Lull in trading, lack of new issues hold market steady

Municipals were lightly traded and little changed as participants await new issues while U.S. Treasury yields fell and stocks were in the red in a risk-off trade.

Triple-A benchmark yields were little changed while the UST 10-year fell four basis points to 1.564% and the 30 fell nine to 2.083% near the close. The 10-year municipal-to-UST ratio is at 75% and the 30-year at 80%, according to Refinitiv MMD. ICE Data Services had the 10-year at 74% and the 30 at 82%.

With little activity in the secondary and no large deals pricing, municipals had little direction as participants trickled back in after a long weekend.

Nuveen said because municipal rates have sold off over the past few weeks, exempts are now considered “attractive,” thus “equilibrium between buyers and issuers should be constructive through the end of this year.”

Volatility in the U.S. Treasury market continues to pull on municipal bond valuations, despite very little municipal trading volume, Nuveen said.

“Even with cross currents emerging, creating net outflows this week, mutual funds continue to buy to invest their large cash balances,” Nuveen said. “Investors concerned with reinvestment risk are enjoying adjusted levels in high-yield municipals. The average high-yield municipal yield has risen 35 basis points since July 31, the peak of summer strength.”

BlackRock noted high-yield fund outflows are “notable given that sustained high-yield outflows have historically been a precursor for the broader market.”

BlackRock said it has shifted to a neutral stance on duration with a barbell yield curve strategy. “We prefer lower-rated investment grade bonds, particularly in the front-end of the yield curve, as well as select high-yield credits,” the report said. “We maintain a favorable view on the tax-backed, transportation, and healthcare sectors.”

Rosebud Strategies diffusion index falls
The Rosebud Strategies diffusion index fell modestly to 0.89 from 0.92. The index, which has been oscillating around both the 13-week moving average and the 12-month trend line, has remained above both for two consecutive weeks.

“Should the index stay above the moving average and 12-month trend on a sustained basis, it would signal a trend toward increased market perception of credit risk,” said Christopher Mier, founder of Rosebud Strategies.

The index has remained below the 1.00 level since June 28.

The index uses social media to gather commentary on the finances of state and local governments and measures the difference between negative and positive sentiment. The index rises as the difference between negative and positive sentiment rises.

The signal strength fell by less than one thousand mentions, or 4.2% of the previous week’s strength.

Secondary trading
Florida PECO 5s of 2022 traded at 0.17%-0.15%. Texas water 5s of 2022 at 0.12%. Minnesota 5s of 2022 at 0.12%. Washington 5s of 2023 at 0.17%.

Ohio 5s of 2025 at 0.41%-0.40%. Wisconsin 5s of 2025 at 0.39%. Texas water 5s of 2026 at 0.64%. New York City TFA 5s of 2026 at 0.86%.

New York EFC 5s of 2028 at 0.86%-0.85%. California 5s of 2029 at 1.11%-1.10%. Maryland 5s of 2030 at 1.18%-1.16%.

Denver city and county 5s of 2035 at 1.35%.

New York City waters 5s of 2044 at 1.94% versus 1.96% Friday. Triborough Bridge and Tunnel Authority 5s of 2051 at 2.08%.

AAA scales
According to Refinitiv MMD, short yields were steady at 0.13% in 2022 and 0.18% in 2023. The yield on the 10-year sat at 1.18% and the yield on the 30-year stayed at 1.69%.

The ICE municipal yield curve showed bonds steady in 2022 at 0.13% and steady in 2023 at 0.18%. The 10-year maturity rose one to 1.14% and the 30-year yield rose one to 1.72%.

The IHS Markit municipal analytics curve showed short yields steady at 0.13% and 0.18% in 2022 and 2023. The 10-year yield sat at 1.15% and the 30-year yield was steady at 1.69%.

The Bloomberg BVAL curve showed short yields steady at 0.16% in 2022 and up one to 0.17% in 2023. The 10-year yield stayed at 1.16% and the 30-year yield at 1.71%.

In late trading, Treasuries were better as equities fell.

The 10-year Treasury was yielding 1.564% and the 30-year Treasury was yielding 2.083%. The Dow Jones Industrial Average lost 117 points, or 0.34%, the S&P fell 0.24% while the Nasdaq lost 0.14%.

Stagflation talk
With inflation and unemployment at higher-than-normal levels, the word stagflation has been resurrected after decades of dormancy.

Answering questions following a speech Tuesday, Federal Reserve Board Vice Chair Richard Clarida said he doesn’t expect stagflation to be a problem. The stagflation in the 1970s, he said, resulted from Fed monetary policy mistakes, which will not be repeated.

Wells Fargo Securities Chief Economist Jay Bryson, Senior Economist Sarah House and Economic Analyst Hop Mathews agree that stagflation is unlikely. “Even if ‘stagnation’ is interpreted as an extended period of sluggish economic growth and elevated unemployment, we do not believe that the current economic environment meets this definition, as growth is anticipated to remain above trend,” they said.

Inflation and unemployment should both “recede,” thereby eliminating the possibility of stagflation.

And while much of the inflation seen to date can be considered “transitory,” Don Rismiller, chief economist at Strategas, said it is “surprising how long those bottlenecks are lasting (and in some cases even intensifying). We expect many to persist into and through 2022.”

These supply shocks are pushing up inflation expectations, “which can contribute to a self-fulfilling cycle for inflation.”

Of concern are “some key components, like rents,” which are rising, Rismiller said.

“Rental inflation is closely correlated to the labor market; as permanent job loss has come down, rental inflation has picked up,” he said. “This series doesn’t bounce around a lot like some do — so when you get a turn, it tends to be durable.”

Federal Reserve Bank of Atlanta President Raphael Bostic also addressed inflation in a Tuesday speech, suggesting “episodic” might be a better description than “transitory,” since the latter suggests a timeframe and “it is becoming increasingly clear” that the feature of the pandemic causing these price spikes “will not be brief.”

He suggested episodic means “these price changes are tied specifically to the presence of the pandemic and, once the pandemic is behind us, will eventually unwind, by themselves, without necessarily threatening longer-run price stability.”

The process has already begun, Bostic said.

But while troubled by the number of items in the consumer price index basket that rose more than 3% in August, more worrisome are the impacts of bottlenecks.

“The real danger, is that the longer the supply bottlenecks and attendant price pressures last, the more likely they will shape the expectations of consumers and businesspeople, shifting their views on pricing and wages in particular,” Bostic said.

On Tuesday, the Federal Reserve Bank of New York released its survey of consumer expectations, which showed inflation expectations at the highest level since the series began in 2013.

One-year inflation expectations rose to 5.3% in the September survey from 5.2% a month earlier, while the three-year jumped to 4.2% from 4.0%.

Turning to monetary policy, Bostic spoke about the 2% inflation goal and overshooting it. “If highly accommodative monetary policy is meant to correct past inflation shortfalls, then we have accomplished that mission,” he said.

While 2.25% average inflation over a six-year period wouldn’t be a concern, Bostic said, “Where I get concerned is if the trajectory of inflation is steep and appears likely to be persistent enough to risk unanchoring long-run inflation expectations.”

He believes underlying inflation has surpassed 2%. “I think inflation is likely to remain above 2% going forward. How far forward I cannot say,” Bostic added. “But upside risks are salient. I believe the conditions I’ve described argue for a removal of the Committee’s emergency monetary policy stance, starting with the reduction of monthly asset purchases, as we discussed in last month’s meeting. This is our first inflationary cycle under the FOMC’s new policy framework. So it is clear to me there’s value in communicating how we gauge progress toward our inflation goals and what we view as the appropriate inflation signal on which consumers, businesspeople and markets should focus.”

Clarida said he believes the Fed is close to its employment goal, having met its price stability target. He said the Federal Open Market Committee believes if progress is as expected, tapering could soon be appropriate at a pace that cuts all purchases by the middle of 2022.

Separately, small business optimism dipped in September, as labor issues and inflation continue to hamper the sector, the National Federation of Independent Business said Tuesday.

“Small business owners are doing their best to meet the needs of customers, but are unable to hire workers or receive the needed supplies and inventories,” according to NFIB Chief Economist Bill Dunkelberg.

Primary to come
Indiana Finance Authority (/A+/AA//) is set to price Thursday $377.52 million of revenue bonds (Deaconess Health System), consisting of: $340.5 million of Series 2021A, taxable and $37.02 million of Series 2021B at a floating-rate note rate. J.P. Morgan Securities LLC.

Texas Water Development Board (/AAA/AAA//) is set to price Wednesday $365.775 million of state revolving fund revenue bonds, serials 2022-2041. Jefferies.

San Ramon Valley Unified School District in Contra Costa County, California, (Aa1/AA+//) is set to price Thursday $260 million of taxable general obligation refunding bonds, Series 2021. Stifel, Nicolaus & Company.

Los Angeles County Public Works Financing Authority (Aa2/AA+/AA/) is set to price Thursday $250.4 million of lease revenue bonds, 2021 Series F (green bonds), serials 2022-2041, terms 2046 and 2051. Siebert Williams Shank & Co.

Indiana Finance Authority (Aaa//AAA//) is set to price $215.03 million of state revolving fund program bonds, Series 2021B (green bonds), serials 2023-2041. Citigroup Global Markets.

Lower Colorado River Authority (/A/A+/) is set to price Wednesday $170.65 million of transmission contract refunding revenue bonds (LCRA Transmission Services Corporation Project), Series 2021A, serials 2022-2041, terms 2046 and 2051. RBC Capital Markets.

King County Public Hospital District No. 2 (EvergreenHealth) in King County, Washington, (Aa3///) is set to price Tuesday $152.243 million of limited tax general obligation and refunding bonds, 2021. Piper Sandler & Co.

Long Beach Community College District in Los Angeles County, California, (Aa2/AA//) is set to price Wednesday $150 million of general obligation bonds 2016 Election, 2021 Series D. Piper Sandler & Co.

Piedmont Municipal Power Agency in South Carolina (A3/A-/A-/) is set to price Wednesday $125.43 million of electric revenue bonds, consisting of $94.095 million, Series 21D, serials 2026-2034 and $31.335 million, Series 21E, serials 2023-2025. Wells Fargo Corporate & Investment.

New York City Housing Development Corp. (Aa2/AA+//) is set to price Wednesday $125 million of taxable multi-family housing revenue sustainable development bonds, 2021 Series J, serials 2023-2032, terms 2036 and 2041. Raymond James & Associates.

Spring Valley Community Infrastructure District No. 1 in Eagle, Idaho, is set to price Wednesday $120.99 million of special assessment bonds, Series 2021. D.A. Davidson & Co.

The Health and Educational Facilities Board of the Metropolitan Government of Nashville and Davidson Counties in Tennessee ((/A+//) is set to price $113.365 million of educational facilities revenue and improvement bonds (Belmont University), Series 2021, serials 2022-2051. Truist Securities.

Competitive
The New York State Urban Development Corp. is set to sell $388.94 million of taxable state sales tax revenue bonds, Series 2021B at 9:30 a.m. eastern Thursday.

The New York State Urban Development Corp. is set to sell $259.545 million of taxable state sales tax revenue bonds, Series 2021B at 10 a.m. eastern Thursday.

The New York State Urban Development Corp. is set to sell $430.02 million of state sales tax revenue bonds, Series 2021A Bidding Group 1 at 10:30 a.m. Thursday.

The New York State Urban Development Corp. is set to sell $443.39 million of state sales tax revenue bonds, Series 2021A Bidding Group 2 at 11 a.m. Thursday.

The New York State Urban Development Corp. is set to sell $450.13 million of state sales tax revenue bonds, Series 2021A Bidding Group 3 at 11:30 a.m. Thursday.

The New York State Urban Development Corp. is set to sell $428.28 million of state sales tax revenue bonds at noon Thursday.

Charleston Country, South Carolina, (Aaa/AAA/AAA) is set to sell $200 million of general obligation transportation sales tax bonds, Series 2021A at 10:30 a.m. Thursday.