Muni secondary quiet amid larger new-issue day, USTs rally after CPI report
10 min read
Municipals were largely unchanged as the market digested another larger primary slate while U.S. Treasuries rallied after the release of economic data showed inflation has eased. Equities ended mixed.
The Dormitory Authority of the State of New York priced and repriced its $1 billion-plus school revenue bond deal for institutions with yields falling on the short end and rising in the belly from Tuesday’s retail offering and a preliminary wire.
More New York paper is on the way as New York City on Wednesday announced a $1.6 billion general obligation bond deal slated for later this month. The city also is offering a tender on its taxable Fiscal 2021 bonds, joining other issuers in tendering their bonds in lieu of refundings.
Meanwhile, the Investment Company Institute reported investors pulled another $600 million out of municipal bond mutual funds in the week ending May 3, after $283 million of outflows the previous week. Exchange-traded funds saw more inflows to the tune of $202 million after $706 million of inflows the week prior.
“Secondary flows have seen respectable support despite an increase in supply,” said Kim Olsan, senior vice president of municipal bond trading at FHN Financial.
A remarkably tight trading range in May “is likely giving bidders some confidence that generic spreads and absolute yields offer fair value,” she said.
While “syndicate activity comprised several larger pricings, bids wanteds totals (via Bloomberg’s platform) reached a 2023 high of $1.6 billion — likely a reflection of expected cash raises for new issues and the second successive day with an elevated figure,” she noted.
Syndicate business, Olsan said, “spanned more than 20 unique names of $25 million par value or greater, with gradations of spread relevant to portfolio diversity.”
Recent 10-year spreads have “settled with general market AAAs trading +5/MMD, local AA-rated credits carrying spreads of +5-15/MMD and the single-A space trading +25/MMD or wider,” she said.
Among the larger pricings, she said “there was more uniformity in spreads out to 10 years with a divergence at the longer end.”
Final yields in Dallas (NR/AA-/) limited tax “GOs brought a 5% due 2033 at 2.69%” and Lower Colorado River Authority, Texas (NR/A/) 5s due 2033 priced at 2.71%.
“Out to the 20-year range, the Dallas yields were approximately 10 basis points tighter than the [Lower Colorado River Authority] issue in 5% coupons,” according to Olsan.
“Another nuance was the consistency of spreads in 4% structures” of a sale of Ann Arbor Schools, Michigan (Aa3/NR/), she said.
“The 10-year maturity carried a spread of +34/MMD and the 20-year 4% was bought at 4.02%, in line with a secondary sale of AAA Texas Water 4s due 2045 at 4.09%,” she said.
Olsan noted “the results point to relative calm ahead of key inflation data and federal debt ceiling proceedings that could bring near-term rate volatility.”
The two-year muni-Treasury ratio Tuesday was at 68%, the three-year at 69%, the five-year at 69%, the 10-year at 67% and the 30-year at 88%, according to Refinitiv MMD’s 3 p.m. ET read. ICE Data Services had the two-year at 67%, the three-year at 68%, the five-year at 65%, the 10-year at 66% and the 30-year at 87% at 4 p.m.
In the primary market Wednesday, RBC Capital Markets priced and repriced for institutions $1.086 billion of school districts revenue bonds for the Dormitory Authority of the State of New York, with yields falling up to three basis points from Tuesday’s retail offering during the preliminary pricing. Yields fell up to six basis points and were cut up to 10 basis points when the deal was repriced.
The first tranche, $795.325 million of Series 2023A (Aa3/AA/AA-/), saw 5s of 10/2024 at 3.04% (-3), 5s of 2028 at 2.51% (unch), 5s of 2033 at 2.70 % (+9), 5s of 2038 at 3.24% (-6), 5s of 2043 at 3.60% (-2) and 5.25s of 2050 at 3.80% (-3), callable 10/1/2031.
The second tranche, $119.760 million of Series 2023B (Aa2/AA/AA-/), saw 5s of 10/2024 at 3.02% (-2), 5s of 2028 at 2.58% (+10), 5s of 2033 at 2.67% (+8), 5s of 2038 at 3.29% (unch), 5s of 2043 at 3.59% (unch) and 4s of 2050 at 4.20% (unch), callable 10/1/2031.
The third tranche, $65.985 million of Series 2023C (/AA/AA-/), saw 5s of 10/2024 at 3.02% (-2), 5s of 2028 at 2.58% (+10), 5s of 2033 at 2.67% (+8) and 5s of 2038 at 3.29% (unch), callable 10/1/2031.
The fourth tranche, $104.655 million of Series 2023D (Aa3/AA/AA-/), saw 5s of 10/2024 at 3.15% (unch), 5s of 2028 at 2.69% (+10), 5s of 2033 at 2.78% (+8), 5s of 2038 at 3.40% (unch) and 5s of 2039 at 3.47% (unch), callable 10/1/2031.
BofA Securities priced for the West Virginia Hospital Finance Authority (A2/A//) $286.105 million of revenue bonds on the behalf of the West Virginia University Health System, with 5s of 6/2027 at 3.76%, 5s of 2038 at 3.85%, 5s of 2043 at 4.15%, 4.25s of 2047 at 4.48% and 4.375s of 2053 at 4.61%, callable 6/1/2033.
Wells Fargo Bank priced the Metropolitan Atlanta Rapid Transportation Authority, Georgia (Aa2/AAA/AAA/), sold $112.505 million of green sales tax revenue bonds, Series 2023B, with 5s of 7/2024 at 3.00%, 5s of 2028 at 2.43% and 5s of 2032 at 2.46%, noncall.
In the competitive, Fort Worth, Texas (Aa3/AA//AA+/), sold $154.325 million of general purpose bonds, to Morgan Stanley, with 5s of 3/2024 at 3.10%, 5s of 2028 at 2.60%, 5s of 2033 at 2.61%, 5s of 2038 at 3.29% and 4s of 2043 at par, callable 3/1/2032.
The city also sold $85.085 million of combination tax and revenue certificates of obligation to Wells Fargo Bank, with 5s of 3/2024 at 3.10%, 5s of 2028 at 2.60%, 5s of 2033 at 2.65%, 5s of 2038 at 3.25% and 4s of 2043 at par, callable 3/1/2032.
Additionally, the city sold $16.955 million of tax notes, to J.P. Morgan, with 5s of 3/2024 at 3.12%, 5s of 2028 at 2.60% and 5s of 2030 at 2.58%, noncall.
NYC to sell $1.62B GOs, announces tender offer
New York City on Wednesday announced details of its upcoming sale of about $1.62 billion of general obligation bonds.
The deal is composed of $1.46 billion of tax-exempt fixed-rate GOs and $154 million of taxable fixed-rate GOs.
Proceeds will be used to refund or purchase and remarket certain outstanding bonds for savings.
Joint senior managers Jefferies and Siebert Williams Shank are expected to price the bonds May 31 after a one-day retail order period.
As part of the transaction, current holders of the city’s Fiscal 2021 tax-exempt Series D GOs and taxable Series E GOs are being invited to submit offers for the purchase of their bonds by the city for cash.
Previously, the city issued a voluntary notice of potential tender offer and/or refunding and supplement describing its plans and rationale for pursuing such a process.
The invitation is available at www.globic.com/nyc and will expire at 5 p.m. eastern on May 23.
Secondary trading
New Mexico 5s of 2024 at 3.10%. Texas 5s of 2024 at 2.97% versus 2.97% on 5/4 and 3.03% on 4/26. NYC TFA 5s of 2025 at 2.79%.
Triborough Bridge and Tunnel Authority 5s of 2028 at 2.37%. California 5s of 2029 at 2.32% versus 2.30% Tuesday and 2.36% Monday. Connecticut 5s of 2029 at 2.44%.
Wisconsin 5s of 2034 at 2.45% versus 2.45%-2.44% Tuesday and 2.48p%-2.47% on 5/3. Energy Northwest, Washington, 5s of 2034 at 2.55%-2.54% versus 2.57% Tuesday and 2.65% original on 5/3. Plano ISD, Texas, 5s of 2035 at 2.72%.
Tennessee State School Bond Authority 5s of 2047 at 3.51%. Illinois Finance Authority 5s of 2051 at 4.20% versus 4.27%-4.20% on 4/26.
AAA scales
Refinitiv MMD’s scale was unchanged: The one-year was at 2.97% and 2.66% in two years. The five-year was at 2.31%, the 10-year at 2.31% and the 30-year at 3.36% at 3 p.m.
The ICE AAA yield curve was cut up to four basis points: 3.04% (+4) in 2024 and 2.73% (+3) in 2025. The five-year was at 2.33% (+2), the 10-year was at 2.29% (flat) and the 30-year was at 3.35% (flat) at 4 p.m.
The IHS Markit municipal curve was unchanged: 2.96% in 2024 and 2.66% in 2025. The five-year was at 2.31%, the 10-year was at 2.30% and the 30-year yield was at 3.36%, according to a 4 p.m. read.
Bloomberg BVAL was little changed: 2.79% (-1) in 2024 and 2.66% (unch) in 2025. The five-year at 2.31% (unch), the 10-year at 2.29% (-1) and the 30-year at 3.38% (-1) at 4 p.m.
Treasuries rallied.
The two-year UST was yielding 3.915% (-12), the three-year was at 3.574% (-16), the five-year at 3.338% (-13), the 10-year at 3.442% (-9), the 20-year at 3.872% (-6) and the 30-year Treasury was yielding 3.794% (-5) at 4 p.m.
CPI
The consumer price index showed inflation had risen 0.4% in April and 4.9% year-over-year.
The CPI numbers coming in pretty much as expected “was a relief” to the markets, with the bond market rallying after the release, Luke Bartholomew, senior economist at abrdn, told The Bond Buyer.
While the market expects the Federal Reserve to pause its rate hikes a “strong” CPI read, he said, “would have made it harder to justify that pause and maybe brought the Fed back to the table.”
“Certainly, we think that this is a pause that will eventually end in a cut sometime later,” Bartholomew said.
A higher print, based on some banks’ projections and the Cleveland Federal Reserve Bank’s FedNow, “would shift the narrative,” he said, “and this print doesn’t do that.”
Friday’s higher-than-expected employment gains and the decrease in concern about the banking sector turmoil concerned the market. If CPI exceeded expectations, Bartholomew said, “all the pieces would have started to point toward okay, maybe the Fed does need to go again.”
And while more employment and inflation data will post before the June 13-14 Federal Open Market Committee meeting, Bartholomew said, “If the Fed does plan on hiking at the next meeting, it’s going to have to do a fair bit of communication” before it meets. “That’s really going to matter what the Fed tells us about how they feel about what the market is pricing at the moment.”
And the year-over-year headline number at 4.9% offers a “psychological” benefit, being below 5%, he said. “But there’s no getting around that 5% is a big number. The real wages are still under considerable pressure,” and it may take a recession to get inflation down to 2%, he added.
Abrdn “penciled in” a recession in the second half of the year. “I think that the timing is a little bit less interesting than the destination and how high rates have to get to generate that recession,” Bartholomew said.
The Fed has tightened enough to cause a recession, he said, “but if we’re wrong about that, if the economy does turn out to be a little bit more resilient and inflation a little bit tougher, then I would say it just means that rates will have to go higher before that recession comes about.”
Indeed the 4.9% figure “is a sigh of relief to a market on edge,” said Alexandra Wilson-Elizondo, co-head of portfolio management for Multi Asset Solutions at Goldman Sachs Asset Management. “The data today will be interpreted as not hot enough to force the Fed’s hand in June. The Fed has an excuse now not to hike. In fact, the market’s first reaction is to price that the Fed will be done.”
But, she cautioned, this one data point won’t be the sole determinant of the next policy decision, with more employment and inflation data to process before the meeting.
“The details of the print suggest that we are still a meaningful distance from the Fed’s 2% target, giving little reason for the Fed to cut this year,” Wilson-Elizondo said, calling the decline “marginal.” As a result she sees the Fed pausing longer than the market expects.
“Unless we start seeing 0.2% or slower month-to-month core CPI readings, returning to 3% inflation by year-end is an extremely farfetched prospect,” said Jeffrey Cleveland, chief economist at Payden & Rygel. “The Fed might be hiking rates this fall, not cutting.”
Given comments this week by Federal Reserve Bank of New York President John Williams, in which he “warned that they were not done raising rates,” Tom Hopkins, Portfolio Manager at BRI Wealth Management, said, “markets need to slowly wake up to the fact that the data is not cool enough, and the Fed is open to raise rates further.”
But this report, combined with the employment report, suggests the Fed should raise rates, said Sean Snaith, the director of the University of Central Florida’s Institute for Economic Forecasting. “The case for a pause was pretty well quashed with today’s inflation report, and the likelihood of a rate cut later this year is becoming more of a fantasy.”
He noted inflation remains too high, with a tight labor market causing “significant pressure on wages, pushing us in the opposite direction of what the Fed is trying to achieve with interest rate hikes.”
Progress in taming inflation “remains incremental rather than rapid,” said Wells Fargo Securities Senior Economist Sarah House and Economist Michael Pugliese. “We expect the FOMC to maintain the federal funds rate at its current level for the foreseeable future and for inflation to slow further in the months ahead as supply pressures continue to ease and demand growth weakens.”
Morgan Stanley economists said they “continue to see the data and financial conditions firmly supporting a pause in June.”
Angelo Kourkafas, investment strategist at Edward Jones, said the report “confirms expectations for a Fed pause.” Core services inflation excluding shelter, which the Fed has “highlighted recently” improved greatly. “This progress enough in our view to keep the Fed from continuing to raise rates.”
The report “supports the case for the Fed to seriously contemplate a pause in rate hikes in June, but does not support any near-term rate cuts,” said Scott Anderson, chief economist at Bank of the West.
But Morning Consult Chief Economist John Leer said, “inflation appears to be settling in at an uncomfortably elevated level.”
As a result, “rate hikes are back on the table at the Fed’s June meeting,” he added, “although ongoing stresses in the banking sector may tighten financial conditions on their own, effectively tightening monetary policy without additional intervention from the Fed.”
Jay Hatfield, CEO at Infrastructure Capital Advisors, said the report shows a Fed policy error, “raising rates too fast and too far, resulting in a banking crisis.” It’s likely the Fed will wait too long to start “cutting rates as they continue to rely on their discredited Phillips curve model of inflation and the economy.”
Primary to come:
The California Housing Finance Agency (/BBB///) is slated to price $277.3 million of social certificates, some of which are partially exempt on Thursday. Serials 2036. Citigroup Global Markets Inc.
The Arkansas Development Finance Authority (/BB-/BB/) is slated to price $240 million of environmental improvement revenue green bonds subject to the alternative minimum tax. Term bond in 2053. BofA Securities.
The Liberty, Mo., School District #53 (/AA//) is set to price $120 million of GO school bonds on Thursday. Serials 2024 to 2043. Stifel, Nicolaus & Co.
Fresno, Calif., (/AA//) will price $100.2 million of airport revenue bonds — both AMT and non-AMT paper — insured by Build America Mutual on Thursday. Serials 2024-2037, with terms in 2042, 2047, and 2053. Raymond James.
Chip Barnett contributed to this report.
