Big competitive calendar to guide yields
8 min readMunicipals ended the week steady along with U.S. Treasuries ahead of one of the more diverse and chunky calendars the summer has seen while supply still simply isn’t keeping up with demand, which should keep municipal yields in a tight range.
The total potential volume for next week is estimated at $9.033 billion, up from total sales of $5 billion this week.
The competitive calendar beefs up, led by nearly $2 billion from the New York Thruway Authority on Tuesday, joined by large deals from San Francisco and North Carolina.
The negotiated calendar is led by a $600 million-plus pension bond deal from the Oregon Education District and two transportation credits from the Los Angeles County Metropolitan Transportation Authority and the Pennsylvania Turnpike Commission.
That supply, however, is still less than the massive amounts of cash on hand. Bond Buyer data shows 30-day visible supply at $12.53 billion.
Since the end of June, fundamentals have become more entrenched.
“Supply is not keeping pace with rollover needs and new money cycling in — a case of supply and demand in its purest form,” said Kim Olsan, senior vice president at FHN Financial. “Distorted credit spreads have developed as a byproduct of too little supply.”
She pointed out that low-AA/single-A airport names in the five-year area are trading at less than +5/AAA.
Out the curve, she noted Georgia GO 3s due 2041 issued in June at +30/AAA have tightened 10 basis points and similar moves can be seen in 4% structures — Energy Northwest 4s of 2042 came in new issue in May at +34/AAA and have tightened 8-10 basis points.
“The reason is that new-issue allotments are failing to keep pace with order flows that are multiple times the number of available bonds,” Olsan said. In addition to the rollover volume, mutual fund inflows are adding more demand at a clip of $2 billion per week, she added.
After a short pause at the end of June, “muni buyers have returned, and tax-exempts outperformed despite a rally in Treasuries,” according to a Barclays PLC report.
The yield curve continued to flatten, with the five-year point doing especially well, outright and compared with Treasuries, they said.
“In our view, the flattening trend will remain firmly entrenched until the hiking cycle gets closer,” Barclays strategists Mikhail Foux, Clare Pickering and Mayur Patel wrote. “The 20-year part of the curve is getting especially rich. … We prefer longer-dated bonds instead.”
Olsan noted the changes to that part of the curve since the March sell-off, when a 50 basis-point increase from mid-February’s lows occurred, putting the 20-year AAA above the 10-year UST.
“By June, the 10-year AAA/UST gap had widened to 60 basis points as govies reacted more broadly to inflation fears and the crush of money in munis began to be felt,” she said. “The 20-year AAA spot moved through the 10-year UST by nearly 20 basis points.”
As of Friday, it has tightened some as the UST 10-year hovered around 1.30% near the close while the Bloomberg BVAL triple-A 20-year is at 1.18%, ICE at 1.16%, IHS at 1.16% and Refinitiv MMD at 1.15%, but still through the UST 10-year.
After this week’s price action, all high-quality tax-exempts became quite rich again, both outright and versus Treasuries, Barclays and others noted, which might push investors toward taxables.
“At current ratios, we do not see that much value in them, but high-quality taxable munis could provide an alternative for some investors,” Barclays said. “The yield differential between tax-exempts and taxables has started to increase again, yet another reason while taxable spreads remain well-supported, as some tax-exempt buyers might look into taxables instead.”
As both markets were little changed Friday, municipal-to-UST ratios also stayed put with the 10-year at 64% and the 30-year at 70%, according to Refinitiv MMD. ICE Data Services had the 10-year muni-to-Treasury ratio at 65% and the 30-year at 70%.
Secondary trading and scales
Sparse trading kept levels steady. California 5s of 2022 at 0.07%. New York City Transitional Finance Authority 5s of 2023 at 0.07%. Ohio water 5s of 2023 at 0.13% versus 0.16% Monday. Charleston, South Carolina, 5s of 2023 at 0.12%.
Delaware 5s of 2030 at 0.75% versus 0.77% Tuesday. New York City water 5s of 2031 at 0.90%-0.88%. Montgomery County, Maryland, 5s of 2031 at 0.96%-0.95%. Fairfax County, Virginia, 4s of 2034 at 1.07%-1.06%. University of North Carolina Chapel Hill 5s of 2036 at 1.03%. Washington GO 5s of 2037 at 1.15%.
Los Angeles Department of Water and Power 5s of 2040 at 1.19%. New York Dormitory Authority 5s of 2051 at 1.52% versus 1.50% original.
According to Refinitiv MMD, short yields were steady at 0.07% in 2022 and 0.11% in 2023. The yield on the 10-year sat at 0.84% while the yield on the 30-year stayed at 1.35%.
The ICE municipal yield curve showed bonds steady at 0.07% in 2022 and 0.11% in 2023. The 10-year maturity held at 0.86% and the 30-year yield at 1.35%.
The IHS Markit municipal analytics curve showed short yields at 0.07% and 0.10% in 2022 and 2023, respectively, with the 10-year steady at 0.84%, and the 30-year yield also unmoved at 1.35%.
Bloomberg BVAL held steady at 0.09% in 2022 and 0.11% while the 10-year sat at 0.84% and the 30-year at 1.35%.
Treasuries were little changed and equities were mixed. The 10-year Treasury was yielding 1.299% and the 30-year Treasury was yielding 1.927% near the close. The Dow Jones Industrial Average lost 275 points or 0.79%, the S&P 500 lost 0.67% while the Nasdaq was up 0.13%.
Inflation
Inflation could soon dampen consumers’ spirits, putting a halt to economic growth, analysts said.
“University of Michigan sentiment dropped significantly, while inflation sharply rose across the board,” said Ed Moya, senior market analyst for the Americas at OANDA. “The U.S. consumer is so far unfazed by higher food, energy, cars, and restaurant prices.”
But, he added, anecdotal evidence suggests that will end.
“Everything we are hearing from earnings season (Conagra and Pepsico will pass on price increases) or even Treasury Secretary [Janet] Yellen (sees several more months of rapid inflation) seems to suggest we will still see inflationary pressures throughout the rest of the year,” he said.
Friday’s data, he said, ” sets up a very strong second quarter GDP reading, but financial markets will doubt that trend can continue as inflationary pressures intensify.”
The University of Michigan preliminary July consumer sentiment index decreased to 80.8 from June’s final of 85.5.
The preliminary current conditions index fell to 84.5 from 88.6, while the preliminary expectations index dropped to 78.4 from 83.5 in June.
Economists polled by IFR Markets estimated a reading of 86.5 for sentiment, 90.0 for current conditions and 85.0 for expectations.
“The consumer sentiment report showed rising complaints about pricing pressures and that was clearly reflected in both inflation expectation forecasts,” Moya said. “Growth concerns from inflationary pressures will start to become a drag on sentiment and that might make it hard to remain upbeat with the U.S. consumer.”
Separately, retail sales rose 0.6% in June after a revised decline of 1.7% in May, first reported as a 1.3% drop-off. Excluding auto sales rose 1.3% in June after a revised decline of 0.9% first reported as a 0.7% slide.
Economists predicted sales would fall 0.4%, with ex-autos gaining 0.5%.
Sales for the past 12 months are up 18%, and 17.6% ex-autos.
Consumers are again “enjoying their new freedom to go out and spend on the pleasures they were denied during lockdown,” said Erez Katz, CEO of Neuravest Research.
“But the progress risks being undone by surging inflation, which has climbed to a 13-year high,” he said. “The Fed has shown no desire to hike interest rates yet, but that prospect is a cloud on the otherwise bright, big-spending horizon.”
Also released Friday, business inventories climbed 0.5% in May after a revised tick up of 0.1% in April, originally reported as a 0.2% decline.
Economists projected inventories would gain 0.5%.
Business sales slid 0.3% in May after gaining 0.6% in April.
Also released Friday, the New York region’s service sector activity “continued to surge,” with the Federal Reserve Bank of New York business leaders survey activity index sliding to 41.7 in July from its record high of 43.2.
The business climate index gained to 6.5 from 1.0, “its first reading meaningfully above zero since January 2020, indicating that, on net, firms viewed the business climate as better than normal for this time of year,” the report said.
The prices paid index declined to 68.1 from 71.2 and prices received gained to 32.1 from 25.8. The number of employees fell to 16.8 in July from 19.9 in June.
Primary calendar
The Oregon Education District (Aa2/AA//) is set to price on Thursday $660.4 million of full faith and credit pension obligations, Series 2021A. Piper Sandler & Co.
The City and County of Honolulu (Aa1//AA+/) is set to price $577.69 million of general obligation bonds, $154.4 million and $33.45 million of Series A and B tax-exempts, $20 million of Series C tables, and $36.29 million and $333.45 million of Series D and E Honolulu Rail Transit Project exempts. BofA Securities.
The City and County of Honolulu (Aa1//AA+/) is also set to price on Wednesday $147.29 million of tax-exempt forward refunding general obligation bonds. BofA Securities.
The Los Angeles County Metropolitan Transportation Authority (Aa1/AAA//) is set to price on Wednesday $506.74 million of Measure R senior sales tax revenue bonds. BofA Securities.
The Pennsylvania Turnpike Commission (A3/A/A-/A+) is set to price on Tuesday $409.95 million of turnpike subordinate revenue bonds, serials 2025-2041, terms 2046, 2051. Siebert Williams Shank & Co., LLC.
The Ochsner LSU Health System of North Louisiana (/BBB//) is set to price $300 million of taxable corporate CUSIP bonds, serial 2031. Citigroup Global Markets Inc.
The Harris County Flood Control District, Texas, (Aaa//AAA/) is set to price on Wednesday $275 million of improvement refunding bonds. Loop Capital Markets.
The Chabot-Las Positas Community College District, California (Aa2/AA//) is set to price on Wednesday $272.1 million of refunding revenue bonds. Morgan Stanley & Co. LLC.
The Chabot-Las Positas Community College District, California (Aa2/AA//) is also set to price $200 million of tax-exempt election of 2016 general obligation bonds. Morgan Stanley & Co. LLC.
The Austin Independent School District, Texas, (Aaa///) (Permanent School Fund Guarantee) is set to price on Wednesday $220.375 million of unlimited tax school building and refunding bonds, serials 2022-2041. Raymond James & Associates, Inc.
North Mississippi Health Services (/A+/AA/) is set to price on Tuesday $200 million of corporate CUSIP revenue bonds. J.P. Morgan Securities LLC.
The Community Development Administration of the Maryland Department of Housing and Community Development (Aa1//AA/) is set to price on Tuesday $170 million of residential revenue bonds. BofA Securities.
The City of Charlotte, North Carolina, (Aa1/AA+/AA+/) is set to price $164.18 million of transit projects refunding certificates of participation. Goldman Sachs & Co. LLC.
Bell County, Texas, (/AA+//) is set to price on Tuesday $138 million of combination tax and revenue certificates of obligation, serials 2022-2041. Raymond James & Associates, Inc.
The State of New York Mortgage Agency (Aa1///) is set to price $130.545 million of homeowner mortgage revenue social bonds, variable rate bonds, Series 234 (Non-AMT), Series 236 (AMT), Series 238 (federally taxable) refunding bonds. Siebert Williams Shank & Co., LLC.
The Florida Housing Finance Corp. (Aaa///) is set to price on Wednesday $125 million of homeowner mortgage revenue non-AMT social bonds, serials 2023-2033, terms 2036, 2041, 2046, 2052, 2052. RBC Capital Markets,
The City of Seattle, Washington, (Aa2/AA//) Is set to price on Tuesday $100.6 million of municipal light and power refunding revenue bonds, SIFMA Index. BofA Securities.
The City of Gainesville, Florida, (Aa3/A/A+/) is set to price on Tuesday $96.2 million of utilities system revenue bonds. Barclays Capital Inc.
In the competitive market Tuesday, the New York State Thruway Authority (///) will sell $1.913 billion of tax-exempt personal income tax bonds and $54.275 million of taxable PITs on Tuesday.
The San Francisco City and County will sell a total of $469 million of tax-exempt and taxable general obligation bonds.
At 11 a.m., it will sell $195 million of health and recovery 2020 GOs. At 11:15 a.m. it will sell $179.1 million of transportation and road improvement bonds, earthquake safety and emergency response 2020 tax-exempt bonds.
The issuer will also sell $95.2 million of taxable transportation and road improvement bonds at 11:30 a.m.
North Carolina (Aa1//) will sell $133 million of limited obligation refunding bonds at 10:30 a.m.
On Wednesday, Rochester, New York, will sell $132.35 million of bond anticipation notes (8/3/2022) at 11 a.m.
