Munis play catch up, face another round of cuts

Municipals faced another weaker day with benchmark yield curves seeing two to four basis point cuts, underperforming a slightly better U.S. Treasury market, while equities ended in the red.

Munis played catch up to the large selloff in Treasuries since Friday, holding municipal to UST ratios steady. The five-year was at 54%, 68% in 10 and 79% in 30, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the five at 52%, the 10 at 70% and the 30 at 79%.

The Investment Company Institute reported a large drop of inflows into municipal bond mutual funds at $142 million in the week ending Jan. 12, down from $1.413 billion in the previous week.

It marked the 45th straight week of positive flows into the long-term funds and exchange-traded funds saw inflows at $460 million after $268 million of inflows the previous week.

Inflation and Fed-related losses in U.S. Treasuries continue to weigh on municipals. However, tax-exempt outperformance is expected this month and next due to substantial built-in reinvestment demand, said Matt Fabian, partner at Municipal Market Analytics.

Last week, bond yields climbed again, with the curve bear-flattening in reaction to higher Fed forecasts and the economic effect of such expectations farther out.

Municipal benchmarks saw only minor corrections, with the majority of that occurring on Tuesday and Wednesday as a catch-up from the previous week.

“There remain highly conflicting economic data about; still rising infections and, most notably, COVID-related deaths, along with the lack of momentum for the Democrat’s Build Back Better stimulus bill, suggest, at a minimum, caution with respect to otherwise strong consumption and related growth,” Fabian said in a weekly Outlook report.

And inflation, even if it is a result of post-pandemic consequences, is likely to dampen growth if it puts downward pressure on employment and investment, he said.

Tax-exempt munis are still susceptible to flows and net supply. January was a particularly strong month for reinvestment demand compared to the previous year, and February is expected to be just as strong, Fabian said. However, when the market turns less optimistic in March, ongoing decline in Treasuries is more likely to lead to more unkempt tax-exempt weakness, he said.

Fabian said despite rising investor price discovery via the Bloomberg PICK system — at its highest level since 2019 — net customer trading activity continues strong. Net customer purchasing was the strongest of the year last week and even reclaimed its long-term trend line, Fabian said.

“In other words, while yields have risen, demand has not been interrupted, and credit spreads, reasonably, are still quite tight,” he said.

In the primary, J.P. Morgan Securities priced for Main Street Natural Gas, Inc. (/BBB-//) $626.255 million of gas supply revenue bonds, Series 2022C. Bonds in 11/2023 with a 4% coupon yield 1.17% and 4s of 2027 at 2.31%, callable 5/1/2027. Mandatory put date of 11/1/2027 with a 4% coupon yields 2.36%.

FHN Financial Capital Markets priced for Georgetown Independent School District, Texas, (Aaa/AAA//) $180.045 million of unlimited tax school building bonds, Series 2022. Bonds in 8/2023 with a 5% coupon yield 0.44%, 5s of 2027 at 1.05%, 4s of 2032 at 1.47%, 2.5s of 2037 at 1.97%, 3s of 2041 at 2.04% and 2.7s of 2047 at 2.7%, callable 8/15/2031.

In the competitive market, Fairfax County, Virginia (Aaa/AAA/AAA/) sold $272.65 million of public improvement bonds, Series 2022A, to BofA Securities. Bonds in 10/2022 with a 4% coupon yield 0.32%, 4s of 2027 at 1%, 4s of 2032 at 1.4%, 2s of 2037 at 2% and 2s of 2042 at 2.28%, callable 4/1/2032.

Informa: Money market muni funds rise
Tax-exempt municipal money market fund assets increased their total by $132.2 million, bringing their total to $87.45 billion for the week ending Jan. 18, 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 remained at 0.01%.

Taxable money-fund assets lost $63.6 billion, bringing total net assets to $4.474 trillion in the week ended Jan. 18. The average seven-day simple yield for the 780 taxable reporting funds was steady at 0.01% from a week prior.

Secondary trading
Georgia 5s of 2023 at 0.38%. Ohio waters 5s of 2023 at 0.40%. Maryland 5s of 2024 at 0.62% versus 0.55% on 1/10. Georgia 5s of 2025 at 0.67%.

California 5s of 2027 at 1.04%, 5s of 2028 at 1.14% and 5s of 2029 at 1.22%. New York City 5s of 2029 at 1.22%. Austin, Texas 5s of 2030 at 1.29%.

Connecticut 5s of 2032 at 1.51%. Maryland 5s of 2033 at 1.35%-1.31% versus 1.26% Thursday. DASNY 5s of 2034 at 1.59%. New York City Transitional Finance Authority 5s of 2035 at 1.65%.

Los Angeles Department of Water and Power 5s of 2039 at 1.71%. University of California 5s of 2040 at 1.78.

New York, New York 5s of 2047 at 2.02%. Los Angeles Department of Water and Power 5s of 2051 at 1.92%.

AAA scales
Refinitiv MMD’s scale was cut two to four basis points at the 3 p.m. read: the one-year at 0.37% (+2) and 0.52% (+4) in two years. The 10-year at 1.25% (+4) and the 30-year at 1.7% (+3).

The ICE municipal yield curve was cut two to four basis points: 0.33% (+1) in 2023 and 0.56% (+2) in 2024. The 10-year was at 1.29% (+2) and the 30-year yield was at 1.72% (+3) in a 3 p.m. read.

The IHS Markit municipal analytics curve was cut two to four basis points: 0.37% (+2) in 2023 and 0.52% (+4) in 2024. The 10-year at 1.24% (+4) and the 30-year at 1.72% (+4) as of a 3 p.m. read.

Bloomberg BVAL was cut two to four basis points: 0.39% (+2) in 2023 and 0.53% (+2) in 2024. The 10-year cut three to 1.27% and the 30-year up two to 1.70% at a 4 p.m. read.

Treasuries were stronger, except on the two-year, and equities ended in the red.

The two-year UST was yielding 1.045%, the five-year was yielding 1.635%, the 10-year yielding 1.849%, the 20-year at 2.226% and the 30-year Treasury was yielding 2.16%, at the close. The Dow Jones Industrial Average lost 339 points or 0.96%, the S&P was down 0.97% while the Nasdaq lost 1.15%, at the close.

Rate hikes will bash bonds
After getting a taste of how the bond market might react to Federal Reserve rate hikes, analysts see the outlook for bonds worsening this year.

“More aggressive Fed interest rate hike expectations drove bond yields higher last week,” noted Bill Merz, director of fixed income at U.S. Bank Wealth Management. “We anticipate low bond market returns this year due to minimal income production and downward price pressure as yields rise.”

In this environment, he suggested turning to high-yield municipal bonds, where “extra income improves return potential while issuers’ strong credit fundamentals mitigate default risk.”

Additionally, he said, “quantitative tightening would place modest upward pressure on bond yields.” Already, Treasury yields’ upward movement are a headwind for bonds.

While the Fed’s hawkish plans will have “only limited impact” on growth and most likely inflation, DWS Group U.S. Economist Christian Scherrmann said, “We had not expected a good year for government bonds anyway, but it could now be worse.”

But rising bond yields may be viewed “as in line with fundamentals and a solid economy, and this is consistent with our unfavorable rating on long-term fixed income,” said Wells Fargo Investment Institute Investment Strategy Analyst Luis Alvarado and Global Fixed Income Strategist Peter Wilson.

Overall, they say, “higher Fed policy rate and rising bond yields can be viewed as a positive given they are more in line with fundamentals and a solid economy.”

“Inflation and interest rate concerns are going nowhere soon,” said Craig Erlam, senior market analyst, UK & EMEA, at OANDA. “The idea that we could go from rock bottom rates and enormous bond-buying to rapid tapering, 50 basis point hikes and earlier balance sheet reduction is quite alarming.”

Markets have gotten used to central bank support, “and very gentle unwinding when appropriate,” he said. “This is quite a shock to the system.”

Inflation has been higher and stickier than expected, noted Anwiti Bahuguna, senior portfolio manager and head of multi-asset strategy at Columbia Threadneedle Investments. “If the various forces keeping inflation high ease next year, then the Fed can implement rate hikes in a measured fashion,” she said.

While inflation is high enough to justify rate hikes, she said, “the usually reliable labor market dynamics are much harder to discern. Sector-specific labor shortages are creating distortions in wage gains.”

Also, maximum employment is open to interpretation. “If we see continued inflationary pressure and improvement in the labor market, we may see a much swifter pace of action from the Fed,” Bahuguna said.

Data released Wednesday offered no good news on inflation. Housing starts climbed 1.4% in December to a seasonally adjusted 1.702 million annual rate, while building permits surged 9.1% to a seasonally adjusted 1.873 million annual pace.

Economists polled by IFR Markets expected starts to slip to 1.65 million and permits to fall to 1.701 million.

“As mortgage interest rates are rising and construction costs increase, affordability headwinds are steepening,” said National Association of Home Builders Chief Economist Robert Dietz.

This will add pressure to home prices, which “soared to record levels in 2021,” said Kelly Mangold of RCLCO Real Estate Consulting. Despite this, “the rental market has seen unprecedented rent growth, so home seekers are left with limited affordable options and may be more willing to accept higher prices.”

Separately, the Federal Reserve Bank of New York’s Business Leaders Survey showed slower growth in the region’s service sector as respondents see the business climate as below usual.

Employment saw modest gains while wages grew “at a solid clip,” the survey said. Prices paid and prices received indexes eased somewhat “but remained near record highs.”

Respondents expect better conditions six months ahead.

Primary to come
The New York City Transitional Finance Authority (Aa1/AAA/AAA/) is set to price Thursday $950 million of tax-exempt future tax secured subordinate bonds, Fiscal 2022 Series C, Subseries C-1. J.P. Morgan Securities.

The Metropolitan Washington Airports Authority (A2/AA//) is set to price Thursday $739.815 million of Dulles Toll Road revenue refunding bonds, Series 2022, insured by Assured Guaranty Municipal Corp., consisting of $418.64 million of second senior lien revenue refunding bonds, Series 2022A, serials 2051-2053 and $321.175 million of federally taxable second senior lien revenue refunding bonds, Series 2022B, serials 2025-2037, term 2041. Wells Fargo.

Dallas Independent School District in Texas (Aaa/AAA/AAA/) is set to price Thursday $387.07 million of unlimited tax school building bonds, Series 2022, serials 2023-2052. HilltopSecurities.

WakeMed Health and Hospitals in North Carolina (A2//A+/) is set to price Thursday $300 million of corporate CUSIP taxable bonds, Series 2022A J.P. Morgan Securities.

Hidalgo County Regional Mobility Authority in Texas (Baa3/BB+///) is set to price Thursday $211.315 million of senior lien toll and vehicle registration fee revenue bonds, Series 2022A and junior lien toll and vehicle registration fee revenue and refunding bonds, Series 2022B, consisting of $69.205 million of Series 1, $79.153 million of Series 2, $30.6 million of Series 3 and $32.358 million of Series 4. Morgan Stanley & Co.

The Village of Skokie, Illinois, (/AA/AA+/) is set to price Thursday $177.335 million, consisting of $151.060 million, Series 2022A, serials 2022-2040 and $26.275 million, Series 2022B, serials 2022-2041. Baird.

The Wisconsin Health And Educational Facilities Authority (Aa3/AA-//) is set to price Thursday $172.085 million of revenue bonds, Series 2022. J.P. Morgan Securities.

Orange County Health Facilities Authority, Florida, (//A-//) is set to price Thursday $140.64 million of revenue bonds, Series 2023A. Ziegler.

Ohio (Baa1///) is set to price Thursday $105.2 million of higher educational facility revenue bonds, serials 2027-2037, terms 2042, 2047 and 2052. KeyBanc Capital Markets.

Missouri Public Utilities Commission is set to price Thursday $100 million of interim construction notes, Series 2022. D.A. Davidson & Co.

Competitive:
New York City Transitional Finance Authority (/AAA//) is set to sell $69.005 million of future tax secured taxable subordinate bonds, Fiscal 2022 Subseries C-3 at 11:15 a.m. eastern Thursday.

New York City Transitional Finance Authority (/AAA//) is set to sell $180.995 million of future tax secured taxable subordinate bonds, Fiscal 2022 Subseries C-2 at 10:45 a.m. Thursday.

Cobb County School District in Georgia (MIG1/A-1+//) is set to sell $100 million of short-term construction notes, Series 2022 at 10:30 a.m. Thursday.