Munis, USTs rally after jobs report


Municipal yields fell Friday ahead of a heavier new-issue calendar while U.S. Treasuries and equities rallied after the latest jobs report offered signs that may suggest inflation will be cooling.

Triple-A benchmark yields fell six to 15 basis points, depending on the scale, pushing the 10-year muni below 2.50% and the 30-year muni below 3.50%. UST yields fell 10 to 21 basis points.

The three-year muni-UST ratio was at 60%, the five-year at 64%, the 10-year at 70% and the 30-year at 92%, according to Refinitiv MMD’s final 3 p.m. ET read. ICE Data Services had the three at 56%, the five at 60%, the 10 at 67% and the 30 at 90% at a 4 p.m. read.

Bond market actions this year have been “positive” as traders expect a recession and see the Federal Reserve “entering the late stage of its rate hike program,” said BofA strategists Yingchen Li and Ian Rogow.

The Fed minutes this week sent “a more hawkish message, and indicated concern about the forward trajectory of inflation,” indicating “volatility may remain quite high in the early months of the year for bond investors,” they said.

Therefore, they noted, ”patience is required for lower yields in 2H23 and a large market rally.”

Barclays strategists Mikhail Foux, Clare Pickering and Mayur Patel are cautious about muni performance in the first quarter, though they said, “the stars are possibly aligning for a relatively benign January.”

“Economic data might be market supportive in the near term, Treasury rates might remain range-bound, supply should be relatively light (at least in January and possibly in February as well), large outflows are not very likely at this point, and January redemptions (although smaller than in recent years) should provide additional market support,” they said. “Moreover, many investors were relatively cautious and light going into 2023, which should also be market-supportive.”

The direction of muni rates during ”the first two months of the year is more dependent on Treasuries,” BofA strategists said.

During the final two weeks of 2022, the UST market “quietly adjusted to the Fed’s new stance and the 10-year Treasury yield rose 50bps to 3.90% from 3.40%,” while muni rates only rose slightly, resulting in rich muni-UST ratios, they said.

BofA strategists believe “these rich ratios will likely remain sticky in January and February, supported by muni supply/demand conditions.”

Given current rations, Barclays strategists see munis “capped” to the upside and expect sideways movement “with some marginal positive bias.” But expect volatility, “and view the current market strength only as a tactical opportunity.”

Despite continued outflows from mutual funds, BofA strategists said, “there is not enough supply for the investor base.”

Principal and coupon redemptions are estimated at $42 billion in January and $45 billion in February.

“In such an environment, it appears likely that munis would outperform in either a Treasury rally or selloff,” BofA strategists said.

Taxable muni investors “may wait for late January/early February for better entry points,” they said.

However, lack of taxable supply “this year should help this market segment,” Barclays strategists said.

Corporate issuance, they noted “is expected to be very heavy in January, in turn, likely pressuring corporate spreads.”

Even though taxables should outperform, Barclays strategists said “their spreads are much more correlated with corporates rather than with tax-exempts.”

For that matter, they noted, there may be a “negative spillover effect onto taxable spreads in the coming weeks, but at current levels, they are priced attractively versus IG corporates.”

Calendar stands at $4.3B
Investors will be greeted Monday with a new-issue calendar estimated at $4.303 billion.

There are $2.956 billion of negotiated deals on tap and $1.348 billion on the competitive calendar.

The negotiated calendar is led by $633 million unlimited tax school building bonds from the Plano Independent School District, Texas, followed by $246 of unlimited tax school building bonds from the Tomball Independent School District, Texas.

Colorado leads the competitive calendar with $425 million of notes, followed by $343 million of water system refunding revenue bonds from the Santa Clara Valley Water District, California, in two deals.

Secondary trading
Maryland 5s of 2024 at 2.52% versus 2.58% Wednesday. North Carolina 5s of 2025 at 2.41%. New York City 5s of 2025 at 2.46%.

Los Angeles DWP 5s of 2027 at 2.36%-2.32%. NY Dorm PIT 5s of 2028 at 2.41%-2.39% versus 2.54%-2.53% on 12/14/22. Maryland 5s of 2028 at 2.37%-2.35%.

NYC TFA 5s of 2031 at 2.49%-2.46%. University of California 5s of 2033 at 2.50%.

Washington 5s of 2047 at 3.75%-3.71% versus 3.74% Wednesday and 3.85%-3.84% Tuesday. District of Columbia 5s of 2047 at 3.63% versus 3.73% Tuesday. Illinois Finance Authority 5s of 2052 at 4.43% versus 4.52%-4.50% Wednesday and 4.57% on 12/22/22.

AAA scales
Refinitiv MMD’s scale was bumped eight to 12 basis points: the one-year at 2.54% (-8) and 2.41% (-8) in two years. The five-year was at 2.36% (-10), the 10-year at 2.48% (-10) and the 30-year at 3.40% (-10).

The ICE AAA yield curve was bumped six to nine basis points: at 2.55% (-8) in 2024 and 2.41% (-8) in 2025. The five-year was at 2.37% (-9), the 10-year was at 2.47% (-8) and the 30-year yield was at 3.41% (-7) at 4 p.m.

The IHS Markit municipal curve was bumped 10 to 12 basis points: 2.57% (-12) in 2024 and 2.40% (-10) in 2025. The five-year was at 2.38% (-10), the 10-year was at 2.47% (-10) and the 30-year yield was at 3.40% (-10) at a 4 p.m. read.

Bloomberg BVAL was bumped nine to 15 basis points: 2.55% (-15) in 2024 and 2.40% (-15) in 2025. The five-year at 2.37% (-10), the 10-year at 2.48% (-9) and the 30-year at 3.40% (-10).

Treasuries rallied.

The two-year UST was yielding 4.258% (-19), the three-year was at 3.989% (-21), the five-year at 3.706% (-20), the seven-year at 3.637% (-18), the 10-year at 3.562% (-15), the 20-year at 3.851% (-11) and the 30-year Treasury was yielding 3.682% (-10) at 4 p.m.

Jobs report
Employers added 223,000 jobs in December, the smallest gain in two years, showing the job market is losing steam, reflecting the consequences of slowing economic growth and the Federal Reserve’s interest-rate increases.

“This is an encouraging jobs report for the Fed that shows the narrow path to a soft landing remains a possibility with wages (and thus inflationary pressure on core services ex-rents — the sole area of the three Fed Chair Jay Powell laid out in a speech last month that was yet heading in the right direction) cooling without requiring widespread job destruction,” said Josh Jamner, investment strategy analyst at ClearBridge Investments.

Meanwhile, Marvin Loh, senior global macro strategist at State Street, said, “the report provides mixed signals, with slowing wage gains positively offsetting still robust job gains.”

“A fifth consecutive drop in temporary help employment is a warning signal while softer wage inflation suggests labor market dynamics are shifting,” said ING Chief International Economist James Knightley. “With business surveys pointing to recession, tougher times are coming.”

However, Alexandra Wilson-Elizondo, head of Multi-Asset Retail Investing at Goldman Sachs Asset Management, said, “the deceleration in average hourly earnings and an unemployment rate of 3.5% should dampen some of the market’s fears of a recession and an overly aggressive Fed.”

With recession discussions occurring “for most of the last year,” Samuel Fuller, director of Financial Markets Online, said, “that sort of forward guidance makes a shallower downturn more likely as firms take evasive action.”

As inflation appears to be cooling “and indications U.S. businesses are less troubled by a higher interest rate environment than feared,” he said, “this could become one of the shallowest recessions experienced on both sides of the Atlantic.”

While the economy slows, Jan Szilagyi, CEO and co-founder of Toggle AI, said, it’s “not slowing enough.”

The pace of job growth is “still way above the speed limit, so for now the economy isn’t anywhere near the kind of ‘benign job growth’ the Fed wants to see,” he said.

“This is definitely a ‘further and longer on the hiking cycle’ kind of report,” Szilagyi added, because despite a “28,000 downward revision to the prior two months, we are solidly above 200,000.”

The report will “most likely add to the growing narrative of a disinflationary environment crossing with a robust economy, and therefore a soft landing.” This, he said, “could prove positive for stocks in the short-term.”

“However, our positioning remains risk-off into 2023,” Goldman Sachs Asset Management’s Wilson-Elizondo said. “It’s hard to see how risky assets can compete with approximately 5% yields in money market funds until more clarity is delivered on the inflation/growth mix.”

She expects rates to be restrictive until the Fed sees “clear evidence that tightness in the labor market is consistently improving.”

“Critical to the outcome this year for risk assets will be the sequencing of the growth inflation direction,” Wilson-Elizondo said. “Furthermore, there remains a risk of a ‘start/stop’ response by the Fed, i.e., a pause followed by a hike or a cut as they are data dependent.”

From the Fed’s perspective, Loh said, the December jobs report “is just one data point and it’s overall concern about labor market tightness remains intact.”

Therefore, he expects “the Fed to continue hiking rates through the [first] quarter, although [Friday’s] report will divide the 50 versus 25 bps camp until next week’s CPI report.”

Jamner noted, “This print on its own doesn’t clearly support a 25 or a 50 bps hike at the next Fed meeting in February, as a result, next Tuesday’s CPI release could prove crucial for that decision.”

However, Mortgage Bankers Association Chief Economist Mike Fratantoni argued the “report will not lead the Fed to quickly change course with respect to the path of interest rates, and we expect a 25-basis-point hike at the next meeting.”

And while the strong print Friday does not change Morgan Stanley Research’s “expectation of a step down to 25bps at the upcoming FOMC,” it said “continued robust jobs growth increases the risks of an extension of the tightening cycle beyond the next meeting, in line with our interpretation of the latest FOMC minutes.”

Loh believes the importance of this report “extends beyond the [first] quarter as the market and Fed contemplates if hikes beyond 5.125% are needed.”

“We are in a data dependent environment, so the Fed will likely not need to make that decision until it convenes in March,” Loh said, noting he believes the jobs report “can support those that think the Fed can pause, presuming the positive trends continue into the spring.”

“This however may be at odds with a market that is pricing an aggressive pivot, which we think would be a response to a recession,” he said.

Primary to come:
The Plano Independent School District, Texas, (Aaa/AA+//) is set to price Tuesday $632.660 million of unlimited tax school building bonds, Series 2023, serials 2024-2043. RBC Capital Markets.

The Tomball Independent School District, Texas, (Aaa/AAA//) is set to price Tuesday $246.355 million of PSF-insured unlimited tax school building bonds, Series 2023. Piper Sandler & Co.

North Dakota (Aa1///) is set to price Tuesday $185 million of Housing Finance Agency Home Mortgage Finance Program housing finance program bonds, consisting of $125 million of non-AMT social bonds, Series 2023A; $40 million of taxables, Series 2023B; and $20 million of taxables, Series 2023C. RBC Capital Markets.

The Municipal Electric Authority of Georgia (A3/A/BBB+/) set to price Wednesday $184.890 million of Plant Vogtle Units 3&4 Project J bonds, Series 2023A. Goldman Sachs & Co.

The New Jersey Economic Development Authority (Baa1/BBB+//) is set to price Wednesday $160 million of taxable Offshore Wind Port Project state lease revenue bonds, 2023 Series A, serials 2024-2033. Loop Capital Markets.

The Georgetown Independent School District, Texas, (Aaa/AAA//) is set to price Tuesday $148.075 million of unlimited tax school building bonds, Series 2023. FHN Financial Capital Markets.

The Municipal Electric Authority of Georgia (A3/A/BBB+/) is also set to price 128.495 million of New York Plant Vogtle Units 3&4 Project M bonds, Series 2023A. Goldman Sachs & Co.

The authority (Baa2/BBB+/BBB+/) is set to price $127.600 million of Plant Vogtle Units 3&4 Project P bonds, consisting of $67.065 million of taxables, Series 2023A, and $60.535 million of exempts, Series 2023B. Goldman Sachs & Co.

The Oklahoma County Finance Authority is set to price Tuesday $110.410 million of Choctaw-Nicoma Park Public Schools Project education facilities lease revenue bonds, Series 2023, serials 2026, 2028, 2030-2032 and 2034-2038, term 2041. D.A. Davidson & Co.

Colorado is set to sell $425 million Education Loan program tax and revenue anticipation notes, Series 2022B, at 11 a.m. Wednesday.

The Santa Clara Valley Water District, California, (Aa1//AA+/) is set to sell $212.820 million of water system refunding revenue bonds, Series 2023A, and revenue certificates of participation, 2023C-1 and Series 2023C-2 (Water Utility System Improvement Projects), (Bid Group A) at 10:30 a.m. eastern Tuesday.

The district (Aa1//AA+/) is also set to sell $130.580 million of water system refunding revenue bonds, Series 2023B, and taxable revenue certificates of participation, 2023D (Water Utility System Improvement Projects), (Bid Group B) at 11:15 a.m. Tuesday.

Wisconsin is set to sell $204.550 million of GOs, Series 2023A, at 10:45 a.m. Tuesday.

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