Munis steady after volatile UST swings

Municipals were little changed Monday while U.S. Treasuries pared back some of Friday’s gains and equities rebounded as markets generally calmed after initial Omicron fears were digested.

Economists don’t appear to be too concerned about the latest COVID-19 variant.

“Even if Omicron causes another pandemic wave, it is more likely to slow rather than interrupt a currently rapid global economic recovery,” said David Kelly, chief global strategist at JPMorgan Funds.

While each variant concerns investors and the public, they “should have a diminishing impact on the economy,” he said. “Many people have simply mentally moved on from the pandemic and will not accept further restrictions on their activities, even with a continued public health threat, particularly for the immunocompromised or unvaccinated.”

Others, who have been more cautious, will continue to employ Zoom, online purchases and mask wearing to protect themselves, Kelly said. “Travel and entertainment could remain somewhat depressed if a new wave emerges,” but other sectors of the economy “would likely see very little disruption and, as has been the case over the past two years.”

Should this variant spark another wave of infections, he added, it would “likely end speculation concerning an early Fed rate hike.” Omicron could weaken demand, he suggested, “taking the edge off recently high inflation.”

The secondary muni market was lightly traded providing little guidance for triple-A benchmarks as the market awaits a larger calendar to begin the final month of 2021.

Ratios fell slightly given the swing in UST with the five-year muni to UST ratio at 51%, the 10-year at 69% and the 30-year at 80%, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the five-year at 51%, the 10 at 72% and the 30 at 82%.

As the calendar grows, issuers will have to coordinate market entry into year-end business but the first of two rounds of redemptions coming Dec. 1 should offer enough buffer, said Kim Olsan, senior vice president at FHN Financial.

“Current inquiry will find the curve slope working in its favor, even if absolute yields have declined from earlier in November,” she said, noting in the five- and 20-year buckets, “extension is being rewarded to near the steepest levels in the last three months.”

The 10- and 15-year ranges have flattened off recent wides, she noted: the 10-year/5-year is 47 basis points (down from a recent wide of 66 basis points) and the 15-year/10-year slope is 11 basis points (about half as flat at it had been).

“Of course, any move lower in yield will incent buyers out the curve no matter what, just at reduced value,” Olsan said. “Overall volume, though, has notched slightly higher in November than in the prior 10 months, averaging about $9 billion par value per day.”

Refinitiv Lipper reports $719M inflow
In the week ended Nov. 24, weekly reporting tax-exempt mutual funds saw $719.772 million of inflows, Refinitiv Lipper reported Friday. It followed an inflow of $1.399 billion in the previous week.

Exchange-traded muni funds reported outflows of $13.56 million, after outflows of $56.3 million in the previous week. Ex-ETFs, muni funds saw inflows of $719.772 million following $1.077 billion in the prior week.

The four-week moving average remained positive at $1.155 billion, after being in the green at $1.074 billion in the previous week.

Long-term muni bond funds had inflows of $745.065 million in the latest week after inflows of $1.042 billion in the previous week. Intermediate-term funds had inflows of $244.302 million after inflows of $367.022 million in the prior week.

National funds had inflows of $679.134 million after inflows of $1.355 billion while high-yield muni funds reported inflows of $407.652 million in the latest week, after inflows of $548.643 million the previous week.

Secondary trading
North Carolina 5s of 2022 at 0.15%. Wisconsin 5s of 2023 at 0.29%. Minnesota 5s of 2023 at 0.26%. Charles County, Maryland, 5s of 2024 at 0.37%-0.36%.

Tennessee school building 5s of 2026 at 0.68%. Henrico County, Virginia, water 5s of 2026 at 0.59%-0.58%.

New York City 5s of 2029 at 1.05%-1.03%. New York City TFA 5s of 2029 at 1.04%-1.03%. Washington 5s of 2030 at 1.01%.

Ohio 5s of 2032 at 1.18%-1.17% versus 1.24% on 11/23. District of Columbia 5s of 2034 at 1.22%. Connecticut 5s of 2036 at 1.44%. New York EFC green 4s of 2038 at 1.46% versus 1.49%-1.48% Friday.

New York City TFA 3s of 2048 at 2.45%-2.39%. Massachusetts 5s of 2050 at 1.70%.

AAA scales
Refinitiv MMD’s scale was steady: the one-year at 0.15% in 2022 and at 0.24% in 2023. The 10-year at 1.06% and at 1.51% in 30.

The ICE municipal yield curve showed yields steady at 0.17% in 2022 and at 0.27% in 2023. The 10-year maturity sat at 1.08% and the 30-year yield at 1.54%.

The IHS Markit municipal analytics curve was unchanged at 0.17% in 2022 and at 0.25% in 2023. The 10-year yield sat at 1.05% and the 30-year yield sat at 1.52%.

The Bloomberg BVAL curve was at 0.17% in 2022 and at 0.23% in 2023. The 10-year yield sat at 1.08% and the 30-year yield was down one basis point to 1.53%.

Treasuries were weaker and equities rebounded.

The five-year UST was yielding 1.178%, the 10-year at yielding 1.522%, the 20-year at 1.934% and the 30-year Treasury was yielding 1.873% near the close. The Dow Jones Industrial Average gained 303 points or 0.87%, the S&P was up 1.56% while the Nasdaq gained 2.04% near the close.

More economists’ Omicron fears subdued
Speaking on CNBC on Monday, Allianz chief economic adviser Mohamed El-Erian said he was more concerned about high inflation than Omicron.

If inflation remains at a 5%-6% rate, the Federal Reserve will have to taper quicker and raise rates to get inflation in check, he said. El-Erian has been warning that inflation is too high and isn’t transitory.

For now, Omicron doesn’t change the market outlook, said John Hancock Investment Management’s Co-Chief Investment Strategists Emily Roland and Matt Miskin. “We see the U.S. as the least likely to implement heavy handed restrictions which likely results in less economic damage,” they said. “The U.S. economy and earnings look strong heading into the end of this year/to start 2022.”

They expect only one rate hike next year, fewer than the market does. “The fiscal calvary won’t come again for additional waves of COVID cases/mutations, but instead it will be on central banks to counter economic headwinds from COVID with accommodative policy,” they said.

The inflation situation makes the possible impact of the variant worse, said Jason Brady, president and CEO at Thornburg Investment Management. “An already difficult supply chain picture, strong jobs growth and a new variant increasing challenges of the first, really puts the Fed behind the curve and the eight-ball.”

While each variant gets its own reaction from the markets, and “Omicron’s impact is unknown,” he said, “investors already know what lockdown looks like.”

Expect “different” markets next year, Brady said, “even if we see some of the same challenges — like a new COVID variant.”

In data released Monday, pending home sales surged 7.5% in October after a 2.4% decline in September, but remain 1.4% below year-ago levels.

“The notable gain in October assures that total existing-home sales in 2021 will exceed 6 million, which will shape up to be the best performance in 15 years,” said National Association of Realtors Chief Economist Lawrence Yun. Price increases will slow in the next few months and demand will slip as mortgage rates climb, he said.

Separately, manufacturing activity expanded in the Texas region in November, “despite widespread supply-chain disruptions and difficulty finding workers,” said Emily Kerr, Federal Reserve Bank of Dallas senior business economist. “Cost pressures escalated further, with stronger increases seen in both raw materials prices and wages.”

Most respondents expect supply issues to continue for at least a half year.

Negotiated primary to come
The Illinois State Toll Highway Authority (Aa3/AA-/AA-/) is set to price $600 million of toll highway senior revenue bonds, serials 2039-2046, on Thursday. Loop Capital Markets.

The New York State Housing Finance Agency (Aa2///) is set to price $454.03 million of affordable housing revenue climate bond certified and sustainability bonds on Wednesday. Citigroup Global Markets Inc.

The Black Belt Energy Gas District (A2///) is set to price $423.875 million of gas project revenue bonds (Project No. 7). Goldman Sachs & Co. LLC.

The CSCDA Community Improvement Authority (nonrated) is set to price on Thursday $335.805 million of essential housing revenue refunding social bonds (Westgate Phase 1-Pasadena). Goldman Sachs & Co. LLC.

The Anaheim Public Financing Authority (A2/AA//AA+) is set to price on Wednesday $250.330 million of taxable convention center lease revenue refunding bonds, insured by Assured Guaranty Municipal Corp. Goldman Sachs & Co. LLC.

The New Mexico Educational Assistance Foundation (Aaa///) is set to price on Wednesday $208 million of AMT and taxable education loan bonds. RBC Capital Markets.

The Board of Supervisors of Louisiana (/AA//) is set to price on Wednesday $155.68 million of State University and Agricultural and Mechanical College taxable auxiliary revenue refunding bonds, insured by Build America Mutual, serials 2022-2043. Raymond James & Associates, Inc.

The Delaware River and Bay Authority (A1/A//) is set to price on Wednesday $151.92 million of revenue and revenue refunding forward delivery bonds. J.P. Morgan Securities LLC

Harris County, Texas, (Aaa//AAA/) is set to price $120 million of permanent improvement refunding bonds on Thursday. Wells Fargo Corporate & Investment Banking.

Freddie Mac (/AA+//) is set to price on Wednesday $110.82 million of multifamily M certificates series M-067, serial 2037. KeyBanc Capital Markets.

The Massachusetts Development Finance Authority (/BBB//) is set to price on Thursday $106.365 million of revenue green bonds, Springfield College Issue. HilltopSecurities.

Competitive
Tampa, Florida, (Aa2/AAA/AA/) is set to sell $102.62 million of non-ad valorem refunding and improvement sustainable revenue bonds at 11 a.m. eastern on Tuesday. The issuer will also sell $26.94 non-ad valorem refunding and improvement bonds at 10:30 a.m. eastern.

Illinois (Baa2/BBB/BBB-/) is set to sell $200 million of general obligation bonds at 10:15 a.m. eastern and $200 million of GOs at 10:45 a.m. eastern on Wednesday.

Westchester County, New York, is set to sell $135.115 million of general obligation bonds at 11 a.m. eastern on Wednesday.

Day-to-day
The Arizona Industrial Development Authority is on the day-to-day calendar with $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.

The Successor Agency to the Redevelopment Agency of the City and County of San Francisco (/AA///) is on the day-to-day calendar with $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.