Post-rally market subdued as hefty calendar awaits

Municipals were steady on Monday as all eyes were on the more than $9 billion of supply headed to the primary in a holiday-shortened week.

“The municipal market is focused on the number of deals being priced Tuesday and Wednesday,” a New York underwriter said Monday, pointing to the Veteran’s Day market close on Thursday.

“In fact most of the calendar will be priced tomorrow, which could put pressure on the market,” he said.

Ahead of the glut of paper, there was light trading in the secondary market and the high-grade scale was steady on Monday.

Generic, triple-A bonds were unchanged Monday from 2022 to 2051 while U.S. Treasuries rose to near 1.50% in 10 years near the close and were little changed in 20- and 30-years.

Municipal-to-Treasury ratios were at 56% in five years, at 75% in 10-years and 84% in 30-years, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the five-year at 52%, the 10 at 75% and the 30 at 85%.

In the primary Monday, Raymond James & Associates price for retail investors for Connecticut $500 million of transportation infrastructure special tax obligation bonds. Bonds in 11/2022 with a 5% coupon yield 0.19%, 5s of 2026 at 0.76%, 5s of 2031 at 1.35%, 5s of 2036 at 1.51%. Its long bond in 2041 was not offered to retail. Callable in 11/1/2031.

Municipals were part of a wider fixed income market rally as high-grade yields were lower by as much as six basis points on the long end, buoyed by the stronger-than-expected October jobs data and upward revisions to non-farm payrolls numbers for September and August.

Friday’s rally sustained lower rates, a flat yield curve and overall strength on the long end of the market.

How the rally continues to impact the market before this week’s holiday is the question, according to the New York underwriter.

“Munis outperformed Treasuries by six basis points in 30 years and many of the deals were heavy with long bonds, so we have to see if that forces a slight sell off,” he said.

The larger calendar this week could portend heavier weekly volume between now and year-end given the arrival of holiday lulls in issuance, which effectively limits available marketing time, according to Jeff Lipton, head of municipal credit and market strategy and municipal capital markets at Oppenheimer Inc.

“With ample cash remaining on the sidelines, we see a pick-up in interest across investor types,” Lipton said Monday.

The retail crowd is displaying some renewed interest, according to Lipton, yet still remains tentative putting cash to work.

Market technicals should be supportive through year-end as Bloomberg reports $24 billion in bond calls and maturing securities over the next 30 days, he said.

“Against this backdrop, better technicals, which are framed by 34 consecutive weeks of fund inflows, may very well promote positive performance, or at the very least, limit any downward trajectory in monthly returns through year-end,” Lipton said.

Secondary trading
Maryland DOT 5s of 2022 at 0.09%-0.10%. Minnesota 5s of 2022 at 0.15%. New York Dorm PIT 5s of 2023 at 0.25%.

Maryland 5s of 2024 at 0.37%. Wisconsin 5s of 2026 at 0.63%.

Maryland 5s of 2030 at 1.06%-1.05% versus 1.12% Thursday.

Arlington County, Virginia 5s of 2038 at 1.33% versus 1.35% Friday. Washington 5s of 2039 at 1.45% versus 1.47% Friday.

Austin, Texas waters 5s of 2046 at 1.70% versus 1.78% Tuesday.

AAA scales
According to Refinitiv MMD, yields were flat on the short end, to 0.13% in 2022 and 0.24% in 2023. The 10-year was steady at 1.13% and the yield on the 30-year remained at 1.58%.

The ICE municipal yield curve showed bonds unchanged at 0.16% in 2022 and 0.24% in 2023. The 10-year maturity was steady at 1.11% and the 30-year yield was flat at 1.60%.

The IHS Markit municipal analytics curve showed short yields flat at 0.14% in 2022 and at 0.21% in 2023. The 10-year yield remained at 1.11% and the 30-year yield was unchanged at 1.59%.

The Bloomberg BVAL curve showed short yields flat at 0.16% in 2022 and at 0.20% in 2023. The 10-year yield remained at 1.12% and the 30-year yield fell a basis point to 1.59%.

The five-year UST was yielding 1.123%, the 10-year at yielding 1.499%, the 20-year at 1.909% and the 30-year Treasury was yielding 1.891% near the close. The Dow Jones Industrial Average rose 87 basis points or 0.24%, the S&P was down 0.03% while the Nasdaq lost 0.03% near the close.

Much ado about the Fed
With little in the way of economic data on Monday, the Federal Reserve headed the news, with many officials speaking and one announcing his departure, giving President Biden two open spots on the Board, with another two expiring.

The speakers tended to confirm that liftoff won’t occur before midyear, but the market is pricing in as many as three rate hikes next year.

The yield curve flattened in October “as the short end of the curve moved up in expectation of an early rate hike, while the long end moved down based on expectations of a Fed policy error,” said John Luke Tyner, a fixed income analyst at Aptus Capital Advisors. “The uncertainty of who will become the next Fed chair is likely exacerbating the yield curve issues.”

And while this doesn’t signal a recession, “there could be a premature rate hike, negatively impacting the economy, without a Powell-led Fed to control some of the Hawkish member.”

“For the Fed, once tapering ends in June 2022, we expect the discussion around the timing of liftoff to ramp up,” said Morgan Stanley Chief U.S. Economist Ellen Zentner in a note. “Labor market developments will be key and while liftoff before the end of 2022 deserves some risk premium, we do not expect the Fed to judge the labor market at maximum employment before 2023.”

While characterizing liftoff as “clearly a ways away,” Fed Vice Chair Richard H. Clarida said, if labor and inflation follow his projections, “then I believe that these three necessary conditions for raising the target range for the federal funds rate will have been met by year-end 2022.”

But, he added, inflation measured by personal consumption expenditures has suggested “much more than a ‘moderate’ overshoot of our 2 percent longer-run inflation objective, and I would not consider a repeat performance next year a policy success.”

Further, he “and 12 of my colleagues believe that the risks to the outlook for inflation are to the upside,” which could lead to earlier/more aggressive policy moves.

Also speaking Monday, Federal Reserve Bank of Chicago President Charles Evans stated, the Fed’s recent “tapering decision does not imply any direct signal regarding our interest rate policy.”

Liftoff, he said, “will depend on economic outcomes,” and the “many uncertainties to the outlook and changing circumstances” as a result of COVID-19 “could lead the FOMC to move up or delay rate increases.” Even so, he continued, “it looks like we are in for a low rate environment for some time to come.”

Indeed, the Federal Reserve Bank of New York’s October Survey of Consumer Expectations showed “uncertainty and disagreement about future inflation increased at both the short- and medium-term horizons to new series highs.”

Respondents still see inflation rising 4.2% over a three year-horizon, unchanged from last month, while one-year inflation expectations rose to 5.7% in October, the highest since the survey began in June 2013, from 5.3% in September.

Employment also seems to be improving. The Conference Board’s Employment Trends Index gained to 112.23 in October from 109.68 in September, suggesting “strong employment growth is in store over the next several months,” said Gad Levanon, head of the group’s Labor Markets Institute.

Federal Reserve Bank of Philadelphia President Patrick Harker said while he doesn’t foresee liftoff before taper ends, “we are monitoring inflation very closely and are prepared to take action, should circumstances warrant it.”

Also Monday, Randal Quarles said he would give up his seat on the Board at the end of December. Quarles’ post as vice chair of supervision expired in October and he was relieved of those duties when his term elapsed. Although Quarles had said he might complete his term on the Board despite losing the chairmanship — which would be an unusual turn of events — in the end he chose to leave before expiration of his Board tenure.

Fed Vice Chair Richard Clarida’s term expires in January and Fed Chair Jerome Powell’s term is up in February. Much speculation has occurred as to whether Powell will be re-nominated and Biden last week promised to act “fairly quickly” on the chair spot.

If Clarida isn’t re-nominated, it would allow Biden to name three new Board members, and four if Powell, still expected to be re-nominated, is replaced as Chair.

Primary market to come
In the upcoming negotiated market, Main Street Natural Gas (Aa2//AA-/) remains on the day-to-day calendar with $750 million of gas supply revenue bonds, Series 2021A, serials 2023-2031, term 2052. RBC Capital Markets.

The District of Columbia (Aaa/AA+/AA+/) is set to price Tuesday $654.815 million, consisting of $404.575 million of general obligation bonds, Series 2021D, serials 2024-2041, term 2046 and $250.24 million of general obligation refunding bonds, Series 2021E, serials 2023-2030 and 2033-2037. RBC Capital Markets.

Dallas Area Rapid Transit (Aa2/AA+//AAA) is set to price Tuesday $578.7 million of senior lien sales tax revenue refunding bonds, taxable series 2021A, serials 2022-2036, term 2048. RBC Capital Markets.

California Community Choice Financing Authority (A2///) is set to price $556.03 million of clean energy project revenue bonds, Series 2021A (green bonds — climate bond certified). Goldman Sachs & Co.

Dallas Area Rapid Transit (Aa2/AA+//AAA) is set to price Tuesday $457.835 million of senior lien sales tax revenue improvement and refunding bonds, Series 2021B, serials 2040-2041, terms 2047 and 2051. Jefferies.

California Housing Finance Agency (/BBB///) is set to price Tuesday $349.265 million of municipal certificates, Series 2021-3 Class X (social certificates), serial 2036. and $349.265 million Series 2021-3 Class A (social certificates), serial 2036. Citigroup Global Markets.

Massachusetts (Aa1/AA/AA+//) is set to price Tuesday $302.495 million of general obligation refunding bonds, 2021 Series B, serials 2022-2025. Citigroup Global Markets.

Pennsylvania Turnpike Commission (A1//A+/AA-) is set to price Tuesday $275 million of turnpike revenue bonds, Series C OF 2021, serials 2022-2023, 2026-2032 and 2037-2041, terms 2046 and 2051. RBC Capital Markets.

American Municipal Power (A1/A//) is set to price Tuesday $258.245 million of AMP Fremont Energy Center Project revenue bonds, refunding series 2021A, serials 2023-2038. Citigroup Global Markets.

Pennsylvania Housing Finance Agency (Aa1/AA+//) is set to price Tuesday $253.605 million of single family mortgage revenue bonds, Series 2021-137 (non-AMT) (social bonds), serials 2022-2033, terms 2036, 2041, 2046 and 2051. RBC Capital Markets.

California Municipal Finance Authority Special Finance Agency is set to price Tuesday $194.87 million of essential housing revenue bonds, consisting of $103.31 million of Series 2021A-1 Senior Bonds, term 2056 and $91.56 million of Series 2021A-2 Junior Bonds (Solana at Grand), term 2045. Jefferies.

California Infrastructure and Economic Development Bank (Aaa/AAA//) is set to price Tuesday $181.09 million of refunding revenue bonds (The J. Paul Getty Trust), Series 2021B, consisting of $45.415 million, Series B-1, term 2047 and $135.675 million, Series B-2, term 2047. Jefferies.

Arizona Industrial Development Authority is set to price $177.97 million of revenue bonds (NewLife Forest Restoration Project), consisting of $110.045 million of senior federally taxable series 2021A (sustainability-linked bonds), term 2041 and $67.925 million of subordinate federally taxable series 2021B (sustainability-linked bonds), term 2046. Goldman Sachs & Co.

El Paso, Texas, (/AA/AA/) is set to price Tuesday $167.03 million, consisting of $78.105 million of general obligation bonds, Series 2021B, serials 2022-2025 and 2027-2041, term 2047 and $88.925 million of combination tax and revenue certificates of obligation, Series 2021C, serials 2022-2025 and 2027-2041, term 2047. Barclays Capital.

Oklahoma Capitol Improvement Authority (/AA-/AA-//) is set to price Wednesday $161.64 million of taxable Oklahoma State Regents for Higher Education Endowed Chairs Program Funding bonds (subject to annual appropriation). J.P. Morgan Securities.

The Board of Trustees of the University of Arkansas (Aa2///) is set to price Tuesday $149.73 million of taxable various facility revenue refunding bonds (Fayetteville Campus), serials 2022-2036, terms 2041 and 2043. Crews & Associates.

New York State Environmental Facilities Corp. (Aaa/AAA/AAA/) is set to price Tuesday $148.095 million of state revolving funds revenue green bonds, Series 2021B (2010 Master Financing Program). Goldman Sachs & Co.

The University Of North Carolina at Charlotte (Aa3/A+//) is set to price Wednesday $141.695 million of taxable general revenue refunding bonds, Series 2021B. Wells Fargo Corporate & Investment Banking.

Charlotte, North Carolina, (Aaa/AAA/AAA/) is set to price Tuesday $125.27 million of general obligation refunding bonds, Series 2021A, serials 2022-2041. PNC Capital Markets.

California Municipal Finance Authority Special Finance Agency is set to price Wednesday $121.23 million of essential housing revenue bonds, consisting of $81 million of Series 2021A-1 senior bonds and $40.23 million of Series 2021A-2 junior bonds (Latitude33). J.P. Morgan Securities.

Successor Agency to the Redevelopment Agency of the City and County of San Francisco (/AA///) is set to price $107.34 million of taxable third-lien tax allocation social bonds, 2021 Series A (affordable housing projects), serials 2023-2031, insured by Assured Guaranty Municipal Corp. Citigroup Global Markets.

San Antonio, Texas, (Aa2/A+/AA-/) is set to price $102 million of electric and gas systems, variable rate junior lien revenue refunding bonds, Series 2015B. Piper Sandler & Co.

Competitive:

California is set to sell $410.645 million of tax-exempt various purpose general obligation refunding bonds, (Bid Group C) at 12:15 p.m. Tuesday.

California (Aa2/AA-/AA/) is set to sell $390.185 million of tax-exempt various purpose general obligation refunding bonds, (Bid Group B) at 11:30 a.m. eastern Tuesday.

California is set to sell $299.515 million of taxable various purpose general obligation bonds and general obligation refunding bonds (Bid Group A) at 10:45 a.m. Tuesday.

California is set to sell $150.075 million of taxable various purpose general obligation bonds and general obligation refunding bonds (Bid Group A) at 10:45 a.m. Tuesday.

South Broward Hospital District (Aa3/AA//) is set to sell $195.89 million of hospital revenue bonds, taxable series 2021A (South Broward Hospital District Obligated Group) at 11 a.m. Tuesday. The issuer is also set to sell $50 million of taxable hospital revenue bonds at 11:30 a.m. Tuesday.

Snohomish County, Washington, (Aa1/AA+//) is set to sell $125.78 million of limited tax general obligation and refunding bonds, 2021 Series B (federally taxable) taxable at 11:45 a.m. Tuesday. Snohomish is also set to sell $34.32 million of limited tax general obligation and refunding bonds, 2021, Series A at 11:15 a.m. Tuesday.

Wisconsin is set to sell $219.605 million of general obligation bonds of 2021, Series B at 10:30 a.m. Tuesday.