Supply surge led by blockbuster deals from New York, D.C.
9 min readMunicipals were mixed to close out a quiet summer Friday session ahead of a larger new-issue calendar that sees several billion-dollar deals.
Triple-A benchmark yields once again largely ignored a selloff in U.S. Treasuries after a robust jobs report indicated the Federal Reserve will likely hike interest rates another 75 basis points at its next meeting. Equities ended slightly up.
June’s jobs report kept “the economy’s key bright spot intact, but it also leaves the Federal Reserve on track for another aggressive rate hike at its July 26-27 FOMC meeting,” said Gary Schlossberg, Wells Fargo Investment Institute global strategist.
“The strength of the labor market gives the Fed a green light to raise rates 0.75% in July to combat higher inflation,” said Matthew Miskin, co-chief investment strategist at John Hancock Investment Management. The rise in the two-year UST as of late shows the bond market has given its blessing for another larger-than-normal rate hike, he noted.
“There are continued signs that inflation likely peaked on a year-over-year basis in the first quarter, but the problem is it is not coming down that quickly,” Miskin said.
This, he said, leaves the Fed in “an unfortunate position where they likely need to tighten further into a slowing economy.”
Muni-UST ratios fell again. They were at 65% in five years, 80% in 10 years and 92% in 30 years, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the five at 65%, the 10 at 82% and the 30 at 92% at a 4 p.m. read.
Investors will be greeted Monday with a massive increase in supply, with the new-issue calendar estimated at $11.47 billion in $7.84 billion of negotiated deals and $3.63 billion of competitive loans. It will be the largest volume week of the year so far.
The new-issue calendar is led by $2.2 billion of state personal income tax revenue bonds from the New York State Thruway Authority in six competitive deals, $1.5 billion of revenue bonds from the District of Columbia and $1 billion of revenue bonds from the Colorado Health Facilities Authority.
Other notable deals in the primary include $762 million of revenue bonds from the Oklahoma Development Finance Authority, $542 million of joint revenue refunding bonds from the Cities of Dallas and Fort Worth, Texas, and $425 million of refunding bonds from Harris County, Texas, while the competitive market also sees the Miami-Dade County School District, Florida, set to sell $271 million of GOs.
“Over the past several months, enough has been said about the dismal performance of the municipal market in the first half of the year,” according to Barclays PLC.
The combination of “ongoing geopolitical concerns and a hawkish Fed brought quite a bit of market volatility, and USTs have whipsawed, taking tax-exempts along for the ride,” Barclays strategists Mikhail Foux, Clare Pickering and Mayur Patel said.
“It did not help that munis entered the year at very rich levels, supported by positive technicals as COVID concerns receded,” they noted.
But market action over the past two weeks has increased BofA strateigsts Yingchen Li and Ian Rogow’s confidence the muni high-grade market “should deliver a strong performance during the second half of 2022 after a record selloff in the first half of the year.” Triple-A benchmark yields saw a mild bear flattening in the first quarter, followed by a strong bear steepening in the second quarter.
They said “strong Fed action and an unwavering hawkish stance, together with resulting recession risks, should bring peak inflation speculation back on again.” But while that speculation will keep long-end rates in check, reduced bets on the final Fed Funds rate in this tightening cycle will keep front-end yields in check too.
“This is the environment we have been waiting for, i.e., a more stabilized macro rates environment in which muni supply/demand factors will be rationalized,” BofA noted.
“Large redemption and coupon payments are at work, retail buyers have shown a more persistent interest in adding and mutual fund flows are essentially flat,” according to Li and Rogow.
Year-to-date, higher rates have caused munis to underperform on a total return basis, despite generally being considered defensive, Barclays strategists said.
Rate volatility is still very high, they said, “as there is much uncertainty about Fed policy and the Fed’s end-point, but clarity should eventually emerge on both issues.”
But Foux, Pickering and Mayur believe that while munis “may be more sensitive to rate volatility than other asset classes, they should outperform them during times of economic stress.”
Overall, they think that yields in the third quarter are unlikely to repeat their second-quarter sell-off and that 10-year USTs will trade around 3% by the end of 2022.
Barclays strategists said munis have “recovered from the extremely cheap levels reached in mid-May,” and “at current levels, there is still enough upside versus Treasuries compared with historical averages, especially for long-dated tax-exempts.”
Additionally, muni valuations become cheaper and “muni curves have also steepened and credit decompressed, with lower-rated issues underperforming,” they said.
Municipal credit quality remains solid, but they noted that generally the asset class is also “considered more defensive than most others during times of economic stress.”
They noted that “state and local municipalities budget ahead, and it takes some time for economic downturns to start affecting their balance sheets — even more so for local municipalities that rely heavily on property taxes.”
Secondary trading
Maryland 5s of 2024 at 1.87%-1.82%. Harford County, Maryland, 5s of 2024 at 1.90%-1.85%. Georgia 5s of 2024 at 1.78%-1.76%.
California 5s of 2027 at 2.02%-2.00%. Washington 5s of 2030 at 2.48%-2.47%. Prince George’s County, Maryland, 5s of 2030 at 2.48%-2.45% versus 2.71% on 6/29.
Montgomery County, Pennsylvania, 5s of 2031 at 2.51%-2.49% versus 2.80% original. Triborough Bridge & Tunnel Authority MTA bridges and tunnels 5s of 2032 at 2.76%. Maryland 5s of 2033 at 2.62% versus 2.64% Wednesday and 2.68% Tuesday.
New York City TFA 5s of 2035 at 3.13% versus 3.30%-3.29% Tuesday. New York City 5s of 2047 at 3.60%-3.56% versus 3.80%-3.79% Friday.
Los Angeles DWP 5s of 2052 at 3.33%. NYC waters 5s of 2052 at 3.66%-3.65%. Charleston, South Carolina, waters 5s of 2052 at 3.27% versus 3.52%-3.50% a week ago and 3.75% original.
AAA scales
Refinitiv MMD’s scale was bumped up to two basis points at the 3 p.m. read: the one-year at 1.47% (-1) and 1.79% (-2) in two years. The five-year at 2.05% (unch), the 10-year at 2.49% (unch) and the 30-year at 3.01% (unch).
The ICE municipal yield curve was weaker in spots: 1.48% (flat) in 2023 and 1.81% (+1) in 2024. The five-year at 2.07% (flat), the 10-year was at 2.51% (flat) and the 30-year yield was at 3.03% (+1) near the close.
The IHS Markit municipal curve was unchanged: 1.47% in 2023 and 1.81% in 2024. The five-year at 2.05%, the 10-year was at 2.49% and the 30-year yield was at 3.01% at the close.
Bloomberg BVAL was mixed 1.50% (unch) in 2023 and 1.78% (unch) in 2024. The five-year at 2.07% (-1), the 10-year at 2.55% (unch) and the 30-year at 3.04% (+2) near the close.
Treasuries were weaker.
The two-year UST was yielding 3.102% (+9), the three-year was at 3.135% (+9), the five-year at 3.121% (+9), the seven-year 3.149% (+8), the 10-year yielding 3.082% (+9), the 20-year at 3.525% (+7) and the 30-year Treasury was yielding 3.258% (+7) at the close.
Jobs report beats expectations, recession fears loom
“As economic slowdown fears cloud the horizon, the labor market continues to be remarkably strong. The pace of payroll gains this month is still double the pre-pandemic average, led by service sector gains in leisure and hospitality, professional services and healthcare,” said Olu Sonola, head of U.S. Regional Economics at Fitch Ratings. “The unemployment rate remained unchanged, the labor force participation rate marginally ticked down and wage growth is showing signs of moderation.
While “Job gains in June slowed modestly month-over-month,” they were much better than expected with total nonfarm payrolls increasing by 372,000 compared to the projected 275,000, said David Kelly, chief global strategist at J.P. Morgan Asset Management.
With June’s payroll growth number and the unemployment rate holding at 3.6%, both are “consistent with the strong job market seen thus far in 2022,” said Joel Kan, associate vice president of economic and industry forecasting at Mortgage Bankers Association.
In the first half of the year, the economy saw 450,000 job gains per month, which is historically an “extremely robust pace,” he said.
“This labor market strength comes despite other economic data showing signs of weakening and a higher probability of a recession,” Kan said.
But at a time when talk of recession dominates, Kelly said that “the continued strength in the labor market provides an important tailwind for the economy against the risks of sustained hot inflation and deteriorating consumer sentiment.”
He said, “employment is generally a lagging economic indicator” so June’s report does not eliminate the possibility of a recession starting soon.
“However, with labor demand still near record highs, this does suggest that the next economic downturn could be a relatively mild one for workers,” Kelly noted.
“Thus far, the steady but gradual deceleration in the labor market bodes well for a soft landing,” Sonola said, noting “we still in the early innings of the Fed’s tightening cycle as attention shifts to the CPI inflation print next week.”
And “with the Federal Reserve intently focused on bringing down inflation, we expect this will not alter near-term expectations for another 75-basis-point rate hike at the next FOMC meeting,” Kan said.
Primary to come:
The District of Columbia (Aa1/AAA//) is set to price Wednesday $1.453 billion of revenue bonds, consisting of $666.740 million of tax-exempts, Series 2022A, serials 2031-2047; $139.395 million of taxables, Series 2022B, serials 2026-2031 and $647.090 million of tax-exempts, Series 2022C, serials 2023-2037. BofA Securities.
The Colorado Health Facilities Authority (/AA+//) is set to price Wednesday $1.075 billion of revenue bonds, consisting of $478.945 million of bonds, Series 2022A; $197.860 million of long-term bonds, Series 2022B; $197.850 million of refunding long-term bonds, Series 2022C and $200 million of refunding floating rate notes, Series 2022D. J.P. Morgan Securities.
The Oklahoma Development Finance Authority (/AAA//) is set to price Tuesday $761.654 million of taxable Oklahoma Gas and Electric Company ratepayer-backed revenue bonds, consisting of $161.654 million of Series 2022A-1, $300 million of Series 2022A-2 and $300 million of 2022A-3. RBC Capital Markets.
The Cities of Dallas and Fort Worth, Texas, (A1/A+/A+/AA/) are set to price Tuesday $542.460 million of non-AMT Dallas Fort Worth International Airport joint revenue refunding bonds, Series 2022B. Jefferies.
Harris County, Texas, (Aaa//AAA/) is set to price Wednesday $425.025 million, consisting of $102.725 million of tax and subordinate lien revenue refunding bonds, Series A; $233.220 million of unlimited tax road refunding bonds, Series B and $89.080 million of permanent improvement refunding bonds, Series C. Estrada Hinojosa & Co.
The Massachusetts Development Finance Agency (A1///) is set to price Thursday $361.510 million of Northeastern University issue revenue refunding bonds, Series 2022. Morgan Stanley & Co.
The San Antonio Independent School District, Texas, (Aaa//AAA/) is set to price Tuesday $322.450 million of unlimited tax school building bonds, Series 2022, serials 2023-2052, insured by the Permanent School Fund Guarantee Program. Raymond James & Associates.
The River Islands Public Financing Authority Improvement No. 1, California, (/AA//) is set to price Tuesday $287.850 million, consisting of $207.735 million of tax-exempt special tax refunding bonds, Series 2022A-1; $3.980 million of taxable special tax refunding bonds, Series 2022A-2; $15.980 million of tax-exempt subordinate special tax refunding bonds, Series 2022B-1 and $60.155 million of tax-exempt special tax bonds, Series 2022B-2. HilltopSecurities.
The Klein Independent School District, Texas, (Aaa/AAA//) is set to price Wednesday $145.340 million of unlimited tax schoolhouse bonds, Series 2022, serials 2023-2047, insured by the Permanent School Fund Guarantee Program. Ramirez & Co.
The City of Phoenix Civic Improvement Corporation, Arizona, (Aa2/AAA/AA+/) is set to price Tuesday $142.275 million of subordinated excise tax revenue bonds, Series 2022. J.P. Morgan Securities.
The Trinity River Authority of Texas (/AAA/AAA/) is set to price Tuesday $126.020 million of regional wastewater system revenue bonds, Series 2022, serials 2024-2042. Citigroup Global Markets.
The Massachusetts Port Authority (Aa2/AA/AA/) is set to price Tuesday $124.730 million of green AMT revenue bonds, Series 2022-A, serials 2028-2042. UBS Financial Services.
Competitive:
The Miami-Dade County School District is set to sell $270.800 million of general obligation school bonds, Series 2022A, at 10 a.m. eastern Tuesday.
The New York State Thruway Authority is set to sell $154.225 million of taxable state personal income tax revenue bonds, Series 2022B, at 10 a.m. eastern Wednesday.
The New York State Thruway Authority is set to sell $360.365 million of state personal income tax revenue bonds, Series 2022A, Bidding Group 4, at 12 p.m. Wednesday.
The New York State Thruway Authority is set to sell $364.250 million of state personal income tax revenue bonds, Series 2022A, Bidding Group 5, at 12:30 p.m. Wednesday.
The New York State Thruway Authority is set to sell $428.870 million of state personal income tax revenue bonds, Series 2022A, Bidding Group 3, at 11:30 a.m. Wednesday.
The New York State Thruway Authority is set to sell $430.380 million of state personal income tax revenue bonds, Series 2022A, Bidding Group 1, at 10:30 a.m. Wednesday.
The New York State Thruway Authority s set to sell $455.885 million of state personal income tax revenue bonds, Series 2022A, Bidding Group 2, at 11 a.m. Wednesday.
Gabriel Rivera contributed to this story.
