, 3s of 2037 at 2.23%, 3s of 2042 at 2.33%, callable 3/1/2032.

Secondary trading
Mecklenburg County, North Carolina 5s of 2023 at 0.89%. New York City 5s of 2023 at 1.01%-1.00%. Washington 5s of 2024 at 1.22%.

Maryland 5s of 2025 at 1.36% versus 1.39% Tuesday. Prince George’s County, Maryland 5s of 2025 at 1.35% versus 1.37% Tuesday. NYC Municipal Water Finance Authority 5s of 2026 at 1.49%-1.45%. District of Columbia 5s of 2027 at 1.49%-1.47%.

LA DPW 5s of 2029 at 1.72%-1.70%. Georgia 5s of 2029 at 1.65%. Forsyth County, North Carolina 4s of 2030 at 1.66%.

Maryland 5s of 2033 at 1.86%-1.85%. Washington 5s of 2035 at 1.96%-1.95%. Connecticut 5s of 2036 at 2.10%-2.07%.

LA DPW 5s of 2046 at 2.34%-2.31%. Washington 5s of 2046 at 2.29%-2.28%.

AAA scales
Refinitiv MMD’s scale was unchanged at the 3 p.m. read: the one-year at 0.84% (unch) and 1.11% (unch) in two years. The five-year at 1.44% (unch), the 10-year at 1.71% (unch) and the 30-year at 2.12% (+3).

The ICE municipal yield curve saw small cuts: 0.87% (unch) in 2023 and 1.18% (+2) in 2024. The five-year at 1.42% (+1), the 10-year was at 1.74% (+1) and the 30-year yield was at 2.11% (+1) in a 4 p.m. read.

The IHS Markit municipal curve was little changed: 0.83% (unch) in 2023 and 1.10% (unch) in 2024. The five-year at 1.45% (unch), the 10-year at 1.70% (unch) and the 30-year at 2.09% (unch) at a 4 p.m. read.

Bloomberg BVAL was little changed: 0.86% (unch) in 2023 and 1.09% (unch) in 2024. The five-year at 1.44% (unch), the 10-year at 1.70% (unch) and the 30-year at 2.08% (unch) at a 4 p.m. read.

Treasuries were flat while equities ended mixed.

The two-year UST was yielding 1.527%, the five-year was yielding 1.918%, the 10-year yielding 2.044%, and the 30-year Treasury was yielding 2.364% at the close. The Dow Jones Industrial Average lost 38 points or 0.11%, the S&P was up 0.16% while the Nasdaq was down 0.05% at the close.

FOMC minutes
Rates could go up faster than they did in 2015 if predictions for the economy hold, according to minutes of the Federal Open Market Committee, but the release offered no hints as to whether a 50-basis point liftoff would be considered.

The markets have priced in a March rate hike, with a 50% chance of a 50-basis-point move instead of 25 basis points.

“Participants viewed that there was a much stronger outlook for growth in economic activity, substantially higher inflation, and a notably tighter labor market,” the minutes of the Jan. 25-26 meeting noted. “Consequently, most participants suggested that a faster pace of increases in the target range for the federal funds rate than in the post-2015 period would likely be warranted, should the economy evolve generally in line with the Committee’s expectation.”

Rate hikes will be assessed on a meeting-by-meeting basis based “on economic and financial developments and their implications for the outlook and the risks around the outlook,” the minutes said.

Many officials supported beginning balance sheet reduction this year.

Participants want to remain flexible given “the current highly uncertain environment.”

And, should inflation remain elevated, the minutes said, most participants think it appropriate “to remove policy accommodation at a faster pace than they currently anticipate.”

In order to prevent “the risk that financial conditions might tighten unduly in response to a rapid removal of policy accommodation,” some officials suggested “clear and effective communication of the Committee’s assessments of the economic outlook, the risks around the outlook, and the appropriate path for monetary policy.”

“The FOMC minutes did not offer much more after the hawkish pivot already delivered at the January meeting,” said Jason England, global bonds portfolio manager at Janus Henderson Investors. “We have reached peak uncertainty for monetary policy.”

While the minutes make clear rates will go up in March, “there was no discussion around a 50 bp hike that many have priced into the market, so although it may still be on the table, that is not our base case,” he said.

Similarly, the only guidance on balance sheet runoff was: it “will likely be quicker this time than after the last crisis,” England said. “Bottom line is that for a market that has shifted more hawkish, these minutes will come off dovish, however remember we have seen a strong January jobs report and a headline CPI print of 7.5% since the January meeting so a data dependent Fed will continue to incorporate these into their outlook as well as another jobs report, PCE print, and CPI print prior to the March meeting.”

Separately, retail sales surprised to the upside.

“Shortages and the pace with which people can get what they want are playing a larger role than weak demand in determining retail sales,” said Grant Thornton Chief Economist Diane Swonk. “This is showing up as upward pressure on a broadening spectrum of prices and has left the Federal Reserve playing catch up with rate hikes.”

A 50-basis point liftoff “is all but a formality,” she said. “The next step is when and how fast the Federal Reserve plans to let its bloated balance sheet shrink; that is more complicated and will be hotly debated at the March meeting.”

The 3.8% jump in January sales topped economists polled by IFR Markets’ expectations of a 1.8% rise.

“Since spending cannot forever outpace inflation, some special factors are at play,” according to Wells Fargo Securities Senior Economist Tim Quinlan and Economist Shannon Seery. “We suspect it may have to do with certain merchandise finally becoming available.”

They noted large gains at car dealers and furniture stores, “where inventory has been severely disrupted by a lack of supply. Some of the major gains in sales were thus made possible by people finally getting their hands on stuff they couldn’t before.”

Separately, the business leaders survey from the Federal Reserve Bank of New York showed business activity was flat in February, while “input and selling price increases remained substantial.”

However, respondents expect conditions to improve in the next six months.

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