Munis outperform UST rally in wake of higher-than-expected jobs report

Municipals were firmer to end the week, outperforming a U.S. Treasury rally after the employment report revealed more jobs than expected were added in February. Equities sold off.

Triple-A benchmark yields were bumped five to 10 basis points, depending on the curve, while U.S. Treasury yields fell 20 to 31 basis points, pushing the five-, seven- and 20-year UST below 4%. The two-year UST has fallen nearly 50 basis points over the past two trading sessions.

The three-year muni-UST ratio was at 62%, the five-year at 65%, the 10-year at 68% and the 30-year at 94%, according to Refinitiv MMD’s 3 p.m. ET read. ICE Data Services had the three at 59%, the five at 60%, the 10 at 65% and the 30 at 92% at 4 p.m.

“Payrolls and the [consumer price index] number next week will largely determine what the Fed will do on March 22,” said Barclays strategists Mikhail Foux, Clare Pickering and Mayur Patel.

Friday’s “payrolls turned out to be a mixed reading; on the one hand, the top number was substantially higher than estimates, on the other, the unemployment rate increased, average earnings declined and net revisions were slightly negative,” they said.

They said, “the probability of a 50bp hike has declined slightly; investors are staying tuned to next week’s CPI for direction.”

Following Fed Chair Jerome Powell’s testimony to Congress, Barclays strategists said, “investors rather dramatically changed their expectations for a larger hike, but following payrolls these expectations have come down a bit.”

Powell took “a more hawkish stance than previously communicated based on the strength of economic and inflation data for the past few weeks,” said BofA strategists.

The Fed, they noted, “is prepared to go faster in speed, longer in time and to a higher terminal target rate if inflation remains sticky.”

As a result, the futures market “not only fully priced in four more rate hikes in 2023; it even began to price in a sizeable probability of a fifth hike by July-September this year,” the BofA strategists said.

A strong Fed is “a friend of long-term bond investors, as the Fed would act rigorously in controlling inflation,” they said.

The 10-year UST yield was kept below 4% after a brief time above that level. “The 2/10 Treasury curve inverted to -107bp, and the 10/30 Treasury inverted to -10bp,” the BofA strategists said. “Sub 4.00% Treasury yields at 10- and 30-year would keep muni-UST ratios in check and the bond investing sentiment healthy.”

“If we are correct in calling the resumption of the muni rally, the market’s technicals point to a newer target below 2.20% for the 10-year AAA rates,” they said.

The BofA strategists believe “a major muni market bullish reversal occurred in early November 2022, and the ensuing rally was strong enough to call it a bull market.”

In that way, they said, the 50-plus basis point “yield backup in February should be viewed as a normal retracement in a bull market.”

As such, the BofA strategists said, the “resumption of the rally suggests that the 10-year should reach 2.00% in 1H23, and then 1.65% by the 4Q23.”

They see the “10-year AAA rates declining for the next three months, backing up some in the summer, and then heading lower to the year end.”

“Factors that will support our targets include improved muni investor sentiment, cash on the sideline, a Treasury market rally, as well as the talk of new taxes in the upcoming budget proposal by President Biden,” BofA strategists said. “This last item, though, has little likelihood of passing, but helps to revive the sentiment on taxes and thus tax-exempt muni investment.”

Given that “March is a seasonally weak time of the year in terms of outflows, there is a lot of focus on that,” the Barclays strategists said. They expect to see outflows in 2023 but noted “this is more a function of rates than tax-related selling.”

“Their magnitude will not be anything like we saw last year, so they will become much less of a drag for funds, especially given that net issuance is actually slightly negative so far this year, even if we don’t account for coupon income,” they said. “Moreover, outflows from ETFs seemed to have stopped, and fund inflows into long-dated funds have been steadily recovering.”

“Even though we remain cautious for the next several months, and believe that munis should cheapen both outright and versus Treasuries, we think this correction will not be overly dramatic, as a lot of investors are looking to buy the dip,” the Barclays strategist noted.

Calendar stands at $6B
Investors will be greeted Monday with a new-issue calendar estimated at $6.041 billion.

There are $4.962 billion of negotiated deals on tap and $1.079 billion on the competitive calendar.

The calendar is led by $1.25 billion of future tax-secured subordinate bonds from the New York City Transitional Finance Authority in three deals — a $950 million negotiated deal and competitive deals of $180 million and $120 million.

Other negotiated deals include $995 million of GOs from the state of Oregon, $618 million of senior sales tax bonds from the Massachusetts Bay Transportation Authority and $486 million of revenue bonds from the Black Belt Energy Gas District.

The state of Maryland leads the competitive calendar with $400 million of GOs in three deals.

Secondary trading
Wisconsin 5s of 2024 at 2.86% versus 2.88% original on Thursday. California 5s of 2024 at 2.67%. Portland, Maine, 5s of 2025 at 2.87%-2.88%.

Triborough Bridge and Tunnel Authority 5s of 2027 at 2.64%. California 5s of 2028 at 2.63%-2.64%. Louisiana 5s of 2029 at 2.66%-2.67% versus 2.73% Thursday.

DC 5s of 2031 at 2.59% versus 2.70%-2.69% Tuesday. Massachusetts Development Finance Agency 5s of 2032 at 2.47% versus 2.50% Tuesday. Austin ISD, Texas, 5s of 2036 at 3.16% versus 3.23% Wednesday.

Washington 5s of 2047 at 3.81% versus 3.88% on 2/22. LA DWP 5s of 2052 at 3.77% versus 3.84% on 3/3 and 3.88% on 3/2. Massachusetts 5s of 2052 at 3.83%.

AAA scales
Refinitiv MMD’s scale was bumped five to 10 basis points. The one-year was at 2.84% (-5) and 2.83% (-5) in two years. The five-year was at 2.59% (-5), the 10-year at 2.51% (-10) and the 30-year at 3.48% (-10) at 3 p.m.

The ICE AAA yield curve was bumped seven to eight basis points: 2.82% (-8) in 2024 and 2.81% (-8) in 2025. The five-year was at 2.55% (-7), the 10-year was at 2.54% (-7) and the 30-year yield was at 3.55% (-7) at 4 p.m.

The IHS Markit municipal curve was bumped five to eight basis points: 2.85% (-5) in 2024 and 2.83% (-5) in 2025. The five-year was at 2.57% (-5), the 10-year was at 2.50% (-8) and the 30-year yield was at 3.50% (-8) at a 4 p.m. read.

Bloomberg BVAL was bumped five to nine basis points: 2.90% (-5) in 2024 and 2.81% (-6) in 2025. The five-year at 2.55% (-7), the 10-year at 2.53% (-9) and the 30-year at 3.50% (-9).

Treasuries rallied hard.

The two-year UST was yielding 4.580% (-31), the three-year was at 4.307% (-26), the five-year at 3.945% (-27), the seven-year at 3.841% (-25), the 10-year at 3.682% (-23), the 20-year at 3.884% (-20) and the 30-year Treasury was yielding 3.681% (-20) at 4 p.m.

311,000 jobs added in February
“Today’s payroll report is a mixed bag,” said Alexandra Wilson-Elizondo, head of multi-asset retail investing at Goldman Sachs Asset Management.

“The headline number and only minor revisions to the robust January figure signal continued strength in the labor market,” she said. “However, underlying data shows signs of slowing, with wages and hours worked declining and an increase in the unemployment and participation rates.”

“Even with February’s increase in the unemployment rate, the labor market remains incredibility tight,” said Wells Fargo Securities Senior Economist Sarah House and Economist Michael Pugliese.

They expect a marked slowing in hiring, but noted “there remains plenty of scope for the jobs market to weaken before concerning the Fed.”

“The upside surprise in today’s report against much tougher seasonal factors than January indicates that the labor market has more momentum than we and the Fed had anticipated just a few weeks ago,” according to Morgan Stanley strategists.

“But with a miss on average hourly earnings and the large increase in the unemployment rate show that the labor supply is improving,” they noted.

“A stronger-than-expected jobs report this morning along with concerns about the financial stability of U.S. regional banks is accelerating a market selloff triggered by Federal Reserve Chairman Jerome Powell,” said José Torres, senior economist at Interactive Brokers. “The Fed chair earlier this week suggested that strong economic data points to the central bank potentially becoming more aggressive in fighting inflation.”

Overall, Christian Scherrmann, U.S. economist at DWS, said, “the recent report certainly does not provide the relief central bankers were looking for.” However, after an unusually strong January, he said, “it is also more in line with the very soft moderating we have seen by the end of last year.”

“We didn’t go from a four-alarm fire to a five-alarm fire with this data report, but the inflation flames aren’t out either,” said Sean Snaith, director of the University of Central Florida’s Institute for Economic Forecasting. “And nothing today indicates that the Fed needs to change its more aggressive approach to raising interest rates.”

“This report validates our view that an incompetent Fed is way too focused on the labor market and driving the unemployment rate up to curb inflation instead of focusing on the sectors that drive high inflation, which are the housing sector and energy/commodity prices,” said Jay Hatfield, CEO at Infrastructure Capital Advisors and portfolio manager of the InfraCap Equity Income ETF. “Both housing prices and energy prices are dropping rapidly indicating we are headed for a deflation.”

“Today’s report leaves the door open for a 50-basis point rate hike in the Fed’s March meeting, although such a decision will hinge more so on the upcoming CPI report and other factors,” said Preston Caldwell, head of U.S. Economics for Morningstar Research Services.

“With the job market showing no signs of slowdown yet not appearing overheated either, the Fed will look to other data to help decide whether to hike by 25 basis points or 50 basis points in its late March meeting,” he said. That data includes CPI and retail sales.

“An outside possibility is that the brisk rate of hiring feeds back into consumer demand, which would help perpetuate a cycle of ongoing growth in jobs and economic activity,” Caldwell said. “In that scenario, the Fed would be apt to take the federal funds rate higher than the approximately 5% we expect in 2023.”

Given that Powell has “emphasized the importance of the ‘totality of the data,’ we think that a 50bp increase in March would take more upside in next week’s core CPI release than we currently expect,” the Morgan Stanley strategists said. Given persistent labor market strength, they see risks skewed toward longer, not faster rate hikes.

Wells Fargo’s House and Michael Pugliese “expect the [Federal Open Market Committee] to remain in tightening mode awhile yet, with the bar for a 50bps hike at the upcoming March meeting looking somewhat higher.”

A deep dive into the employment figures, along with “the recent turmoil in the banking sector” offer”a compelling argument for the Fed to be patient, utilizing a series of 25 basis point hikes instead of 50,” Wilson-Elizondo said.

“Another strong jobs figure for February would on its own have boosted market expectations for a 50bp rate hike on March 22, but market angst is on the rise,” said ING Chief International Economist James Knightley. “Monetary policy operates with long lags and higher borrowing costs and reduced access to credit are going to make the jobs market look a lot weaker later in the year.”

Jan Szilagyi, CEO and co-founder of Toggle, said, “the Fed hates to flip-flop, so the bar to moving back to 50 (or even 75) is going to be pretty high, especially since they maintain the view that inflation dynamics will be very favorably impacted by a drop in shelter prices by mid-year.”

He said, “this is creating a period of uncertainty that could lead to substantial volatility in the coming months: Will the Fed resume a more hawkish pace (and drive markets lower) or stick with the dovish path, risk getting behind the curve, and have to catch up later (driving markets lower)?”

Primary to come:
Oregon will bring $995 million of its general obligation debt on Wednesday in a four-pronged Series 2023. Series A consists of $654.9 million of serial paper maturing from 2024 to 2043 and a term bond in 2048; $155.5 million Series D bonds mature serially from 2024 to 2043.

Series 2023 B and C taxable GOs, will sell on Wednesday. The $176 million Series 2023 B mature serially from 2024 to 2030 and the $8.55 million Series 2023 C mature in 2024.

All the series will be led by book-runner BofA Securities.

Series A and D are rated Aa1 by Moody’s Investors Service and AA by both S&P Global Ratings and Fitch Ratings, while 2023 B is rated Aa1 by Moody’s and AA-plus by both S&P and Fitch.

New York City Transitional Finance Authority’s has a $950 million sale of future tax-secured subordinated bonds. Fiscal 2023 Series F consists of subseries F1 tax-exempt bonds maturing serially from 2025 to 2028 and 2037 to 2043 and term bonds in 2047 and 2051. Ramirez & Co. will senior manage the deal, which has ratings of Aa1 from Moody’s and AAA from S&P and Fitch.

Oregon will bring $810 million of general obligation debt on Wednesday in a two-pronged Series 2023 sale. Series A consists of $654.9 million of serial paper maturing from 2024 to 2043 and a term bond in 2048; also selling is $155.5 million of Series D bonds maturing serially from 2024 to 2043. The deal, which is rated Aa1 by Moody’s and double-A by both S&P and Fitch, will be led by book-runner BofA Securities.

The Massachusetts Bay Transportation Authority, meanwhile, will sell $618.2 million of 2023 senior sales tax bonds Thursday, following a Wednesday retail order period. The deal, which is rated AA by S&P, and triple-A by both Fitch and Kroll Bond Rating Agency, consists of $510.2 million of Series A-1 bonds structured as serials from 2025-2030, 2032-2033, 2035-2043 and terms in 2048 and 2053; as well as $107.9 million of Series A2 sustainability bonds maturing serially from 2025-2030, 2032-2033, and 2035-2038. The bonds will be senior managed by Barclays Capital.

A $485.7 million sale of gas project revenue bonds is planned by the Black Belt Energy Gas District. The revenue bonds are rated A1 by Moody’s and will be senior managed by Goldman, Sachs & Co.

The Los Angeles Department of Water and Power plans a $305.5 million sale of power system revenue bonds for Thursday. The Series A serial bonds mature from 2023-2024 and 2026-2032 and are being senior managed by Ramirez. The bonds are rated Aa2 by Moody’s, AA-minus by S&P, and AA by Fitch.

Wisconsin is bringing $278.4 million of transportation revenue bonds in a two-pronged offering being underwritten by book-runner Citigroup Global Markets. The structure includes $144.5 million of Series 23 A bonds maturing serially from 2024-2043, as well as $133.8 million of Series 23-1 maturing serially from 2027 to 2035 and a term in 2037. The bonds are rated triple-A by S&P and KBRA, and AA-plus by Fitch.

The Gerald Ford International Airport Authority, Kent County, Michigan, will sell $165.3 million of revenue bonds in a federally taxable Series 2023A sale of limited tax GO paper maturing from 2028 to 2038 with terms in 2043 and 2053. The Wednesday sale is rated triple-A by Moody’s and S&P and is being senior-led by Citigroup.

A $150 million sale of homeowner mortgage revenue bonds is planned for Thursday by the State of New York Mortgage Agency. The social bonds will consist of $115.8 million Series 250 non-AMT paper structured with term bonds in 2038, 2043, 2048, and 2053. Series 251 AMT paper will consist of $34.1 million maturing from 2023 to 2034 with a term bond in 2036.

The St. Louis Board of Education is planning a $135 million sale of education GO bonds on Tuesday in a deal led by bookrunner Stifel, Nicolaus & Co. The bonds are rated AA by S&P and are insured by Assured Guaranty Municipal Corp. and will mature serially from 2033 to 2043.

The Idaho Housing & Finance Association will sell $115.2 million of single-family mortgage bonds in a two-pronged offering that is rated Aa1 by Moody’s. The $65.1 million Series A fixed-rated, non-AMT bonds mature serially from 2024 to 2035 with terms in 2038, 2043, 2048, and 2053, while Series B-1 consists of $50 million of fixed-rate taxable paper maturing serially from 2024 to 2035 with term bonds in 2038, 2041, and 2053. Barclays is the lead book runner.

Competitive:
The competitive activity will be led by a two-pronged sale from the New York City Transitional Finance Authority. The first Series is a $119.6 million offering that consists of future tax secured subordinated bonds in Series F and Subseries F-3 taxable bonds. The second is $180.3 million of future tax secured subordinated fiscal 2023 Series F-2 taxable bonds. The sales are planned for Tuesday.

Maryland will sell $400 million of bonds Wednesday: $50 million taxable state and local facilities loan GOs and $184.1 million and $165.8 million of tax-exempt GOs.

The Davis School District is planning a $100 million sale of GOs backed by the Utah School District Bond Guaranty Program on Monday. The bonds are rated Aaa by Moody’s.