Issuers to call, redeem $300 billion in 2022

The year winds down with another day of an unchanged muni market and slightly weaker U.S. Treasury market while equities were mixed.

Triple-A benchmarks were left unchanged and ratios were also little changed. The five-year was at 47%, 70% in 10 and 78% in 30, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the five at 46%, the 10 at 72% and the 30 at 78%.

In 2022, issuers are expected to return $300 billion of maturing and called bond principal. Of that, $195 billion will come from maturing debt, while $105 billion will come from bonds that have already been called or are pre-refunded. Taxable municipals will contribute $32 billion.

Investors will also receive $139 billion of interest payments in 2022, about $593 million more than in 2021, according to a report from CreditSights.

“The amount of maturing bonds is down slightly from 2021, when $200 [billion] of bonds matured,” the report said. “The amount that will be called in the new year will certainly grow as issuers refinance older bonds.”

The amount of money redeemed in January is expected to be $20.2 billion, the lowest since April 2018. Later in the year, there will be fewer planned redemptions, but as issuers refund older bonds, the totals will climb, the report said.

Taxable bonds will account for $1.6 billion of the January principal.

In January, the report said, bondholders will get $13.7 billion of interest payments, raising the total amount available for reinvestment to $33.8 billion.

The sectors with the largest January redemptions will be general obligations with $2.7 billion, followed by hospitals with $2 billion, airports with $1.5 billion and higher education with $700 million, according to the report.

The states with the largest amounts of redemptions will be: New York with $2.3 billion, Illinois with $2.2 billion, Ohio with $1 billion and Georgia with $1 billion.

“Tax-exempt yields are currently so low that they are not compelling for most corporate investors subject to the 21% federal income tax rate,” the report noted.

For that reason, principal and interest returned to those investors is likely to leave the tax-exempt muni market.

“Some of those corporate investors have been buying taxable municipals to diversify into municipal credit risk, so much so that taxable supply has not been enough to satisfy demand,” the report said.

The municipal market has been a relative bright spot for core fixed-income investors in 2021.

“While most of the other ‘safe’ parts of the core fixed-income universe have generated negative returns this year, the national muni market is up for the year,” a report from LPL Financial said.

With state and local governments flush with cash due to better-than-expected tax receipts along with generous amounts of federal aid, many municipalities are in good shape.

“2021 has been a good year for munis and valuations reflect that good story,” noted LPL Financial Fixed Income Strategist Lawrence Gillum. “Continued positive inflows to the asset class along with the improved fundamental story for many state and local governments should provide a positive backdrop for returns next year.”

Just two trading sessions remain in 2021 and two reports of fund flows from the Investment Company Institute and Refinitiv Lipper come Wednesday and Thursday, with the expectation of positive flows to end the year, though unlikely to break records.

The effects of higher tax collections, strong federal support, and robust investor demand has thus far had a positive impact on municipal bond valuations. As such, when looking at the ratio between AAA munis and similar-maturity Treasury yields, prices remain elevated at this point, the report said.

“And while the relative valuation story has improved in recent months, munis remain expensive relative to history with 10-year AAA and 30-year AAA munis near the bottom decile of historical valuations, meaning munis have been cheaper approximately 90% of the time,” Gillum said. “While valuations, per se, aren’t necessarily a reason for yields and spreads to move higher in the near term, they do likely provide a slight headwind to potential future returns.”

Investor expectations should likely be guided downward as outsized returns are unlikely, the report said.

“As 2022 approaches, we continue to favor municipal bonds as a high-quality option for taxable accounts,” the report said. “Federal stimulus is providing support, although valuations relative to Treasuries remain elevated and demand may not get a boost from personal tax rate increases.”

What else to expect in 2022
Uncertainty took center stage in 2021 and its remnants remain heading into 2022.

“There was plenty to worry about in 2021,” said Darrell Cronk, CIO of Wealth & Investment Management (WIM) at Wells Fargo, “but we saw a robust economic recovery and we stayed optimistic about risk assets.”

Besides COVID variants, inflation and uncertainty about Federal Reserve action, there were also supply chain issues to be concerned about, he said.

The firm is still optimistic about next year, “in fact, significantly more optimistic than many on the street,” he said. “Some are actually pricing in a Fed policy mistake as their base case, forecasting ever-increasing numbers of Fed rate hikes in 2022.”

The economy “is clearly stronger than many realize as we move from early-cycle dynamics to mid-cycle drivers and the economic recovery becomes self-sustaining,” Cronk said.

Although inflation will continue in the first half of the year, he said, it should “fade” in the last half as supply chain issues resolve.

“One data point that we will watch closely and wait for is labor inflation,” Cronk said. “During past inflationary cycles, inflation progressed from goods inflation to services-based inflation to labor inflation,” he said. “We have seen goods inflation and we are right in the thralls of service-driven inflation.”

As for data on Tuesday, regional Fed surveys took the spotlight.

Activity in the Texas service sector “remains robust but moderated in December,” according to the Dallas Fed as the revenue and employment indexes suggested deceleration from November.

“Price pressures fell from last month’s record highs but remain highly elevated,” Dallas Fed associate economist Christopher Slijk said. “Sentiment about current business conditions remains optimistic, and expectations are for increased activity going into 2022.”

The general business activity index fell to 12.9 in December from 22.7 in November, while the company outlook index slid to 13.7 from 16.8. The revenues index dropped to 20.4 from 25.4, remaining above the 17.5 it averaged this year.

The employment index declined to 10.7 from 12.9, input prices decreased to 47.8 from 51.8 and selling prices fell to 27.4 from 29.7.

Separately, the Federal Reserve Bank of Richmond said the region’s manufacturing sector “strengthened” in the month, with the composite index climbing to 16 in December from 12 in November, as shipments and new orders gained. Employment “moderated,” but stayed in expansion mode.

“More manufacturing firms reported increasing employment than decreasing in December,” the report noted, but finding skilled workers remained an issue.

The price indexes both rose in the month.

The Richmond Fed also reported expansion in the service sector in December, with increased demand and growing capital spending.

Employment also gained in the month, while prices increased.

Also reported Tuesday, home prices climbed at a slightly slower pace in October, with the S&P CoreLogic Case-Shiller U.S. National Home Price Index (not seasonally adjusted), showing prices climbed 19.1% on an annual pace, after a 19.7% gain in September.

The 10-city composite grew 17.1% in the month, off from 18.9% a month earlier, while the 20-city composite jumped 18.4%, down from 19.1% in September.

All three indexes rose 0.8% month-over-month in October.

AAA scales
Refinitiv MMD’s scale was unchanged: the one-year at 0.14% and 0.24% in 2023. The 10-year sat at 1.03% and at 1.48% in 30.

The ICE municipal yield curve showed yields were little changed: 0.16% in 2022 and 0.28% in 2023. The 10-year steady at 1.04% and the 30-year yield at 1.49%.

The IHS Markit municipal analytics curve was steady: 0.16% in 2022 and to 0.25% in 2023. The 10-year at 1.01% and the 30-year at 1.48% as of a 3 p.m. read.

Bloomberg BVAL was unchanged: 0.17% in 2022 and 0.22% in 2023. The 10-year was at 1.04% and the 30-year at 1.48%.

Treasuries were range-bound while equities were mixed.

The five-year UST was yielding 1.246%, the 10-year yielding 1.486%, the 20-year at 1.937% and the 30-year Treasury was yielding 1.909% at 3:30 p.m. eastern. The Dow Jones Industrial Average gained 108 points, or 0.30%, the S&P was down 0.03% while the Nasdaq lost 0.39% at 3:30 p.m.