Munis underperform UST rally, remain cautious ahead of new issues

Municipals underperformed a flight-to-safety rally in U.S. Treasuries as COVID-19 and its variants surge around the globe, pushing edgy investors to flee the stock market, as some contemplate the idea the economic recovery has peaked, and will potentially regress from the virus’ effects.

Municipal triple-A benchmarks were pushed to lower yields by one to three basis points across the curve, with the bigger moves out long, but still vastly underperformed the 10-plus basis point moves in UST.

As such, municipal-to-UST ratios rose with the 10-year at 68% and the 30-year at 72%, according to Refinitiv MMD. ICE Data Services had the 10-year muni-to-Treasury ratio at 71% and the 30-year at 73%.

“With the calendar we’ve got this week, I’m not surprised munis took a wait-and-see-approach,” a New York trader said. “We’ve really decoupled with UST generally since the March selloff and given how volatile govies have been of late, it makes sense for our market to see how far USTs go.

“Is this a one-day stock market pull-back or will we see the flight to safety continue? Tuesday is the day we will see the muni reaction to this rapid move,” he said.

Investors await a big competitive day on Tuesday which should also help to direct benchmark yields. The New York Thruway Authority, with its nearly $2 billion worth of loans and its AA-plus ratings from S&P Global and Fitch Ratings, may be telling for how rich the market will allow double-A credits to get and how tight spreads can go.

Spreads between triple-A and double-A on the ICE Data Services benchmark are at 6 basis points on the five-year, 7.5 basis points on the 10 and 13.3 basis points on the 30-year.

“Double-As have already tightened substantially this year and we’ve already seen them trade through triple-As in the secondary inside 10-years. It reiterates the need to reach out the credit spectrum for any yield and really is a boon to issuers,” the trader said.

“You have to reach out past 15 years to get more than 1% on a triple-A right now,” he added.

Secondary trading and scales
Trading showed firmer prints across the curve. Maryland 5s of 2024 at 0.14% versus 0.18% Tuesday. New York City 5s of 2025 at 0.33%. Washington 5s of 2026 at 0.42% versus 0.44% Tuesday.

Georgia 5s of 2029 at 0.67%. New York Dorm PIT 5s of 2030 at 0.88% versus 0.92% Friday. California 5s of 2031 at 0.88%. New York City water 5s of 2031 at 0.86% versus 0.90%-0.88% Friday. Katy, Texas, ISD 5s of 2032 at 1.14%.

Hennepin County, Minnesota, 5s of 2034 at 1.04%-1.03%. Austin, Texas, water 5s of 2035 at 1.05%. University of North Carolina Chapel Hill 5s of 2037 at 1.06%. Hawaii highway 5s of 2037 at 1.17% versus 1.20% Friday.

Washington 5s of 2039 at 1.17%-1.16% versus 1.22%-1.21% Tuesday. Los Angeles Department of Water and Power 5s of 2039 at 1.15%-1.14%.

New York City TFA 4s of 2045 at 1.62%-1.59% versus 1.71%-1.65% Friday. LA DWP 5s of 2048 at 1.36%-1.35%. NYC TFA 4s of 2049 at 1.67%-1.66%. On July 1, they traded at 1.87%.

Godley, Texas, ISD 3s of 2051 at 1.92%. Texas water 4s of 2051 at 1.58% versus 1.71%-1.61% Thursday.

According to Refinitiv MMD, short yields fell one basis point to 0.06% in 2022 and 0.10% in 2023. The yield on the 10-year fell three basis points to 0.81% while the yield on the 30-year fell three to 1.32%.

The ICE municipal yield curve showed bonds fall one basis point to 0.06% in 2022 and 0.10% in 2023. The 10-year maturity fell two to 0.84% and the 30-year yield fell two to 1.33%.

The IHS Markit municipal analytics curve showed short yields at 0.07% and 0.10% in 2022 and 2023, respectively, with the 10-year falling three to 0.81%, and the 30-year yield also down three to 1.32%.

Bloomberg BVAL fell one basis point to 0.07% in 2022 and 0.09% while the 10-year fell two to 0.82% and the 30-year was down three to 1.32%.

Treasuries rallied and equities sold off. The 10-year Treasury was yielding 1.178% and the 30-year Treasury was yielding 1.811% near the close. The Dow Jones Industrial Average lost 868 points or 2.50%, the S&P 500 lost 1.99% while the Nasdaq fell 0.99%.

Inflation debate redux
While Federal Reserve officials stick to their position the current spike in inflation is transitory, two economists suggest rising wages and the increasing money supply will prove them wrong.

Wages remain the biggest upside risk to inflation, said Nanette Abuhoff Jacobson, Global Investment Strategist at Hartford Funds. If people choose not to work for whatever reason, labor “shortages may persist and that’s why companies are raising wages and if wages go up, that has a ripple effect on prices for everything you pay for.”

Fergus Hodgson, director at Econ Americas, offered three main reasons why he thinks inflation won’t be transitory: “unprecedented monetary expansion, economies impeded by COVID-19 controls and elevated inflation expectations.”

“If you shut down economies for over a year and print money like a madman, you are going to get inflation,” he said. “And now that the layman can see this, the United States has entered a period of higher inflation expectations.”

When inflation expectations rise, Hodgson said, the cost increases become “embedded in contracts [and] price projections — including wages,” making it difficult to undo the “temporary” increases.

Prices could remain elevated for “two years, perhaps longer,” he said.

Abuhoff Jacobson said she would consider price pressures transitory if they lasted less than a year. But, she sees inflation between 2.5% and 3% next year, much higher than the Fed’s 2.1% expectations.

While some categories that have boosted inflation should dissipate in the next half year — hospitality, leisure and travel, and used car prices — the ones caused by supply-chain bottlenecks won’t be transitory since they “could take more than a year to resolve.”

But other groups, including “commodity prices, housing, rent, shelter and wages will be much sticker,” she said, and could take three years to decline.

As the population ages, “the need for federal deficits and consequent monetization will only grow,” which will be inflationary, Hodgson said. Further, he is concerned about the decline in the labor participation rate.

But Patrick Reid, co-founder at Adamis Principle Ltd., noted that while he believes the Fed is correct, the picture will clear later in the year. “September and October will be crunch time. That is when the [added $300 a week unemployment] benefits stop and schools go back.”

At that point, “we may very well be looking at either a monumental jobs report or a scant one,” he added. “We do not know.”

Separately, the National Association of Home Builders’ housing market index dipped to 80 in July from 81 in the prior month.

Economists polled by IFR Markets estimated a reading of 82.

“Builders are contending with shortages of building materials, buildable lots and skilled labor as well as a challenging regulatory environment,” said NAHB Chief Economist Robert Dietz. “This is putting upward pressure on home prices and sidelining many prospective home buyers even as demand remains strong in a low-inventory environment.”

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 taxables, 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.