Munis make gains despite FOMC-led UST losses
9 min readOn a day when the Federal Open Market Committee made taper official, equities hit all-time record highs and U.S. Treasuries lost ground, while municipals made gains early on and stuck with them in an actively traded secondary.
High-grade benchmark yields fell one to three basis points while USTs ended the day higher after an up-and-down trading session that moved the 30-year back above 2%, but still inverse to the 20-year.
Secondary market trading was stronger to start the day and carried throughout. Trading post-FOMC fell off slightly as participants digested the FOMC news and held back on making any big moves, though some firmer prints out longer were seen. Secondary trading was elevated near 12% over Tuesday’s levels.
The day’s moves saw the 5-year municipal-to-UST ratio at 54%, the 10-year at 76% and the 30-year at 84%, according to Refinitiv MMD’s read at 3 p.m. eastern. ICE Data Services had the 5-year muni-to-UST ratio at 52%, the 10-year at 73% and the 30 at 82% near the close.
Another subdued, but slightly elevated level of inflows into municipal bond mutual funds was reported. The Investment Company Institute reported $584 million of inflows into municipal bond mutual funds for the week ending Oct. 27, up from $193 million a week prior, marking the 34th consecutive week of inflows and bringing the total for the year to $77.5 billion.
Exchange-traded funds, though, saw a large drop to $43 million of inflows, down from $262 million of inflows a week prior.
The municipal market had a slightly stronger tone along the curve as ratios have cheapened to levels not seen in a while, according to Roberto Roffo, managing director and portfolio manager at SWBC Investment Company.
“After the weak muni market we have experienced [in recent weeks] and the cheapened ratios, I would expect the trend we are seeing today to continue as the strong technical and fundamentals remain for the time being,” Roffo said. “Investors are using accumulated cash from the strong inflows and are purchasing primary and secondary offerings that have better structures in terms of coupon and calls.”
New issues are mixed as some of the cheaper deals are getting done and others are cheapened to clear the market, Roffo noted.
In the primary Wednesday, Miami-Dade County School District (Aa3///) sold $169.08 million of taxable general obligation school refunding bonds to Wells Fargo Investment & Corporate Banking with a true interest cost of 2.652%. Bonds in 3/2022 with a 3% coupon yield 0.372%, 2.75s of 2026 at 1.36%, 2.10% par in 2033, 2.65% par in 2036, 2.875% par in 2041 and 2.95% par in 2043, callable March 15, 2031. Bonds in 2033 and out are insured by Build America Mutual.
J.P. Morgan Securities priced for the Spartanburg Regional Health Services District, South Carolina, (A3/A//) $102.63 million of hospital revenue refunding forward delivery bonds (settle date 1/19/2022). Bonds in 7/2022 with a 5% coupon yield 0.28%, 5s of 2026 at 0.96%, 5s of 2031 at 1.65%, 4s of 2036 at 2.09% and 4s of 2037 at 2.12%, callable April 1, 2032.
Supply is ticking up with some bellwether credits including $1.25 billion of general obligation bonds from California, about $450 million of which is taxable, as well as $650 million of District of Columbia general obligation bonds. Thirty-day visible supply sits at $12.10 billion.
While munis ended the day stronger, this market often lags larger UST movements. Participants said they will be watching whether the Treasury market pressures seen today will continue and how that may affect munis in the coming sessions.
Secondary trading pre-FOMC
New York City TFA 5s of 2023 at 0.30%. Washington 5s of 2024 at 0.33% versus 0.32% original.
Georgia 5s of 2025 at 0.44%. Georgia 5s of 7/2026 at 0.60% and 5s of 12/2026 at 0.66%. Maryland 5s of 2026 at 0.63%. Texas 5s of 2026 at 0.64%.
Monmouth County, New Jersey, 5s of 2030 at 1.10%. Washington Suburban Sanitation District 5s of 2032 at 1.21%. NYC TFA 5s of 2032 at 1.45%-1.38%. Indiana Finance Authority green 5s of 2035 at 1.35% versus 1.40% Tuesday.
Washington 5s of 2040 at 1.70%. Los Angeles Department of Water and Power 5s of 2049 at 1.71%.
Post-FOMC
Prince George’s County 5s of 2022 at 0.17%. Florida PECO 5s of 2024 at 0.33%-0.32%.
Washington COPs 5s of 2025 at 0.70%. Fairfax County 4s of 2026 at 0.65% versus 0.68% Thursday.
Montgomery County 5s of 2028 at 0.99%. Alabama public school social 5s of 2033 at 1.35% versus 1.44%-1.42% a week ago.
Austin, Texas, water 5s of 2037 at 1.52% versus 1.58% Tuesday. Ohio 5s of 2035 at 1.38% versus 1.43% Tuesday and 1.47%-1.46% Friday.
AAA scales
According to Refinitiv MMD, yields were steady on the short end with the one-year at 0.16% in 2022 and at 0.25% in 2023, the 10-year fell two to 1.19% and the yield on the 30-year fell three to 1.66%.
The ICE municipal yield curve showed bonds steady at 0.17% in 2022 and fall one to 0.24% in 2023. The 10-year maturity fell two to 1.16% and the 30-year yield fell one to 1.67%.
The IHS Markit municipal analytics curve showed short yields steady at 0.16% in 2022 and at 0.23% in 2023. The 10-year yield fell two to 1.18% and the 30-year yield down two to 1.67%.
The Bloomberg BVAL curve showed short yields steady at 0.17% in 2022 and at 0.21% in 2023. The 10-year yield fell two basis points to 1.18% and the 30-year was down three to 1.68%.
Treasuries were weaker and equities were up at the close.
The 5-year Treasury was yielding 1.178%, 10-year Treasury was yielding 1.597%, the 20-year at 2.034% and the 30-year Treasury was yielding 2.024%. The Dow Jones Industrial Average rose 104 points, or 0.29%, the S&P was up 0.65% while the Nasdaq gained 1.04%.
Informa: Money market muni funds rise
Tax-exempt municipal money market fund assets rose by $571.8 million, bringing their total up to $88.16 billion for the week ending Nov. 2, according to the Money Fund Report, a publication of Informa Financial Intelligence.
The average seven-day simple yield for the 150 tax-free and municipal money-market funds sat at 0.01%, the same as the previous week.
Taxable money-fund assets gained $4.21 billion, bringing total net assets to $4.414 trillion. The average, seven-day simple yield for the 771 taxable reporting funds sat at 0.02%, same as the prior week.
Taper announced
The Federal Open Market Committee, as expected, announced it will begin tapering its asset purchases later this month, buying $10 billion less of Treasury securities and $5 billion less agency mortgage-backed securities each month.
The statement said the Fed expects to reduce the purchases by those amounts every month, but will make changes if needed as the result of economic outlook changes.
“It’s clear they want to wrap up the asset purchase program sooner rather than later, a slightly hawkish outcome,” said Tom Garretson, senior portfolio strategist at RBC Wealth Management. “However, the Fed’s policy statement offset any hawkish tone from tapering as the key question for markets surrounding this meeting was how they would characterize inflation that has thus far clearly proved more persistent than many had expected.”
The panel also held the fed funds rate target at a range of zero to 0.25%. The vote was unanimous.
In the statement, the panel acknowledges “sizable price increases in some sectors,” but sees supply chain issues easing, which will lead to reduced inflation.
That the Fed kept the term “transitory” in the statement while acknowledging higher-than-expected price rises in some areas, interested Steven L. Skancke, chief economic adviser at Keel Point and former White House and Treasury Department staff member.
“While there is no announced plan to accelerate the timetable for raising interest rates sooner than late 2023, the ‘dot plot’ from the November meeting likely will be supported by additional members of the FOMC to begin raising rates sooner,” he predicted. But don’t expect any hikes before the November 2022 elections, Skancke said.
“Fed funds future markets — showing an increasing probability of three rate increases in 2022 (June, September and December) — are expecting either an early completion of tapering or the FOMC having a very different sense of urgency in addressing inflation that would warrant an interest rate increase so close to mid-term elections,” he said.
In his press conference, Fed Chair Jerome Powell said supply chain issues will resolve and inflation will drop closer to the 2% target, although “timing is highly uncertain.” He asserted taper has no direct impact on liftoff plans and the test for liftoff hasn’t been met on the employment side and wasn’t discussed at the meeting.
When asked if the markets were correct in assuming two rate hikes next year, Powell said the timing of hikes will depend on the economy “and we can be patient.” Maximum employment could be reached by the end of next year and supply chain issues should be resolved in time to allow inflation to decline in the second half of the year.
“We think the market has priced in too much policy tightening in 2022, with slightly more than two rate hikes expected by the end of next year,” said RBC’s Garretson. “The end of tapering won’t automatically mark the transition to rate hikes. We maintain our view that the Fed will end its asset purchase program in June of next year, before taking some time to reassess the incoming data and the economic and inflation outlook, supporting our view that one rate hike by the end of 2023 should be the base-case expectation.”
Powell said he doesn’t see evidence of a wage-price spiral and doesn’t expect wage increases to become “troubling.”
“The Fed bought themselves an option,” by stating the taper schedule may be adjusted, said John Luke Tyner, a fixed income analyst at Aptus Capital Advisors.
Whether Powell is renominated will be interesting to watch, he said.
“We are getting down to the final minutes as far as the process goes,” he noted. “The market still seems to strongly believe Jay Powell will get the renomination (according to betting odds).”
When asked, the chair wouldn’t elaborate on what conditions would merit a change in the taper pace, not would he comment on the risks of the taper needing alterations.
“As expected, the taper is now a reality, and the question is when the Fed will raise rates and how many times,” said John Farawell, managing director and head of municipal trading at Roosevelt & Cross. “The chairman spoke of risk management which acknowledged the uncertainty and challenges moving forward. But the same questions remain — is inflation transitory? Will supply chain continue longer than expected?”
In data released Wednesday, ADP reported private sector payrolls added 571,000 jobs in October after a downwardly revised 523,000 in September, first reported as 568,000.
Economists polled by IFR Markets expected 400,000.
Also released, the Institute for Supply Management’s services index soared to 66.7% in October, a series high, from 61.9% in September. Economists expected 62.1%.
Employment slowed but was still expanding and business activity gained.
The gains were “spurred by robust growth in new orders and business activity, reflecting roaring demand and the waning impact of the Delta variant on service sector activity,” Berenberg chief economist for the U.S., Americas and Asia Mickey Levy said in a report. “The increases in the business activity and new orders sub-indices are striking: 94.8% of survey respondents noted business activity was either higher or the same in October and 91.3% of respondents noted new orders were higher or the same.”
When viewed in conjunction with ADP report, Levy said, it bodes “well for employment growth in October. Businesses are ramping up employment to meet production needs and staffing requirements in anticipation of what is likely to be a strong retail season.”
Wells Fargo Securities Senior Economist Tim Quinlan and Economist Shannon Seery said, “Activity has never been more fast-paced, demand shows no signs of slowing, prices show no signs of falling, good help is hard to find and the wait time for supplies is ever long.”
The prices index climbed again and is at its second highest ever level.
Separately, new factory orders rose 0.2% in September after a 1.0% climb in August. Economists expected a 0.1% increase.
Primary to come
Main Street Natural Gas (Aa2//AA-/) is on the day-to-day calendar with $750 million of gas supply revenue bonds, Series 2021A, serials 2023-2031, term 2052. RBC Capital Markets.
Allina Health System (Aa3/AA-/AA-//) is set to price Thursday $303.031 million of corporate CUSIP taxable bonds, Series 2021. J.P. Morgan Securities.
The Economic Development Authority of Lynchburg, Virginia, (Baa1/A-/A-/) is set to price Thursday $211.955 million of hospital revenue and refunding bonds (Centra Health Obligated Group), Series 2021, serials 2027-2047 and 2049-2055. Barclays Capital.
Minneapolis, Minnesota, (Aa3/AA-/AA-//) is set to price Thursday $172.135 million of health care system revenue bonds, Series 2021 (Allina Health System). J.P. Morgan Securities.
The Fort Bend Grand Parkway Toll Road Authority, Texas, (Aa1//AA+/) is set to price Thursday $137.16 million of limited contract tax and subordinate lien toll road revenue refunding bonds, Series 2021A. Mesirow Financial.
Palm Beach County Health Facilities Authority, Florida, is set to price $128.815 million of revenue refunding bonds (Toby & Leon Cooperman Sinai Residences at Boca Raton), Series 2022 (forward delivery). HJ Sims & Co.
The Successor Agency to the Redevelopment Agency of the City and County of San Francisco (/AA///) is on the day-to-day calendar with $107.34 million of taxable third-lien tax allocation bonds, 2021 Series A (affordable housing projects) (social bonds), serials 2023-2031, insured by Assured Guaranty Municipal Corp. Citigroup Global Markets.
Dallas, Texas (///AA+) is set to sell $235.245 million of unlimited tax general obligation bonds at 10:30 a.m. eastern on Thursday.
