Yields fall after Powell indicates rate cuts are on horizon

Municipals improved Wednesday, as U.S. Treasury yields fell five years and out and equities saw gains after Fed Chair Jerome Powell indicated rate cuts are still set for this year.

“The Fed wants to see continued evidence that inflation is moving closer to target,” said Jeff Lipton, managing director of credit research at Oppenheimer., who believes the Fed is in a “good position.”

While Friday will see the release of February nonfarm payroll numbers, recent data releases show “a strong labor market,” he said.

Despite this, he noted inflation is still “sticky,” especially concerning services inflation. Any “disinflationary drift” will largely come from services inflation.

Markets, he said, are “paying very close attention to all of this.”

Triple-A yields fell two to four basis points Wednesday while Treasuries saw yields fall three to five 10 years and out.

The Investment Company Institute reported smaller inflows into municipal bond mutual funds for the week ending Feb. 28, with investors adding $59 million to funds following $530 million the week prior.

ICI reports exchange-traded funds saw inflows of $320 million following $305 million of inflows the week prior.

The Texas Transportation Commission (Aaa/AAA//AAA/) led the primary market Wednesday with $696.175 million of State of Texas Highway Improvement GO refunding bonds. The issuer saw yields range from 2.97% with a 5% coupon in 2025 to 3.47% with a 5% maturing in 2044.

Wells Fargo priced for the Lower Colorado River Authority (/AA/A+/) $319.995 million of LCRA Transmission Services Corporation Project transmission contract refunding revenue bonds, with yield ranging from 3.07% with a 5% coupon in 2025 to 3.96% with a 5.25% maturing in 2054.

Issuance year-to-date is at $63.217 billion, up 35.7% from 2023 thanks to an “active” January, a robust February, and several large deals this week, he said.

Supply, though, is still not meeting demand, according to Lipton.

March is usually a weaker month for munis as the new-issue calendar typically expands, he said.

Several outsized deals — such as the mega deals from Tuesday, including the New York City Municipal Water Finance Authority, the Regents of the University of California and the Presidents and Fellows of Harvard College — should be “well-bid and fully placed,” he said.

There may be “heavier sidelined issuance ahead of the November general election, and the election outcome could influence year-end volume activity,” he said.

Muni market volatility relative to other fixed-income cohorts has been tempered by “thinly stocked dealer inventories and a general lack of secondary paper,” according to Lipton.

“The better returns have prevailed despite the frothy price levels offered by tax-exempt,” he said.

The two-year muni-to-Treasury ratio Wednesday was at 59%, the three-year at 59%, the five-year at 58%, the 10-year at 59% and the 30-year at 84%, according to Refinitiv Municipal Market Data’s 3 p.m. EST read. ICE Data Services had the two-year at 60%, the three-year at 59%, the five-year at 59%, the 10-year at 60% and the 30-year at 83% at 3:30 p.m.

The 10-year MMD-UST ratio and 30-year ratio are “a long way from the averages since 1981 with the 10 and 30-year ratios approximating 90% and 100% respectively, yet the 10-year has recently broken through richer terrain,” Lipton said.

Shorter-end investing by separately managed accounts has continued this year, “thus holding shorter ratios at richer levels,” he said.

There should be a greater institutional presence as “the market becomes cheaper and relative value frees up,” he said.

Certain classes of buyers can “tolerate” low ratios, but “cross-over interest needs to be fueled by cheaper levels,” Lipton said.

AAA scales
Refinitiv MMD’s scale was bumped two to four basis points. The one-year was at 2.95% (-2) and 2.71% (-2) in two years. The five-year was at 2.40% (-4), the 10-year at 2.42% (-4) and the 30-year at 3.57% (-2) at 3 p.m.

The ICE AAA yield curve was bumped up to two basis points: 2.99% (unch) in 2025 and 2.75% (-2) in 2026. The five-year was at 2.44% (-1), the 10-year was at 2.45% (-1) and the 30-year was at 3.53% (unch) at 3:30 p.m.

The S&P Global Market Intelligence municipal curve was bumped two to four basis points: The one-year was at 2.93% (-2) in 2025 and 2.71% (-2) in 2026. The five-year was at 2.41% (-2), the 10-year was at 2.42% (-4) and the 30-year yield was at 3.54% (-2), according to a 3 p.m. read.

Bloomberg BVAL was bumped two to three basis points: 2.91% (-3) in 2025 and 2.76% (-3) in 2026. The five-year at 2.40% (-3), the 10-year at 2.46% (-3) and the 30-year at 3.60% (-2) at 3:30 p.m.

Treasuries were firmer five years and out.

The two-year UST was yielding 4.562% (+2), the three-year was at 4.334% (+1), the five-year at 4.121% (-1), the 10-year at 4.109% (-3), the 20-year at 4.357% (-4) and the 30-year at 4.244% (-3) at 3:30 p.m.

Powell testimony
Federal Reserve Board Chair Jerome Powell reiterated that interest rate cuts are likely this year if the economy progresses as expected, in a semi-annual monetary policy report and testimony before the House Financial Services Committee.

When asked about cuts by panel Chair Rep. Patrick McHenry, R-N.C., Powell repeated the Federal Open Market Committee wants to see more data that gives them confidence inflation is on a path down to 2%.

Most questions dealt with regulation. Powell did say there are no signs of a coming recession, but there would be no declaration of a soft landing.

“The (prepared) opening statement in Fed Chair Powell’s semi-annual Monetary Policy Report, today to the House Financial Services Committee, contained no new information,” noted Michael Gregory, BMO deputy chief economist. “The themes from the Jan. 31 policy announcement and press conference, along with subsequent speeches from several Fed officials, were repeated.”

June remains the likely timing for the first rate cut, according to ING Chief International Economist James Knightley. “We think it will come given evidence of a cooling jobs market and the prospect that weak real disposable household income growth, the exhaustion of pandemic era accrued savings and high borrowing costs putting more stress on household finances will result in weaker consumer spending.”

José Torres, senior economist at Interactive Brokers, noted, “stocks are recovering from [Tuesday]’s selloff while yields decline as Powell acknowledges that the likelihood of another rate hike is low.”

Primary on Wednesday
Jefferies priced for the Texas Transportation Commission (Aaa/AAA//AAA) $696.175 million of state of Texas highway improvement GO refunding bonds, Series 2024.

Wells Fargo priced for the Lower Colorado River Authority (/A/A+/) $319.995 million of LCRA Transmission Services Corp. Project transmission contract refunding revenue bonds.

J.P. Morgan priced for the Collier County Industrial Development Authority, Florida, is set to price Wednesday $159.120 million of NCH Healthcare System Projects healthcare facilities revenue bonds

The first tranche was $94.120 million of Assured Guaranty-insured fixed-mode bonds, Series 2024A (A1/AA/A-/).

The second tranche is $30 million of term mode bonds, Series 2024B-1 (A3//A-/).

The third tranche is $35 million of term mode bonds, Series 2024B-2 (A3//A-/).

Gary Siegel contributed to this story.