Munis mixed as inflation, Fed hang over
5 min read
Municipals were weaker in spots in light trading Friday while U.S. Treasuries were weaker again on the short end on higher inflation reads. Equities rallied on a potential debt ceiling deal.
“A slew of hot economic data points are keeping the bond market selloff going strong,” noted Edward Moya, senior market analyst at OANDA.
The Fed’s preferred measure of inflation, core PCE, rose 0.4% in April and climbed up to 4.7% on an annual basis.
“Higher prices did not deter spending as that climbed more than expected to 0.8% in April,” Moya said. “Incomes ticked higher as expected to 0.4%, which suggests the consumer is still going to spend in the future.”
The U.S. economy is “too resilient and this will force the Fed to not only deliver more tightening but also to keep rates higher for much longer,” Moya said.
He said Fed rate cut bets will soon get pushed into next year as the economy “remains somewhat hot.”
“Although we expect the Fed will opt to keep the Fed Funds rate unchanged at its June 13-14 meeting, largely driven by concerns over the extent of credit tightening and banking sector stress, today’s PCE report joins a wider set of data flagging firmer-than-expected economic activity and unrelenting upward price pressures,” said Mickey Levy, chief economist for Americas and Asia at Berenberg Capital Markets.
Levy said the strength of personal spending and inflation “is likely to tilt the Fed toward at least one more 25bp rate hike in Q3, possibly at its July 25-26 meeting, and will embolden hawkish Fed members to press the case for further rate hikes under the argument that rates remain insufficiently restrictive.”
Municipals were little changed Friday despite the moves in USTs, which are more focused on what’s coming from the Fed than on the debt ceiling.
“While we are hopeful that the debt ceiling standoff will be resolved, we would not be surprised if the markets are spooked yet again,” Barclays PLC said in a weekly report. “In that case, we would expect a flight to safety, and a UST rally. For now, Treasury yields have continued inching higher, increasing 5-20bp this week, with the yield curve inverting further, on investor concern that the Fed is not fully done with hiking rates.”
Typically tax-exempts outperform when Treasuries sell off, “but this time around municipals and USTs have moved in lock-step, and tax-exempts have actually underperformed, although on relatively light volume,” Barclays strategists Mikhail Foux, Clare Pickering and Mayur Patel wrote in the report.
Muni yield curves have become even more inverted, they said, adding “it seems that investors have finally started extending as the long end started performing and although the 10s20s portion of the curve remains uncharacteristically steep, it has started flattening.”
Ratios have adjusted higher, especially in the front end and the belly of the curve, Barclays noted.
The two-year muni-Treasury ratio Friday was at 69%, the three-year at 71%, the five-year at 71%, the 10-year at 71% and the 30-year at 91%, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the two-year at 70%, the three-year at 73%, the five-year at 71%, the 10-year at 72% and the 30-year at 92% at 3 p.m.
“Municipal valuations have become much more attractive, but a combination of concerns related to the debt ceiling, as well as heavier supply in early June gives us a little bit of a pause,” Barclays said. “Moreover, this year’s summer redemptions, while still large, should be substantially lower than in recent years, mostly due to lower redemptions attributed to current refundings.”
Despite this, they expect tax-exempts to perform relatively well in June “given their relative cheapness.”
The new-issue calendar is estimated to be $6.1 billion. New York City is on the calendar with $1.6 billion of general obligation bonds and the city confirmed it would price the bonds after officials said earlier in the week that they had concerns about timing if an agreement to raise debt ceiling was not done.
The calendar is also led by a $750 million taxable corporate CUSIP deal from Sutter Health and $760 million of tax-exempt and taxable GOs from Connecticut.
Secondary trading
Ohio 5s of 2024 at 3.30%. Texas waters 5s of 2026 at 3.11%. Los Angeles Department of Water and Power 5s of 2026 at 2.93%. LADWP 5s of 2028 at 2.70%.
California 5s of 2030 at 2.82%. Wisconsin 5s of 2030 at 2.87%.
LADWP 5s of 2034 at 2.79%. Boston 5s of 2042 at 3.49%.
AAA scales
Refinitiv MMD’s scale was unchanged: The one-year was at 3.31% (unch) and 3.15% (unch) in two years. The five-year was at 2.83% (unch), the 10-year at 2.72% (unch) and the 30-year at 3.62% (unch) at 1 p.m.
The ICE AAA yield curve saw small cuts: 3.35% (unch) in 2024 and 3.20% (+1) in 2025. The five-year was at 2.84% (+1), the 10-year was at 2.75% (+2) and the 30-year was at 3.68% (+1) at 1 p.m.
Bloomberg BVAL was unchanged: 3.17% (unch) in 2024 and 3.07% (unch) in 2025. The five-year at 2.76% (unch), the 10-year at 2.68% (unch) and the 30-year at 3.72% (unch) at 1 p.m.
Treasuries were weaker.
The two-year UST was yielding 4.56% (+3), the five-year at 3.93% (+2), the 10-year at 3.81% (-1) and the 30-year Treasury was yielding 3.96% (-3) at 1:30 p.m.
Primary to come
Sutter Health (A1/A+/A+/) is set to price $750 million of taxable corporate CUSIP bonds Thursday. Serials 2033, 2053. Citigroup Global Markets Inc.
Riverside County, California, is set to price Thursday $360 million of tax and revenue anticipation notes. J.P. Morgan Securities LLC.
Connecticut (Aa3/AA-/AA-/AA+) is set to price $360 million of general obligation bonds Thursday. Morgan Stanley & Co. LLC.
Connecticut is also set to price $350 million of taxable GOs Thursday. Morgan Stanley & Co. LLC.
The Massachusetts Educational Financing Authority (/AA//) is set to price $352.7 million of taxable education loan revenue bonds Thursday. Serials, 2028-2033, term 2044. RBC Capital Markets.
The Irvine Facilities Financing Authority (/AA+//) is set to price $325.51 million of Gateway Preserve Land Acquisition Project lease revenue bonds Thursday. Serials, 2027-2038, terms, 2043, 2048, 2053. Stifel, Nicolaus & Company, Inc.
The Maryland Stadium Authority (/AA/AA/) is set to price Thursday $233.98 million of football stadium issue revenue bonds, serials, 2025-2037. Raymond James & Associates, Inc.
The Iowa Finance Authority (Aaa//AAA/) is set to price Thursday $186.215 million of state revolving fund revenue green bonds, serials 2025-2043, terms 2048, 2053. RBC Capital Markets.
The Utah Board of Higher Education (Aa1/AA+//) is set to price Thursday $163.195 million of University of Utah general revenue bonds, serials 2026-2053. Wells Fargo Bank, N.A. Municipal Finance Group.
The Indiana Finance Authority (/BBB-//) is set to price Thursday $140.155 million of taxable CHF-Tippecanoe, LLC student housing project revenue bonds. RBC Capital Markets.
The South Carolina State Housing Finance and Development Authority (Aaa///) is set to price $106.19 million of mortgage revenue bonds, serials 2025-2035, terms, 2038, 2043, 2048, 2053, 2054. Citigroup Global Markets Inc.
The New Jersey Housing and Mortgage Finance Agency (/AA-//) is set to price Wednesday $104.645 million of multi-family non-AMT social revenue bonds. Barclays Capital Inc.
Competitive:
Elk Grove USD, California, (Aa2///) is set to sell $132.4 million of general obligation bonds at 11:35 a.m. eastern Wednesday.
Putnam County School District, Florida, (A2//A+/) is set to sell $100 million of general obligation bonds at 11 a.m. eastern Wednesday.
Clark County, Nevada, is set to sell $100 million of sales and excise tax revenue streets and highways bonds at 11:30 a.m. eastern Thursday.
Ventura County, California, is set to sell $90. million of tax and revenue anticipation notes at 11:45 a.m. eastern Thursday.
