Swings in UST push ratios closer to 100%
10 min readMunicipals ended the week mixed, while the swings in U.S. Treasuries continued and equities sold off as Russia’s invasion of Ukraine escalates.
Triple-A yield curves saw one to four basis point cuts while UST yields fell up to 12 basis points on the 10-year, with ratios inching closer to 100% as a result.
Municipal to UST ratios showed the five-year at to 82% (up from 77% Thursday), 93% in 10-years (up from 87%) and 94% in 30 (up from 91%), according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the five at 81% (up from 75%), the 10 at 97% (up from 89%) and the 30 at 95% (up from 89%) at a 4 p.m. read.
Bond markets are caught between a rock and a hard place, according to Barclays PLC in a weekly report. Investors are focused on the Russia-Ukraine conflict, which is frequently resulting in a flight-to-quality, but they are also monitoring inflation and the Federal Reserve’s rate hike schedule, which is pushing yields higher, said Barclays strategists Mikhail Foux, Clare Pickering and Mayur Patel. Market volatility has risen significantly, particularly in the last several weeks, with daily Treasury yield swings of 10 basis points or more becoming the norm.
“This year, investors are faced with some of the hardest market conditions in recent history, as muni-Treasury ratios keep oscillating, and rate volatility is never conducive to risk-taking,” they said. “We think that the belly of the curve has adjusted enough that it is starting to get interesting versus Treasuries.”
Mutual fund outflows continue with about $8.6 billion so far in 2022, per Refinitiv Lipper data, and bids wanted lists have surpassed $1 billion 16 times. Those two factors have been a leading challenge to the market as well.
Supply has been lackluster so far this year as a result of the volatility but issuers are ramping up with next week’s potential volume hitting $10.406 billion, $8.919 billion of which are negotiated deals and $1.477 billion of competitive loans. Thirty-day visible supply now sits at $16.27 billion, per Bond Buyer data while net negative supply is at $3.461 billion, per Bloomberg data.
This influx of new-issues may add pressure to municipal yields.
The largest deal of the week comes from California with $2.2 billion of general obligation bonds, its first large issuance of the year. Other notable deals include two deals — $1.5 billion of bonds and $583 million of taxable revenue bonds — from the Regents of the University of Michigan, $845 million of future tax-secured subordinate bonds from the New York City Transitional Finance Authority and $560 million of taxable bonds from the University of Massachusetts Building Authority.
The Board of Trustees of the University of Alabama System and a New York City Transitional Finance Authority taxable deal lead the competitive calendar with deals over $100 million.
Investors should be more selective in their approach amid this volatile time, analysts say.
Barclays strategists said they believe the ideal place for investors to be is at the upper-end of the quality spectrum. Single-A and triple-B spreads have begun to widen but are still lower than they were in 2021, and the high-yield high-grade index difference is at historic lows. Barclays strategists said they would be more comfortable with lower-rated names if spreads were far wider than they are now.
Taxable muni spreads have widened in lockstep with corporate spreads, Barclays said, with the yield differential between the two indexes narrowing. Barclays remains cautious on taxable municipals, since the new-issuance pipeline may put more pressure on spreads. They prefer the belly of the curve because a flatter UST yield curve might lead longer-dated credit spreads to widen even further.
Secondary trading
Los Angeles County Metropolitan Transportation Authority 5s of 2023 at 0.93%-0.91%. Wake County, North Carolina 5s of 2024 at 1.08%. Ohio GARVEEs 5s of 2024 at 1.15%-1.14%.
Maryland Department of Transportation 5s of 2025 at 1.23%. Maryland 5s of 2025 at 1.15%-1.14%. District of Columbia Water and Sewer Authority 5s of 2025 at 1.24%. New York City 5s of 2026 at 1.42% versus 1.47% Wednesday. Columbus, Ohio 5s of 2028 at 1.49%.
Cambridge, Massachusetts 5s of 2030 at 1.57%-1.56%. Maryland 5s of 2030 at 1.60%-1.59%. Montgomery County, Maryland 5s of 2031 at 1.65%-1.64%. Florida DOT 5s of 2030 at 1.64% versus 1.55% original. Florida DOT 5s of 2031 at 1.68% versus 1.58% original. New York City Municipal Water Finance Authority 5s of 2033 at 1.95%.
Washington 5s of 2038 at 2.04%. Energy Northwest, Washington 5s of 2041 at 2.09%. NYC TFA 5s of 2044 at 2.54%.
AAA scales
Refinitiv MMD’s scale saw one to two basis point cuts in spots at the 3 p.m. read: the one-year at 0.84% (unch) and 1.08% (unch) in two years. The five-year at 1.34% (unch), the 10-year at 1.61% (unch) and the 30-year at 2.03% (unch).
The ICE municipal yield curve was mixed: 0.82% (unch) in 2023 and 1.09% (-2) in 2024. The five-year at 1.33% (unch), the 10-year was at 1.66% (+3) and the 30-year yield was at 2.07 (+4) in a 4 p.m. read.
The IHS Markit municipal curve was unchanged: 0.84% in 2023 and 1.11% in 2024. The five-year at 1.38%, the 10-year at 1.65% and the 30-year at 2.02% at a 4 p.m. read.
Bloomberg BVAL saw one to two basis point cuts: 0.82% (unch) in 2023 and 1.05% (unch) in 2024. The five-year at 1.36% (unch), the 10-year at 1.62% (+1) and the 30-year at 2.02% (+2) at a 4 p.m. read.
Treasuries were better while equities ended the day in the red.
The two-year UST was yielding 1.492% (-4), the five-year was yielding 1.65% (-8), the 10-year yielding 1.742% (-10), and the 30-year Treasury was yielding 2.165% (-8) at the close. The Dow Jones Industrial Average lost 179 points or 0.53%, the S&P was down 0.79% while the Nasdaq lost 1.66% at the close.
Jobs
The employment report came in stronger than expected (678,000 jobs added vs. 450,000 projected by economists polled by IFR Markets), but with a 25-basis-point rate hike all but guaranteed for the March Federal Open Market Committee meeting, analysts’ focus is elsewhere.
“The labor market recovery remains very robust across the board as more Americans are returning to work,” said Eric Merlis, managing director, global markets at Citizens Bank. “Geopolitical issues and inflation pose ongoing threats to the U.S. economic recovery, but pandemic restrictions are being lifted and we continue to see strong job growth.”
The report “won’t move markets,” said Ron Temple, head of U.S. Equities at Lazard Asset Management, but it shows “an economy firing on all cylinders.”
“The U.S. economy is open for business,” said Morning Consult Chief Economist John Leer. “Omicron is in the past, and businesses expect demand to remain strong going forward.”
The summer should bring “robust jobs growth,” he said, as the pandemic eases, warm weather returns and mask mandates are lifted.
“The crisis in Ukraine overshadows the positive job numbers as we see the flight-to-safety in our Treasury market,” said John Farawell, managing director and head of municipal trading at Roosevelt & Cross. “Until we see a settling in the Ukraine the weekly economic releases should continue to take a back seat.”
The pause in average hourly earnings growth “should ease concerns that wages — and therefore inflation — are running away,” said Wells Fargo Securities Senior Economist Sarah House and Economist Michael Pugliese.
“The increased availability of workers appears to be taking the edge off current wage pressures,” they said. “While we suspect wage pressures will remain fairly strong in light of the overall tight state of the labor market, the easing in February reduces concerns about wage growth running away and taking inflation with it.”
Despite the flat wages in the month, the three-month annualized pace remained “elevated in February (+4.6%) compared to the average pace of gains in the years before the pandemic (3.0% from 2017-2019),” noted Rhea Thomas, senior economist at Wilmington Trust.
But, reminding that one month’s numbers can be misleading, Wells Fargo Investment Institute Senior Global Market Strategist Sameer Samana said, “additional slowing in wage growth may help alleviate concerns about future inflation and deterioration corporate profit margins.”
The weakness in month-over-month wage growth may be overstated, said Marvin Loh, senior macro strategist at State Street Global Markets. “We suspect that there was some Omicron impact at work in this figure, as hours worked increased, reversing prior month weakness. This does not explain all of wage weakness however, and we may be getting towards equilibrium, with worker shortages becoming less acute, thereby relieving wage pressures. Nonetheless, if wage gains moderate, it will lessen concerns over upwardly spiraling wages.”
But, the report will not change the Fed’s plans to raise rates 25 basis points at its upcoming meeting, he said. “The strong report will give the Fed comfort that the employment landscape is adequately healed to start the tightening process.”
However, if wage gains remain moderate, the Fed may be “less active than expected in the second half of the year,” Loh said. “But with other inflation pressures building in food, energy and shelter, the uncertainty over the correct path for policy in late 2022 and 2023 remains high.”
The report reflects “past conditions,” noted Noah Williams, Manhattan Institute Adjunct Fellow. “That is no less the case now, with the turmoil from Russia’s invasion of Ukraine roiling world markets, with the impact of the invasion and the global sanctions in response still mostly yet to be felt. These shocks will continue to strain supply chains and increase price pressures.”
This report suggests the U.S. economy was strong entering “this period of increased uncertainty,” and even if economic growth cools in the near future, he said, “the robust recovery is likely to continue.”
Noting that Federal Reserve Board Chairman Jerome Powell termed the labor market “overheated” in testimony, Grant Thornton Chief Economist Diane Swonk said, “That begs the question of whether rate hikes that slow the pace of hiring will be enough to derail inflation; the Fed may also have to allow unemployment to rise to boost the supply of workers.”
The numbers suggest “there won’t be many FOMC members left who think the maximum employment threshold for raising interest rates has not yet been reached,” said Brian Coulton, Fitch Ratings chief economist. “But from an inflation perspective there might be some reassurance drawn from this report by the slowdown in month-on-month wage growth, which came as the labor force participation rate increased again and the number of people prevented from looking for work due to the pandemic fell.”
The rise in nonfarm payrolls and the 3.8% unemployment rate are “clear proof that the labor markets are at full, if not maximum, employment,” said DWS Group U.S. Economist Christian Scherrmann.
“That clearly is a very hawkish input for the upcoming March meeting,” he said. “But central bankers might draw some comfort from overall stagnating monthly gains in wages, which might ease a little their fears on a potential wage/price spiral.”
But any comfort is “limited” by inflation, which could “approach 8% in February.”
The employment-to-population ratio in the 25-54 age category is nearing pre-COVID levels, said Jeffrey Cleveland, chief economist at Payden & Rygel. “Good news and not a sign of stagnation.”
The weaker wage growth “could be due to compositional effects (e.g., lots of hiring in leisure & hospitality),” he said. “Given the strength in labor market wage growth will probably continue to accelerate this year.”
Still, he is concerned about “real wage growth,” which depending on the inflation measure used “is either barely positive or negative.”
Also causing worry, oil price spikes have historically “preceded recessions,” Cleveland said, although the U.S. is now one of the leading producers. Finally, he is watching the 2s10s yield curve, which “is collapsing.” Inversion of that part of the curve “led recession by 22 months in the 2000s, 13 months in the 1990s and 5 months in the COVID era.”
Primary to come:
California (Aa2/AA-/AA/) is set to price Wednesday $2.209 billion of general obligation bonds, various purpose general obligation bonds and various purpose general obligation refunding bonds, consisting of $1.458 billion of Series 22NM, serials 2023-2033, 2047, 2049 and 2052 and $751.09 million of Series 22REF, serials 2023-2024, 2035, 2037 and 2042. Wells Fargo Bank.
The Regents of the University of Michigan (Aaa/AAA//) is set to price Wednesday $1.5 billion of bonds, consisting of $1.2 billion of Series 2022A and $300 million of Series 2022B. Barclays Capital.
The Regents of the University of Michigan (Aaa/AAA//) is also set to price next week $582.74 million of taxable general revenue bonds, Series 2022C. Goldman Sachs.
The New York City Transitional Finance Authority (Aa1/AA+//) is set to price Wednesday $844.855 million of tax-exempt future tax-secured subordinate bonds, consisting of $780.45 million of Fiscal 2022 Series D Subseries D-1, serials 2023-2034 and 2037-2041 and $64.405 million of Fiscal 2022 Series E, serials 2022-2030. Jefferies.
The University of Massachusetts Building Authority (Aa2/AA-/AA/) is set to price Wednesday $559.565 million, consisting of $351.95 million of taxable project revenue bonds, Senior Series 2022-2, serials 2024-2037, terms 2042 and 2052 and $207.615 million of taxable refunding revenue bonds, Senior Series 2022-3, serials 2022-2037, term 2041. Citigroup Global Markets.
Denver Public Schools, Colorado (Aa1/AA/AA/) is set to price Thursday $345 million of general obligation bonds, Series 2022A. Stifel, Nicolaus & Co.
Howard University (/BBB-/BBB-//) is set to price Tuesday $300 million of taxable corporate CUSIP bonds, Series 2022A. J.P. Morgan Securities.
Northwest Independent School District, Texas (Aaa//AAA/) is set to price $289.255 million of taxable unlimited tax bonds, Series 2022, serials 2022-2045, insured by Permanent School Fund Guarantee Program. RBC Capital Markets.
Allen Independent School District, Texas (Aaa/AAA//) is set to price Tuesday $221.595 million of taxable unlimited tax bonds, Series 2022, serials 2022-2044, insured by Permanent School Fund Guarantee Program. RBC Capital Markets.
Jefferson Parish Consolidated Waterworks District No. 2, Louisiana (/AA//) is set to price Tuesday $177.745 million of water revenue and refunding bonds, Series 2022, serials 2023-2042, insured by Build America Mutual. Stifel, Nicolaus & Co.
The Hospitals and Higher Education Facilities Authority of Philadelphia (Baa3/BBB/BBB/) is set to price Wednesday $173.905 million of revenue bonds, Series 2022, serials 2035-2042. RBC Capital Markets.
Nova Southeastern University, Florida is set to price Tuesday $150 million of taxable corporate CUSIP bonds, Series 2022. Morgan Stanley.
The Dormitory Authority of the State New York (A3/BBB+//) is set to price Wednesday $148.015 million of tax-exempt The New School Revenue Bonds, Series 2022A. Goldman Sachs.
Virginia Electric and Power Company (A2/BBB+//) is set to price Tuesday $137.5 million of bonds, consisting of $37.5 million of Series 2008C and $100 million Series 2010A. J.P. Morgan Securities.
Louisiana (Aa3/AA-//) is set to price Tuesday $121.25 million of gasoline and fuels tax second lien revenue refunding bonds, 2022 Series A. Morgan Stanley.
The Northern California Power Agency (Aa3//AA-/) is set to price Thursday $119.72 million of Hydroelectric Project Number One revenue bonds, 2022 Refunding Series A, serials 2024-2032. Citigroup Global Markets.
The District of Columbia Water and Sewer Authority is set to price Thursday $100 million of public utility subordinate lien multimodal revenue bonds, Series 2022E. RBC Capital Markets.
Competitive:
The Board of Trustees of the University of Alabama System (/AA//) is set to sell $159.3 million of University of Alabama at Birmingham general revenue bonds, Series 2022-A, at 11 a.m. Tuesday. The issuer is also set to sell $9.71 million of University of Alabama at Birmingham general revenue bonds, Series 2022-B, at 11 a.m. eastern Tuesday.
The New York City Transitional Finance Authority (Aa1/AA+//) is set to sell $198 million of taxable future tax-secured taxable subordinate bonds, Fiscal 2022 Subseries D-2, at 10:45 a.m. eastern Wednesday.
Lynne Funk contributed to this report.
