Munis stronger following govies as Omicron, Powell rattle markets
9 min readMunicipals were stronger Tuesday as U.S. Treasuries rallied and stocks sold off on Omicron variant concerns and Federal Reserve Chairman Jerome Powell’s comments on speeding up tapering the Fed’s bond buying sooner than originally expected.
It is appropriate to “consider ramping up tapering” and it will be discussed at the next FOMC meeting, when more information about the Omicron variant and its impacts are known, he said at a Senate hearing.
The 10-, 20- and 30-year U.S. Treasury yields fell further below Friday’s levels. The 30-year UST is at its lowest at 1.789% since January 27 when it was at 1.775%. Triple-A municipal benchmark yields fell one to four basis points.
Ratios rose slightly given the swing in UST with the five-year muni to UST ratio at 51%, the 10 at 74% and the 30 at 84%, according to ICE Data Services.
The Omicron variant news illustrates how the “markets remain highly sensitive to new pandemic developments, increasing exposure to headline risk and related corrections,” Municipal Market Analytics said.
“More importantly for municipals, the potential for new, pandemic-related risk episodes will only encourage state and local governments to remain defensive with respect to budget management, suppressing or delaying the recovery in issuance of new-money bonds for fresh infrastructure projects while encouraging new rounds of scoop and toss refinancings to free up cash flow,” said Matt Fabian, partner at MMA.
So long as tax-exempt advance refundings remain unavailable, “that dynamic suggests continued, downward pressure on tax-exempt net supply, tighter/tight credit spreads, outperformance vis-a-vis other fixed income asset classes and more difficult conversations with reinvesting clients.”
While November volume rose year-over-year, supply still hasn’t kept up with demand, and participants are mixed on how much supply will rise in the coming months as factors outside the municipal space create more uncertainty for issuers. The net-negative supply — currently at $9.83 billion per Bloomberg data — is a key reason to why municipals have outperformed UST.
“It remains difficult, amid persistently negative net supply conditions for tax-exempts, for most municipals, to show much in the way of a negative evaluation/price trend,” according to MMA’s Weekly Outlook. “Rather, negative movements will reflect primary market caution where underwriters set levels as appropriate across other markets, but not secondary weakness produced by selling pressure.”
MMA noted that while fund flows did slow a bit, and “reasonably with the Thanksgiving holiday, but if 2021 flows are to stay ahead of their 2019 record (which showed about $2 billion weekly inflows during December, this year will need a boost of demand momentum.”
Such will be difficult if USTs adopt a negative price trend and muni fund and exchange-traded fund NAVs lack a compelling momentum argument vis-à-vis alternatives.
“But even if 2021 flows fall short of 2019’s record pace, performance does not appear to be at material risk; rather, the next few weeks are more likely to show continuity than the opposite,” the report said.
In the negotiated primary market, RBC Capital Markets priced for the Ohio Water Development Authority (Aaa/AAA//) $250 million of water pollution control loan fund revenue green bonds, Kestrel Verified. Bonds in 6/2026 with a 4% coupon yield 0.47%, 5s of 12/2026 at 0.63%, 5s of 6/2031 at 1.08%, 5s of 12/2031 at 1.10%, 4s of 12/2036 at 1.41%, 4s of 12/2041 at 1.58%, 5s of 2046 at 1.54% and 4s of 2046 at 1.71%, callable in 12/1/2031.
In the competitive market, Alexandria, Virginia (Aaa/AAA//) sold $143.135 million of unlimited tax general obligation bonds to J.P. Morgan Securities LLC at a 1.5004% TIC> Bonds in 12/2022 with a 5% coupon yield 0.15%, 5s of 2026 at 0.60%, 5s of 2031 at 1.04%, 1.875s of 2036 at 1.78% and 2s of 2041 at 1.97%, callable in 12/15/2031.
Tampa, Florida, (Aa2/AAA/AA/) sold $102.62 million of non-ad valorem refunding and improvement sustainable revenue bonds to Citigroup Global Markets Inc. at a 2.2684% TIC. Bonds in 10/2031 with a 5% coupon yield 1.21%, 3s of 2036 at 1.67%, 2s of 2041 at 2.12%, 2.25s of 2046 at 2.31%, 2.25s of 2051 at 2.43%, callable in 10/1/2031.
Secondary trading
Minnesota 5s of 2022 at 0.14%. Minnesota 5s of 2023 at 0.24%. Charles County, Maryland 5s of 2023 at 0.25%.
Dallas waters 5s of 2024 at 0.33%. Maryland 5s of 2025 at 0.50%-0.48% and 5s of 2026 at 0.63%-0.60%.
California 5s of 2028 at 0.95%. Ohio waters 5s of 2029 at 0.95%.
New York City TFA 5s of 2034 at 1.35%. Washington 5s of 2034 at 1.21%. Connecticut 5s of 2036 at 1.38%. Ohio 5s of 2041 at 1.38%.
Los Angeles DWP 5s of 2045 at 1.50% versus 1.60% Wednesday. District of Columbia 5s of 2046 at 1.56%. Katy, Texas ISD 3s of 2051 2.07%-2.05% versus 2.10% Monday. Triborough Bridge and Tunnel 5s of 2051 at 1.73% (1.81% on 11/19).
AAA scales
Refinitiv MMD’s scale was steady on the short end: the one-year at 0.15% in 2022 and at 0.24% in 2023. The 10-year fell three basis points to 1.03% and down three to 1.48% in 30.
The ICE municipal yield curve showed yields steady at 0.17% in 2022 and down one to 0.26% in 2023. The 10-year maturity fell three to 1.05% and the 30-year yield dropped four to 1.50%.
The IHS Markit municipal analytics curve fell one basis point to 0.16% in 2022 and to 0.24% in 2023. The 10-year yield fell three to 1.02% and the 30-year yield fell three to 1.49% as of a 3 p.m. read.
The Bloomberg BVAL curve was at 0.17% in 2022 and down one to 0.22% in 2023. The 10-year yield fell three to 1.05% and the 30-year yield was down four basis points to 1.49%.
Treasuries rallied and equities sold off.
The five-year UST was yielding 1.154%, the 10-year at yielding 1.436%, the 20-year at 1.852% and the 30-year Treasury was yielding 1.789% at the close. The Dow Jones Industrial Average lost 652 points or 1.86%, the S&P was down 1.90% while the Nasdaq lost 1.55% at the close.
FOMC will consider taper speed up
The Federal Open Market Committee will consider speeding up taper as inflation remains a concern, Powell told the Senate Banking, Housing and Urban Affairs Committee.
“This does sound like a significant change of tone from Powell,” said Brian Coulton, Fitch Ratings chief economist. “It looks like the Fed wants to create some space to give them the option to raise rates well before the end of next year if they feel they need to.”
“Today will go down as the day Fed Chair Powell shed his dovish wings and showed signs of becoming a hawk,” said Edward Moya, senior market analyst for the Americas at OANDA. “An abrupt shift is conveniently timed as less than a week ago he was nominated by President Biden to serve a second term as Fed chair.”
Economists agree it is too soon to determine how Omicron will impact the economy as it has yet to be determined how transmissible it is, how severe an illness it causes, and how the vaccines available hold up against it.
“It is too early to assess if we will need to update all of the COVID vaccines and treatments, but some of the early reports across Europe are that the Omicron cases are mostly mild or asymptomatic,” Moya said. “Financial markets appear to be mostly optimistic that the growth outlook across the US will not be terribly disrupted by the Omicron variant,” he said.
“Until more is learned about the Omicron variant, our base case view remains that the Fed will lift rates later than what is currently priced in the market,” said BCA Research in a note. “We think a September or December 2022 liftoff date is reasonable.”
Panic has lessened from concerns over the weekend after Moderna CEO Stéphane Bancel’s warning that vaccines will be far less effective against Omicron riled the markets.
“From our perch, we remain steadfast in our belief that, despite the uncertainty surrounding Omicron, the virus’ ability to severely impact economy and markets will continue to decline,” said Steve Chiavarone, portfolio manager and head of multi-asset solutions at Federated Hermes. “Vaccines, therapeutics, a more flexible economy and a better understanding of the risks surrounding COVID have all created an environment that allows the economy to coexist alongside COVID.”
On other topics in the Powell testimony, responding to a question about the amount of time inflation can run high and the Fed would still consider it transitory, Powell said it might be time to stop using that word, since inflation is high enough to meet the goal of 2% average inflation.
The economy and labor market continue improving, but “there’s still ground to cover to reach maximum employment,” Powell said, while “inflation is well above our 2% goal” and the issues causing inflationary pressures will “linger well into next year.”
As for Omicron, it raises uncertainty and downside risks, Powell said.
Consumer confidence declined to a nine-month low as inflation weighed on buyers’ minds, while the Chicago Business Barometer tumble and home prices continued to rise.
Consumer confidence fell to 109.5 in November from 111.6 in October, with the present situation index dropping to 142.5 from 145.5 and the expectations index slipping to 87.6 from 89.0, The Conference Board reported.
Economists polled by IFR Markets expected a 110.7 read.
“Concerns about rising prices — and, to a lesser degree, the Delta variant — were the primary drivers of the slight decline in confidence,” said Lynn Franco, Senior Director of Economic Indicators at The Conference Board. “Confidence and spending will likely face headwinds from rising prices and a potential resurgence of COVID-19 in the coming months.”
Fewer respondents said they plan to buy a car, home or major appliance in the next half year.
“It is too early for this slip to be attributable to the Omicron variant, though rising COVID case counts in November may well have been a factor,” said Wells Fargo Securities Senior Economist Tim Quinlan and Economic Analyst Sara Cotsakis.
But the decline can be attributed to multiple reasons, they said. “Inflation is as high as it has been in a generation, financial markets remain choppy and the usual stress that comes with the holiday season is complicated by an ever-changing virus and evolving guidance about how to best contain it.”
Separately, the Chicago Business Barometer plunged to 61.8 in November from 68.4 in October, while economists expected it to hold at 68.4
Inventories and production rose while the other indexes fell. Prices paid dipped to a near record 93.8 and employment fell.
Also released Tuesday, home prices rose 19.5% across the nation in the 12 months ended in September, according to the S&P CoreLogic Case-Shiller Indices. In August prices were up 19.8% year-over-year. The 20 city composite grew by 19.1% in the year and the 10-city index grew 17.8%, both lower than August’s gains.
Finally, the Dallas service sector “accelerated in November, with revenue growth increasing sharply to a seven-month high,” said Christopher Slijk, Federal Reserve Bank of Dallas associate economist. “Price and wage pressures rose to all-time highs in the survey’s 14-year history.”
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
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.
