Firmer end to week ahead of uptick in supply
10 min readMunicipals ended firmer on the short end Friday, capping off a quieter, but stronger week, while U.S. Treasuries were weaker and equities sold off.
Investors will be greeted Monday with an increase in supply with the new-issue calendar estimated at $6.488 billion in $4.142 billion of negotiated deals and $2.347 billion of competitive loans.
The primary calendar is led by bellwether Maryland with $1.05 billion in four general obligation bond deals in the competitive market.
Other competitive deals include Seattle with $119 million of double-A-plus revenue bonds and triple-A-rated South Carolina with $101 million of GOs.
In the negotiated market, Atlanta, Georgia, will bring $587 million of AMT and non-AMT airport general revenue bonds from. Other notable deals include another corporate CUSIP university deal with $350 million from Case Western Reserve University, Ohio, (Aa3/AA-//) while the Texas Water Development Board (/AAA/AAA/) will bring $254.1 million of taxable and tax-exempt revenue bonds.
The current market turnaround came at a great speed, according to Barclays PLC, noting that “although all fixed income asset classes strongly rallied, municipals were one of, if not the best-performing asset class in the past two weeks, recouping a portion of this year’s losses.”
However, the recent rally has put investors in a very difficult position, said Barclays strategists Mikhail Foux, Clare Pickering and Mayur Patel.
“It was so fast that few investors were able to leg into it, valuations are clearly not as appetizing (especially for crossover investors), technicals are getting more supportive and a lot of uncertainties on the economic front remain unanswered,” according to their report.
From its recent peak of 3.02% on May 18, the 10-year muni triple-A landed at 2.43% Friday, per Refinitiv MMD. The muni triple-A curve bull flattened and muni-UST ratios have fallen about 20% across the curve, Foux, Pickering and Patel said.
Muni-to-UST ratios on Friday were at 68% in five years, 82% in 10 years and 89% in 30, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the five at 68%, the 10 at 82% and the 30 at 91% at a 4 p.m. read.
Retail investors have shown active interest leading up to the recent rally, noted Jeff Lipton, managing director and head of municipal credit and market strategy at Oppenheimer Inc.
“With noted bumps along the triple-A curve this week, interest has abated somewhat with retail a bit dazed over the heavy advances in bond prices,” Lipton said. “Institutional business has largely been done by crossing bonds in the secondary and the front end of the muni curve continues to show the most activity for accounts.”
As the summer months approach, Lipton said market technicals will be the guiding force, “with demand outstripping supply, thus creating a more supportive tone that could catalyze a cycle of positive fund flows as cash is ripe for application into the asset class.”
Muni credit spreads generally remain wide, even with the rally, said BofA municipal strategists Yingchen Li and Ian Rogow. High-yield index spreads widened a bit further, “bringing the total widening from the trough in March to 65 basis points,” they said.
Although “crossover and other trading accounts may be the first movers in the muni rally, it was also the result of large redemptions and a slowdown in mutual funds outflows,” according to Li and Rogow.
Going forward, they said that “while lower ratios may slow crossover buyers, munis’ core investor base — mutual funds inflows and retail purchases — likely will get stronger.”
“Large redemptions will continue to the end of August,” and therefore, “munis’ rates rally and ratio improvement should have more momentum even if Treasury rates retest their recent peaks,” they said.
But while technicals are much more supportive now, Barclays strategists noted, “if rates continue selling off it will only be a matter of time until tax-exempts follow.”
“Most investors felt that the tax-exempt muni market was extremely cheap in mid-May,” they said. For high quality tax-exempts, 10-year and 30-year muni-UST ratios that have topped 100% “have in the past attracted not only traditional municipal investors, but also crossover buyers, and this has repeated itself this year.”
Over a short period, high-grade tax-exempts have outperformed USTs by 20-plus ratios, and “their strong performance has continued in the early part of the week,” they said.
“This muni rally has been powered mostly by better-quality high-grade municipals,” rated single A and higher, while triple-Bs and high-yield munis somewhat have lagged.
In high grade paper, Barclays strategists have not seen the long end outperforming, something that generally happens in all-out market rallies.
“The 10s30s and to a lesser degree the 10s20s curves have actually steepened, while the 5s10s has flattened,” they said. “In other words, the belly of the curve has outperformed other maturities; this was especially true for higher-rated, on-the-run triple-A and double-A bonds.”
“Similarly, muni high yield’s performance has been mostly powered by its liquid benchmarks, especially the ones in the Puerto Rico complex,” Barclays said. Even though Puerto Rico bonds account for just 18% of the high yield index notional, Barclays strategists said, they helped push down the yield of the high yield muni index by five to seven basis points on the week, compared with the high yield index that excluded Puerto Rico bonds.
Secondary trading
North Carolina 5s of 2023 at 1.49%-1.42%. Washington 5s of 2023 at 1.54%-1.50%. Wake County, North Carolina 5s of 2024 at 1.68%-1.57%. Texas 5s of 2025 at 1.90%.
Maryland 5s of 2027 at 2.08%. Baltimore County 5s of 2028 at 2.17%.
California 5s of 2033 at 2.55%-2.54% versus 2.65%-2.63% Thursday. Loudoun County 5s of 2033 at 2.54%.
Los Angeles DWP 5s of 2035 at 2.89%-2.83%. New York City TFA 5s of 2047 at 3.43%-3.42%.
AAA scales
Refinitiv MMD’s scale was bumped two basis points inside five years at the 3 p.m. read: the one-year at 1.47% (-2) and 1.75% (-2) in two years. The five-year at 2.01% (-2), the 10-year at 2.43% (unch) and the 30-year at 2.78% (unch).
The ICE municipal yield curve saw up to three basis point bumps: 1.44% (-3) in 2023 and 1.78% (-3) in 2024. The five-year at 2.03% (-2), the 10-year was at 2.41% (unch) and the 30-year yield was at 2.86% (unch) at a 4 p.m. read.
The IHS Markit municipal curve saw two basis point bumps inside five years: 1.45% (-2) in 2023 and 1.75% (-2) in 2024. The five-year at 2.02% (-2), the 10-year was at 2.44% (unch) and the 30-year yield was at 2.78% (unch) at 4 p.m.
Bloomberg BVAL saw up to a one basis point bump: 1.51% (-1) in 2023 and 1.79% (-1) in 2024. The five-year at 2.10% (-1), the 10-year at 2.44% (unch) and the 30-year at 2.80% (unch) at a 4 p.m. read.
Treasuries were weaker.
The two-year UST was yielding 2.660% (+3), the three-year was at 2.854% (+3), the five-year at 2.941% (+3), the seven-year 2.978% (+3), the 10-year yielding 2.944% (+3), the 20-year at 3.316% (+2) and the 30-year Treasury was yielding 3.096 (+2) at the close.
Jobs report has no surprises
Despite predictions of an economic downturn and soaring inflation figures, the U.S. economy added 390,000 jobs in May — better than projected — “as hiring remained strong in almost all sectors, indicating ongoing robust demand for labor,” said Christian Scherrmann, DWS’ U.S. economist.
Additionally, the unemployment rate remained flat, the labor force participation rate was up marginally and wage pressures stayed elevated, said Olu Sonola, head of U.S. regional economics at Fitch Ratings.
“This is very much in line with the strong labor market gains of recent months,” he of the May jobs report. “The only surprise this month is that there is no surprise.”
In the first five months of this year, “the labor force is up by 2.1 million while job openings are up by just 478,000 over the past five readings,” said Wilmington Trust Chief Economist Luke Tilley.
That differential, he said, “is relieving the pressure in the labor market and is the key reason that wages have cooled to 4.7% annualized” over the past three months.
Comparatively, in July 2021, the five-month increase in job openings “hit 2.9 million as firms scrambled for workers, but labor force growth was inadequate at just one million over those same five months,” he said.
The shortage of workers, Tilley noted, “drove three-month annualized wage growth as high as 6.4% in 2021.” He expects wages to continue cooling moving forward.
However, “this month’s report is unlikely to calm the Fed’s fears of a hot labor market that needs to be reined in to manage inflation,” according to Sonola.
Scherrmann disagreed, saying May’s jobs report could comfort the Fed.
“As significantly in terms of whether U.S. labor markets are on the right track, as far as the U.S. central bank is concerned: there still appears some hesitancy among those thinking about returning to the labor force,” he said. The labor force participation rate only ticked up by a tenth to 62.3%, keeping the unemployment rate steady at 3.6%, he noted.
Overall, Scherrmann said, “the job creation machine runs on full-steam and anecdotal evidence has it that hiring remains difficult for businesses of all sizes as demand outpaces supply.”
May’s jobs report does not change the Fed’s trajectory over the next several meetings where it’s likely to hike in 50 basis points increments, Tilley said.
“But a broad look at the labor market paints a reassuring picture relative to the excessive tightness that existed when the Fed turned hawkish around the start of the new year,” he said. “Job openings have slowed, labor force is growing, wages are slowing, the Conference Board measure of job market perceptions has cooled and the newswires are rife with hints of job reductions in some industries.”
Tilley expects “wage pressure and inflation to slow further over the course of the summer and for the Fed to slow relative to market expectations, ending the year with a fed funds rate of 2.0%-2.25%.”
Morning Consult Chief Economist John Leers said while job growth slowed month-over-month in May, “that doesn’t mean a recession this year is inevitable.”
“Despite elevated inflation and rising interest rates, businesses are hiring,” he said.
“Tightening financial conditions will likely weigh more on business investment and hiring towards the end of the third quarter, providing the Federal Reserve additional time to assess the economy’s ability to absorb higher rates,” Leer added.
Primary to come:
Atlanta, Georgia, (Aa3//AA-/) is set to price total of $578 million of AMT and non-AMT airport general revenue bonds consisting of $179.51 million of exempts, Series 2022A; $118.145 million of exempts, Series 2022C; $218.165 million, Series 2022B; and $61.95 million of AMT bonds, Series 2022D. Goldman Sachs & Co.
Case Western Reserve University, Ohio, (Aa3/AA-//) is set to price Tuesday $350 million of taxable corporate CUSIP bonds, Series 2022C, term 2122. Barclays Capital.
The Public Finance Authority, Wisconsin, (/AA-/AA/) is set to price Tuesday $255.530 million of tax-exempt and taxable Cone Health health care system revenue bonds, Series 2022. J.P. Morgan Securities.
The Texas Water Development Board (/AAA/AAA/) is set to price Wednesday $254.125 million of state revolving fund revenue bonds, New Series 2022. Piper Sandler & Co.
The West Valley-Mission Community College District, California, (Aaa/AAA///) is set to price Monday $238.640 million of bonds, consisting of $175 million of Series 1 and $63.640 million of Series 2. Morgan Stanley & Co.
Harris County, Texas, (Aa2//AA/) is set to price Tuesday $200.870 million of toll road first lien revenue refunding bonds, Series 2022A, serials 2023-2033. Jefferies.
The Prosper Independent School District, Texas, is set to price Thursday $200 million of fixed rate unlimited tax school building bonds, Series 2022. Piper Sandler & Co.
The New York City Housing Development Corp. is set to price Wednesday $160.765 million of sustainable development multi-family housing revenue bonds, Series C-1. Wells Fargo Bank.
The Iowa Student Loan Liquidity Corp. (/AA//) is set to price Thursday $155.700 million of senior student loan revenue bonds, consisting of $128.500 million of taxables, serials 2023-2032, term 2039 and $27.200 million of AMT bonds, Series B, serials 2029-2032. RBC Capital Markets.
The University of North Carolina at Chapel Hill (Aaa/AAA/AAA/) is set to price Tuesday $150.925 million of general revenue refunding bonds, consisting of $100 million of Series 2019A and $50.925 million of Series 2019B. Wells Fargo Bank.
The university is also set to price $100 million of the Board of Governors of the University of North Carolina general revenue bonds, Series 2012B. Wells Fargo Bank.
The Conroe Independent School District, Texas, (Aaa/AAA//) is set to price Wednesday $147.075 million of unlimited tax school building bonds, Series 2022A, serials 2023-2047, insured by Permanent School Fund Guarantee Program. Raymond James & Associates.
The New Hampshire Municipal Bond Bank (/AA+//) is set Tuesday $129.685 million of bonds, 2022 Series C, serials 2023-2042, terms 2047 and 2052. Raymond James & Associates.
The Public Utility District No. 1, Washington, (Aa2/AA//) is set to price Thursday $103.220 million of wells hydroelectric revenue bonds, consisting of $36.555 million of Series A, serials 2023-2038 and $66.665 million of Series B, serials 2038-2052. Barclays Capital.
The Brazoria County Industrial Development Corporation, Texas, is set to price Thursday $100 million of Aleon Renewable Metals Project solid waste disposal facilities revenue bonds, Series 2022, term 2042. Citigroup Global Markets.
The Minnesota Housing Finance Agency (Aa1/AA+//) is set to price Wednesday $100 million of taxable social residential housing finance bonds, 2022 Series G, serials 2023-2034, terms 2037, 2039 and 2047. RBC Capital Markets.
Competitive:
Seattle, Washington, (Aa1/AA+//) is set to sell $118.765 million of drainage and wastewater system improvement and refunding revenue bonds, Series 2022, at 10:45 a.m. eastern Tuesday.
Maryland (Aaa/AAA/AAA/) is set to sell $335.180 million of general obligation bonds state and local facilities loan of 2022, First Series A Bidding Group 1, at 10 a.m. eastern Wednesday.
The state is also set to sell $303.040 million of general obligation bonds state and local facilities loan of 2022, First Series A Bidding Group 3, at 11 a.m. Wednesday.
The state is additionally set to sell is set to sell $261.780 million of general obligation bonds state and local facilities loan of 2022, First Series A Bidding Group 2, at 10:30 a.m Wednesday.
The state is set to sell $150 million of taxable general obligation bonds state and local facilities loan of 2022, First Series B, at 11:30 a.m. eastern Wednesday, as well.
South Carolina (Aaa/AA+/AAA/) is set to sell $101.255 million of Clemson University general obligation state institution bonds, Series 2022A, at 10:15 a.m. eastern Thursday.
Christine Albano contributed to this report.
