Pressure creeps in, but muni yields mostly hold steady

Secondary trading saw an uptick and some pressures emerged on munis, but benchmark yield curves were little changed to weaker by a basis point in spots, again outperforming taxables.

U.S. Treasuries slid further with the largest rise in yields on the long bond, and equities made gains after a mixed open. ICE Data Services and Bloomberg BVAL cut yields by a basis point in spots and Refinitiv MMD and IHS Markit left their curves unchanged.

The weaker UST complex led to ratios falling again with the five-year muni-to-UST ratio at 48% in five years, 68% in 10 and 79% in 30, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the five at 46%, the 10 at 70% and the 30 at 79%.

The Investment Company Institute reported $289 million of inflows into municipal bond mutual funds in the week ending Dec. 1, down from $965 million in the previous week.

It marked the 39th straight week of positive flows into the long-term funds and brought the total inflows for this year near $81 billion. Exchanged-traded funds saw $229 million of inflows after $12 million of inflows the previous week.

Generic yields have largely been unchanged for six sessions, “a combination of heavy muni supply and back-and-forth UST yields has forced some inquiry into wait-and-see mode,” said Kim Olsan, senior vice president at FHN Financial.

“Across new issues, structures like floating rates, puts and zero coupons comprised a larger share of issues, stranding more activity in mainstream/benchmark-driven names,” she said.

While the market navigates a larger influx of new issuance, secondary metrics of dealer holdings and bid-wanteds, flows “suggest some selling pressure.”

“Inventory carry as reported via weekly Federal Reserve data show dealers holding nearly $13 billion in position over the last month, a sustained increase from the sub-$9 billion range of August-September,” Olsan said. “Likewise, secondary sell lists have grown 16% this month from this year’s average, topping $600 million par value on any given day (and excluding items offered for sale by customers outside of bid list formats).”

The primary gets a burst of New York metro area issuance with nearly $2.5 billion of New York Dormitory Authority personal income tax bonds and more to follow next week from the New York Liberty Development Authority, the Port Authority New York and New Jersey, and $800 million of Connecticut general obligation bonds, $300 million of which are social. Benchmark names should provide more direction. Thirty-day visible supply rises to $14.02 billion.

In the primary Wednesday, Goldman Sachs & Co. priced for the San Joaquin Hills Transportation Corridor Agency (/A/BBB/) $605 million of taxable senior lien tolls road refunding revenue bonds, insured by Assured Guaranty. Bonds were spread to UST at +70 in 1/2027 to yield 2.153%, +105 in 2030 at 2.571%, +180 in 2036 at 3.321% and +160 in 2051 at 3.492%, callable 1/15/2032.

Goldman Sachs & Co. priced for the San Joaquin Hills Transportation Corridor Agency (/A/BBB/) $97.1 million of senior lien tolls road revenue bonds, with 5s of 1/2030 at 1.32%, 5s of 2031 at 1.37%, 4s of 2036 at 1.78%, 4s of 2041 at 1.97%, and 4s of 2045 at 2.09%, callable 1/15/2032.

Goldman Sachs & Co. priced for the Metropolitan Atlanta Rapid Transit Authority (Aa2/AA+//) $275.63 million of taxable sales tax revenue refunding green bonds. Bonds in 7/2022 yield 0.625%, 1.515% in 2026, 2.111% in 2031, 2.741% in 2036 and 2.981% in 2045, callable 1/2031.

Citigroup Global Markets priced for the California Municipal Finance Authority (A3/A-//) $137.32 million of Community Health System taxable revenue bonds at par: 0.725% in 2/2022, 1.865% in 2026, 2.661% in 2031 and 3.28% in 2046, make whole call. Insured by Assured Guaranty.

Wells Fargo Corporate & Investment Banking priced for the New York City Housing Development Corp. (Aa2/AA+//) $100 million of taxable index floating rate sustainable development multi-family housing revenue bonds, 2021 Series L, maturing in 11/2061 at SOFR +76 basis points, callable 2/1/2022.

Citigroup Global Markets priced for the Massachusetts Housing Finance Agency (Aa1///) $100 million of non-AMT single family housing notes, Series 2021, maturing in 12/2022 at 0.25% par, callable 5/1/2022.

In the competitive space, the San Francisco Public Utilities Commission sold to RBC Capital Markets $47 million of power revenue bonds and $71.875 million of power revenue green bonds. Both series saw the same yields: 5s of 11/2024 at 0.35%, 5s of 2026 at 0.59%, 5s of 2031 at 0.99%, 4s of 2036 at 1.31%, 4s of 2041 at 1.49%, 4s of 2046 at 1.67% and 4s of 2051 at 1.73%, callable 5/1/2031.

Secondary trading
California 5s of 202 at 0.16%-0.15%. New York City 5s of 2022 at 0.14%. Prince George’s County 5s of 2022 at 0.15%. Georgia 5s of 2023 at 0.22%-0.19%. Wake County 5s of 2023 at 0.27%.

Maryland 5s of 2025 at 0.46%-0.45%. Florida PECO 5s of 2026 at 0.54%. Ohio 5s of 2026 at 0.52%. District of Columbia 5s of 2026 at 0.63%.

Illinois Finance Authority 5s of 2027 at 0.71%-0.70%. Maryland 5s of 2028 at 0.84%.

District of Columbia 5s of 2034 at 1.21%-1.19% versus 1.16% Friday. Metropolitan Water District of Southern California 5s of 2039 at 1.27%-1.26%. Los Angeles MTA 5s of 2039 at 1.24%. Metropolitan Water District of Southern California 5s of 2046 at 1.43% versus 1.44%-1.39% Tuesday.

AAA scales
Refinitiv MMD’s scale was unchanged: the one-year at 0.15% and 0.24% in 2023. The 10-year sat at 1.03% and at 1.48% in 30.

The ICE municipal yield curve showed yields up one basis point to 0.18% in 2022 and to 0.29% in 2023. The 10-year maturity was steady at 1.05% and the 30-year yield was up one to 1.50%.

The IHS Markit municipal analytics curve was steady: 0.17% in 2022 and at 0.25% in 2023. The 10-year was at 1.02% and the 30-year at 1.49% as of a 3 p.m. read.

The Bloomberg BVAL curve was steady at 0.17% in 2022 and up one to 0.23% in 2023. The 10-year yield rose one to 1.05% and the 30-year yield rose one to 1.49%.

Treasuries were weaker and equities rallied.

The five-year UST was yielding 1.267%, the 10-year at yielding 1.52%, the 20-year at 1.94% and the 30-year Treasury was yielding 1.888% near the close. The Dow Jones Industrial Average gained 35 points or 0.09%, the S&P was up 0.31% while the Nasdaq gained 0.90% at the close.

How many rate hikes?
While the markets are pricing in three or four rate hikes by the Federal Reserve next year, Wells Fargo Investment Institute sees just one hike, although it expects the Fed to accelerate taper at next week’s meeting.

“We think the Fed will tighten policy” next year, said WFII President Darrell Cronk in an outlook presentation, “but won’t drive it off the cliff by overtightening or a policy error.”

The one hike, which could come as late as the fall, said WFII head of global fixed income strategy Brian Rehling, will depend on how economic data come in. “I don’t think the Fed needs to be aggressive.”

Inflation, they said, “will be sustained at above-trend levels,” but should peak in the first or second quarter, yet they estimate a year-over-year consumer price index increase of 4.0% in 2022.

Cronk said, “growth would probably have to be quite hot to support three hikes” next year. In most economic cycles, he said, “the markets get ahead of themselves in terms of expecting rate hikes.”

If inflation moderates, as most economists and the Fed expect, and the supply chain issues clear, Rehling asked, does the Fed really “want to get aggressive [with monetary policy] ahead of next year’s elections?” he believes the Fed will be patient “unless the data forces it” to get aggressive.

“The risk,” he said, “is if the Fed moves faster than expected.” And while the Fed’s tone “clearly” has shifted in the past month or two, the number of rate hikes will depend on the inflation data, Rehling said. “How long does it take to get back to pre-pandemic levels” and “how concerned” do Fed officials get about inflation?

In addition, Cronk said, “there are lots of open chairs” on the Fed Board and President Biden is likely to try to fill them with “doves or über doves,” and if he succeeds, it will be harder to get rate hikes implemented. “The dollar has gone up,” he added, “which is doing some of the Fed’s tightening.”

As for the Summary of Economic Projections, Rehling said, “we will almost certainly see estimates increase,” but he noted those predictions often don’t come to fruition. “There’s lots of uncertainty between now and the middle of next year.”

But, he believes the nine officials that didn’t expect a rate hike next year have changed their minds. “I would be surprised if we saw anybody not pencil in at least one rate hike next year.”

Primary to come
The Massachusetts Water Resources Authority (Aa1/AA+/AA+//) is set to price Thursday $694.09 million of taxable general revenue refunding green bonds, 2021 Series C, serials 2022-2036, terms 2041 and 2044. Citigroup Global Markets.

Oregon Health and Science University (Aa3/AA-/AA-//) is set to price Thursday $334.115 million of revenue green bonds, Series 2021A. J.P. Morgan Securities.

Pompano Beach, Florida, (//BBB/) is set to price $139.885 million of revenue bonds (John Knox Village Project), Series 2021, consisting of $89.885 million of Series 2021A, $25.43 million of Series B-1 and $24.57 million of Series B-2. HJ Sims & Co.

The New Hope Cultural Education Facilities Finance Corp., Texas, is set to price Thursday $125 million of Jubilee Academic Center education revenue bonds. D.A. Davidson & Co.

Santa Maria Joint Union High School District (Santa Barbara and San Luis Obispo Counties, California) (Aa2///) is set to price Wednesday $114.43 million, consisting of $67 million of Series 2021, serials 2023-2026 and 2030-2042 and $47.43 million of taxables, serials 2022-2037. Raymond James & Associates.

Competitive
The Dormitory Authority of the State of New York will sell $2.469 billion of personal income tax revenue bonds consisting of $2.141 billion of tax-exempts and $328.08 million of taxables on Thursday.

Pulaski County Special School District, Arkansas, is set to sell $108.75 million of refunding and construction bonds, tax exempt, Series 2021B at noon Thursday.