Munis end the week mixed, USTs sell off
7 min read
Municipals were mixed to end the week as U.S. Treasury yields rose double-digits five years and in and equities ended down.
The three-year muni-UST ratio was at 61%, the five-year at 62%, the 10-year at 66% and the 30-year at 91%, according to Refinitiv MMD’s 3 p.m. ET read. ICE Data Services had the three at 65%, the five at 64%, the 10 at 68% and the 30 at 93% at 4 p.m.
This morning’s data “suggest the economy is very resilient and might prompt more bets that the Fed will need to take rates closer to 6.00%,” said Edward Moya, senior market analyst for the Americas at OANDA.
Everything will depend on the upcoming nonfarm payroll report, “which should provide some evidence the labor market is beginning to cool,” he said.
“The market should stick to pricing in three more rate hikes, any more is premature and probably unnecessary for now,” he noted.
“This morning is not just about PCE inflation, but also the consumer,” he said.? “The consumer is still looking strong as personal income/spending posted healthy gains and as sentiment hit the highest level in over a year, which is also bolstering the case for a half-point rate increase at the March FOMC meeting.”
Moya said, “the Fed’s rate hiking campaign looks like it might go into the summer, especially if the labor market refuses to break.”
“Markets are plunging on the news as bond yields reach fresh 2023 highs while the yield curve inversion along the 2 and 10-year maturities widened” to 86 basis points, said José Torres, senior economist at Interactive Brokers.
The 2-year yield is up 12 basis points to 4.810% while the 10-year is up eight basis points to 3.949%, once more approaching the pivotal 4% level.
Concern about rate hikes took a toll on munis, Barclays strategists said. After USTs “sold off 40-70bp in February, munis gave back most of their gains for the year, with the total returns of the IG and HY indices barely remaining in the positive territory,” said Barclays strategists Mikhail Foux, Clare Pickering and Mayur Patel.
Moreover, “tax-exempts are actually not cheap anymore against Treasuries and high-grade corporates; [they] are still quite rich, even after the correction,” they said. In the coming week, they said munis will likely cheapen further.
“Supply has been anemic this week and even next week is projected to be light, but we still see issuance picking up in March-April, likely coinciding with the period of seasonally weak municipal performance, and fund outflows related to tax selling (although tax selling might be more subdued this year),” the Barclays strategists said.
Meanwhile, they noted, “the shape of the yield curve continues to bring up questions.”
“This week the SIFMA index adjusted 56bp lower, while the long end sold off a bit, which released some funding pressure,” they said. “However, the muni yield curve remains inverted, and the belly of the high-grade curve does not seem to provide much value at the moment, with MMD-UST ratios in the mid-60s.”
February “is the month volatilities came back to both munis and Treasuries, with the Fed at the driver’s seat,” said BofA strategists.
“The macro market is fully embracing the Fed’s view of three more 25bp Fed rate hikes before the end of 1H23, all based on a slower decline of inflation, strong job market and a non-recessionary economy,” they said.
“Although rates volatilities are hard to deal with … a strong Fed is always something to appreciate,” the BofA strategists noted.
“A higher terminal Fed target rate generally works as a guardrail against sticky inflation and should ultimately benefit bond market duration investors,” they said.
The muni market rallied too fast from October through January, achieving BofA strategists’ 2023 target in January instead of at yearend. “A backup in muni rates in such a volatile environment isn’t unusual,” they said.
Typically, the BofA strategists said, “if the market has made a long-term bullish reversal, a retracement of less than 50% is normal.”
Only if the retracement exceeds two-thirds of the rally “does one need to be alert for the possible invalidity of the supposed long-term bullish reversal,” they said.
The 10-year AAA only retraced 30.1% of the October-January rally and the 30-year retraced 39.4%, both below 50%. On the other hand, retracement for the five-year was 44.6%, “somewhat high but still below 50%,” the BofA strategists said.
“Overall, the backup in muni rates is well within the framework of a counter-trend move,” they noted.
“Even in the adverse case that Treasury rates deliver newer highs, muni rates do not need” to do so as long as muni-UST ratios are stable,” they said.
March and April can be a test during the tax season, but the BofA strategists “believe supply/demand imbalance in munis, together with the fact that this selloff is likely near its end, should keep muni rates well in check.”
“With all eyes on the February employment and inflation data to be released in the second week of March, the month of March may prove to be more constructive in market tone,” they said.
This selloff “seems to have happened in a haste, triggered by data that closed the gap between the market’s expectations and the Fed’s stance,” the BofA strategists said.
“A quick directional move in financial markets is generally not sustainable and invites counter actions,” they said. “Also, the typical characters of a countertrend move — short in time and threatening in levels — are all present in this selloff. As such, we expect that any forthcoming soft data would halt the bearish progress.”
Calendar stands at $4.1B
Investors will be greeted Monday with a new-issue calendar estimated at $4.098 billion.
There are $3.660 billion of negotiated deals on tap and $438 million on the competitive calendar.
The negotiated calendar is led by $650 million of commodity supply revenue bonds from the Southeast Energy Authority, Alabama, followed by $583 million of revenue bonds from the Port of Portland, Oregon.
Cambridge, Massachusetts, leads the competitive calendar with the sale of $94 million of GOs.
Secondary trading
DC 5s of 2024 at 3.02% versus 3.06% Thursday. NYC 5s of 2024 at 2.89%-2.99% versus 3.04% Thursday. California 5s of 2025 at 3.01% versus 3.19%-3.03% Wednesday.
Georgia 5s of 2028 at 2.68%-2.67%. Richmond, Virginia, 5s of 2029 at 2.67%-2.61%. Texas Water Development Board 5s of 2030 at 2.78%-2.71%.
Triborough Bridge and Tunnel Authority 5s of 2035 at 3.07% versus 3.10% Thursday. University of California 5s of 2036 at 3.11%-3.10% versus 3.10% Thursday and 3.12% original on 2/16. NYC TFA 5s of 2037 at 3.39%-3.38%.
LA DWP 5s of 2052 at 3.90%. Illinois Finance Authority 5s of 2052 at 4.37%-4.35% versus 4.35% Thursday and 4.38% on 2/17.
AAA scales
Refinitiv MMD’s scale was bumped up to two basis points. The one-year was at 3.03% (-2) and 2.95% (-2) in two years. The five-year was at 2.61% (unch), the 10-year at 2.59% (unch) and the 30-year at 3.56% (unch) at 3 p.m.
The ICE AAA yield curve was cut up to five basis points: 3.12% (flat) in 2024 and 3.02% (+4) in 2025. The five-year was at 2.67% (+5), the 10-year was at 2.61% (+4) and the 30-year yield was at 3.59% (+2) at 4 p.m.
The IHS Markit municipal curve was bumped two basis points at one-year: 3.04% (-2) in 2024 and 2.95% (unch) in 2025. The five-year was at 2.59% (unch), the 10-year was at 2.58% (unch) and the 30-year yield was at 3.58% (unch) at a 4 p.m. read.
Bloomberg BVAL was cut up to four basis points: 3.15% (+1) in 2024 and 2.93% (+4) in 2025. The five-year at 2.61% (+1), the 10-year at 2.62% (+1) and the 30-year at 3.60% (+1).
Treasuries sold off.
The two-year UST was yielding 4.810% (+12), the three-year was at 4.533% (+13), the five-year at 4.211% (+11), the seven-year at 4.110% (+8), the 10-year at 3.949% (+8), the 20-year at 4.125% (+9) and the 30-year Treasury was yielding 3.937% (+7) at 4 p.m.
Primary to come:
The negotiated activity will be highlighted by a $650 million offering of Series 2023 commodity supply revenue bonds from the Southeast Energy Authority, Alabama. The bonds will be senior managed by Goldman, Sachs & Co. and are rated A1 by Moody’s Investors Service.
The Port of Portland, Oregon, is slated to sell $583.1 million of Series 29 Port International airport revenue AMT green bonds on Thursday. Goldman, Sachs is the senior manager of the deal, which is rated AA-minus by both S&P Global Ratings and Fitch Ratings.
A $528.9 million offering of dedicated capital improvement tax bonds is on tap from the Chicago Board of Education on Tuesday. The Series 2023 bonds mature serially from 2033 to 2043, with a term bond in 2048 and are rated A by S&P and BBB-plus by Fitch. BofA Securities is the senior manager.
The Washington Metropolitan Area Transit Authority, District of Columbia, is planning a $392 million sale of Series 2023 dedicated revenue green bonds on Thursday. RBC Capital Markets is the senior bookrunner and the bonds are rated AA by S&P and Fitch and AA-plus by Kroll Bond Rating Agency.
The Texas Department of Housing and Community Affairs is slated to sell a $230 million offering of residential mortgage revenue bonds on Wednesday. The Series 2023 A non-AMT bonds are structured with serial from 2024 to 2035 and terms in 2038, 2043, 2048, and two in 2053. The bonds will be lead managed by RBC and are rated Aaa by Moody’s and AA-plus by S&P.
A $225 million sale of Series 2023 general obligation bonds is planned by Portland Community College. Oregon. Rated AA-plus by S&P. The bonds are being senior managed by Piper Sandler & Co.
The San Jose-Evergreen Community College District in California plans a $200 million sale of Series C GO bonds on Tuesday. The bonds are rated Aa1 by Moody’s and AA-plus by S&P. Piper Sandler will be the book runner.
The Illinois Housing Development Authority, meanwhile, will sell $120 million of Series A non-AMT social bonds on Tuesday. The bonds are rated Aaa by Moody’s and will be senior managed by Morgan Stanley & Co. LLC.
Burbank, California, on Tuesday is slated to sell $120 million of Series 2023 water and power electric revenue bonds. Structured with serial bonds from 2026 to 2043, and term bonds in 2048 and 2053, the bonds will be senior managed by RBC.
Competitive:
The largest competitive deal is a triple-A-rated Cambridge, Massachusetts, sale totaling $93.63 million slated for Wednesday.
Christine Albano contributed to this story.
