In wake of Fed cut, and despite underperforming taxables, muni momentum is positive
8 min read
Despite the pressure on U.S. Treasuries this week following the Federal Reserve’s 50 basis point rate cut, municipals closed out the week on track to post positive returns for the fourth consecutive month, the first time since 2021.
Triple-A municipal yield curves were lightly traded and little changed while Treasuries saw small improvements for the first session since the Federal Open Market Committee decision.
Tax-exempts mostly lag rate moves, noted Barclays strategists in a weekly report, adding that muni-to-UST ratios increase as a result.
“The bulk of this underperformance also happens prior to actual rate cuts, although at times we see substantial follow-through after,” Barclays strategists Mikhail Foux and Clare Pickering said.
This year’s performance has been largely consistent with previous cycles thus far, they said. “The 10-year and 30-year ratios have increased 4-6 basis points since mid-June; the five-year ratio has barely increased, but it was relatively cheap to start, so it is not surprising. The 5s10s curve has steepened nearly 20 basis points, more than the average, but the 10s30s curve has steepened less.”
The two-year muni-to-Treasury ratio Friday was at 64%, the three-year at 66%, the five-year at 66%, the 10-year at 70% and the 30-year at 86%, according to Refinitiv Municipal Market Data’s 3 p.m. EST read. ICE Data Services had the two-year at 64%, the three-year at 66%, the five-year at 66%, the 10-year at 70% and the 30-year at 86% at 3:30 p.m.
“Normally muni ratios decline slightly after the first rate cut, but we are not sure this will be the case in 2024, as technicals should remain challenging in September and October, as supply should return with a vengeance,” Barclays said. “Meanwhile, yield curves typically continue to steepen, and we believe this will be the case for the remainder of the year; in our view the 10s30s curve has more room run.”
The September new-issue calendar remains large, though muni ratios, “which are currently at the cheapest levels year-to-date, have kept the market well-bid despite lighter redemptions in September,” BofA Global Research strategists said in a weekly report. “
Issuance ticks up to almost $14 billion next week while Bond Buyer 30-day supply sits at $19.04 billion.
The new-issue calendar is led by three highly rated issuers — Texas Water Development Board’s (Aaa/AAA/AAA/) $1.258 billion of state water implementation revenue fund master trust revenue bond deal along with a $362 million taxable pricing, while the Los Angeles Unified School District (Aa2//AAA/AAA) is set to price Wednesday $1.1 billion of dedicated unlimited ad valorem property tax general obligation sustainability bonds.
Gilt-edged Montgomery County, Maryland, will sell $398.9 million of general obligation bonds in the competitive market in two deals Thursday.
Tax-exempt investment-grade munis continue to underperform their taxable sector counterparts.
The Bloomberg Municipal Index is at positive 0.85% in September and positive 2.15% year to date while USTs are returning 1.61% so far in September and 2.37% year-to-date and corporate bonds are at positive 2.02% in September and 5.58% in 2024.
“Should September’s positive returns hold as we expect, it would mark the fourth consecutive month of positive total returns — the first such period since the five-month period spanning from March through July 2021,” BofA strategists Yingchen Li and Ian Rogow said.
High-yield municipals are returning 0.95% in September and 7.53% in 2024 while taxable munis are at positive 1.79% in September and 5.68% year-to-date.
BofA said the expected pace of rate cuts up to the first half of 2025 “is consistent with BofA’s technical strategists’ view that the bond market rally indeed will take a fast pace with the 10-year Treasury on track to reach 3.25% by the end of 2024.”
“For the muni market, the fast-paced rally is likely to be more concentrated in the final two months of 2024; post-election, we expect a lighter issuance calendar and lower muni ratios,” Li and Rogow said. “Our year-end target of 1.80%-1.90% for the 10-year AAA muni remains on track.”
Barclays strategists said they still believe the market is “well-positioned for a year-end rally, and only a ‘red wave’ in November could derail this sanguine outlook.”
“Even though investors should keep in mind this risk, we would consider adding in October if valuations become more attractive,” they added.
AAA scales
Refinitiv MMD’s scale was little changed: The one-year was at 2.50% (unch) and 2.30% (unch) in two years. The five-year was at 2.31% (unch), the 10-year at 2.63% (unch) and the 30-year at 3.52% (unch) at 3 p.m.
The ICE AAA yield curve was little changed: 2.51% (unch) in 2025 and 2.31% (unch) in 2026. The five-year was at 2.32% (unch), the 10-year was at 2.60% (unch) and the 30-year was at 3.50% (unch) at 4 p.m.
The S&P Global Market Intelligence municipal curve was little changed: The one-year was at 2.49% (unch) in 2025 and 2.32% (unch) in 2026. The five-year was at 2.32% (unch), the 10-year was at 2.58% (unch) and the 30-year yield was at 3.50% (unch) at 4 p.m.
Bloomberg BVAL was little changed: 2.43% (unch) in 2025 and 2.38% (unch) in 2026. The five-year at 2.36% (unch), the 10-year at 2.61% (+1) and the 30-year at 3.48% (unch) at 4 p.m.
Treasuries were better.
The two-year UST was yielding 3.578% (-3), the three-year was at 3.465% (-3), the five-year at 3.484% (-2), the 10-year at 3.726% (-1), the 20-year at 4.11% (-2) and the 30-year at 4.069% (-1) near the close.
Primary calendar:
The Texas Water Development Board (/AAA/AAA/) is set to price Thursday $1.258 billion of state water implementation revenue fund master trust revenue bonds, Series 2024A, serials 2025-2037, terms 2038, 2039, 2040, 2041, 2042, 2043, 2044, 2049, 2054, 2059. BofA Securities
The Texas Water Development Board is also set to price Wednesday $362.465 million of taxable state water implementation master trust revenue taxable bonds, serials 2025-2039, terms 2044, 2054. BofA Securities.
The Los Angeles Unified School District (Aa2//AAA/AAA) is set to price Wednesday $1.1 billion of dedicated unlimited ad valorem property tax general obligation sustainability bonds, Series QQR, consisting of $989.505 million of Series QRR, serials 2025-2031, 2035-2045, terms 2049, and $110.495 million of Series QRR-T, serial 2025. RBC Capital Markets.
The Port Authority of New York and New Jersey (Aa3/AA-/AA-/) is set to price Wednesday $1.007 billion of consolidated bonds, consisting of $551.695 million of Series 245th, serials 2025-2028, 2030-2044, terms 2049, 2054, and $456.060 million of Series 245th AMT, serials 2025-2028, 2030-2034, 2036-2044. BofA Securities.
The New York City Municipal Water Finance Authority (Aa1/AA+/AA+/) is set to price $843.905 million of water and sewer second general resolution revenue bonds, consisting of $600 million of Series AA-1, serials 2050-2054, $243.905 million of refunding Series AA-2, serials 2031, 2037-2038, 2046, 2048-2049. Loop Capital Markets.
The State Public Works Board of California (Aa3/A+/AA-/) is set to price Tuesday $799.92 million of various capital project lease revenue refunding bonds, serials 2025-2039. Siebert Williams Shank & Co., LLC
The Salt River Project Agricultural Improvement and Power District (Aa1/AA+//) is set to price Wednesday $700 million of Salt River Project electric system revenue bonds, consisting of $551.12 million Series A, serials 2026-2027, 2029-2038, 2040, 2042-2044, terms 2049, 2054, and $144.88 million of Series B, serials 2039, 2042. BofA Securities.
Lee County, Florida, (A1//A/AA-) is set to price Tuesday $564 million of AMT airport revenue bonds, Series 2024, serials 2034-2044, terms 2049, 2054. BofA Securities.
The Board of Regents of the University of Texas System (Aaa/AAA/AAA/) is set to price Tuesday $511.995 million of revenue financing system refunding bonds, Series 2024B.Morgan Stanley & Co. LLC.
Sacramento County (A2/A+//) is set to price Tuesday $478.26 million of airport system senior revenue bonds, Series 2024 non-AMT, serials 2028-2044, terms 2049, 2054. Wells Fargo Bank, N.A. Municipal Finance Group.
The Power Authority of the State of New York (Aa1/AA/AA/AA+) is set to price $404.375 million of revenue bonds, Series 2024A. Goldman Sachs & Co. LLC.
The Allegheny County Sanitary Authority (Aa3/AA-//) is on the day-to-day calendar with $360.46 million of sewer revenue refunding bond, serials 2024-2044, terms 2049, 2055. PNC Capital Markets LLC.
St. Cloud, Minnesota, (A2//AA-/) is set to price Tuesday $324.982 million of CentraCare Health System healthcare revenue bonds, Series 2024. Piper Sandler & Co.
The Cypress-Fairbanks Independent School District (Aaa/AAA//) is set to price Wednesday $303.965 million unlimited tax school building bonds, Series 2024B, PSF guaranteed. Wells Fargo Bank, N.A. Municipal Finance Group.
The Charleston County Airport District, South Carolina, (A1/A+//) is set to price $300.29 million of airport revenue bonds, consisting of $97.73 million Series 2024 AMT (A1/A+//), serials 2041-2044, terms 2049, 2054, and $202.56 million of tax-exempts, serials 2028-2044, terms 2049, 2054. BofA Securities.
The City and County of Denver (Aaa/AAA//) is set to price Tuesday $263.98 million of water revenue refunding bonds, Series 2024A, serials 2025-2044, terms 2049, 2054. BofA Securities.
The Industrial Development Authority of the City of Sierra Vista, Arizona, unrated, is set to price $208.665 million of American Leadership Academy education facility revenue bonds, Series 2024, terms 2034, 2039, 2044, 2049, 2054, 2059, 2064. Baird.
Tacoma School District No. 10, Pierce County, Washington, (Aaa/AA+//) is set to price Tuesday $146.465 million of unlimited tax general obligation bonds, insured by WA State SD Cr. Enhancement Program, serials 2026-2044, term 2048. RBC Capital Markets.
The Missouri Housing Development Commission (/AA+//) is set to price Thursday $142 million of single family mortgage revenue bonds, consisting of $130 million of Series 2024G, serials 2025-2036, terms 2039, 2044, 2049, 2054, 2055, and $12 million of Series H taxables, terms 2026, 2027, 2028, 2029, 2030, 2031, 2032, 2033, 2034, 2039, 2044, 2049, 2054. Stifel, Nicolaus & Company, Inc.
The Dormitory Authority of the State of New York (A1/A+//) is set to price Tuesday $122.86 million of NYU Langone Hospitals Obligated Group revenue bonds. Goldman Sachs & Co. LLC.
The Arlington Higher Education Finance Corp. (/AAA//) is set to price Wednesday $110.57 million of LifeSchool Dallas education revenue bonds, PSF guaranteed. D.A. Davidson & Co.
Erie County, New York, (/AA//AA) is set to price Tuesday $110 million of general obligation public improvement serial bonds (Buffalo Bills Stadium Project), serials 2025-2049. Jefferies LLC.
The California Enterprise Development Authority is set to price Tuesday $109.135 million of Castilleja School Foundation Project revenue bonds (/A//), serials 2035-2044, terms 2049, 2054. Stifel, Nicolaus & Company, Inc.
The Oklahoma Water Resources Board (/AAA//) is set to price Wednesday $109.105 million of state loan program revenue bonds, serials 2025-2039, terms 2044, 2049, 2054. BOK Financial Securities, Inc.
The Galena Park ISD (Aaa///) is set to price $100 million of unlimited tax school building bonds, PSF guaranteed, serials 2025-2049. Loop Capital Markets.
Competitive:
The Kansas Development Finance Authority is set to sell $270.625 million of Kansas Department of Health and Environment revolving funds revenue bonds, Series 2024SRF, at 11:15 a.m. eastern Tuesday.
Jefferson County School District, Kentucky, is set to sell $139.720 million of general obligation bonds at 11 a.m. eastern Tuesday.
The Indiana Finance Authority is set to sell $175 million of state revolving fund program green bonds at 10:45 a.m. eastern Wednesday.
Waltham, Massachusetts, is set to sell $118.9 million of general obligation bonds at 11 a.m. eastern Wednesday.
Montgomery County, Maryland, (Aaa/AAA/AAA/) is set to sell $280 million of general obligation bonds at 10 a.m. eastern and $456.465 million of GO refunding bonds at 10:15 a.m. Thursday.
