Munis, UST mixed while equities sell off on Ukraine concerns

Bonds

Municipals were mixed on Tuesday with U.S. Treasuries providing little guidance while equities sold off on increasing concerns over Ukraine and Russia.

Municipal triple-A yields were unchanged on Refinitiv MMD and Bloomberg BVAL scales while experiencing up to three basis point bumps on the long end of ICE Data Services’ curve and two basis point bumps along IHS Markit’s. Secondary trading was light and prints were mixed.

Between the long holiday weekend and investors trying to absorb the Russia-Ukraine developments, it was a slow start to the week in the municipal market.

“I think people are trying to get their heads around what’s going on overseas, with the concern that we might see some widening of credit spreads,” the trader said. “You would normally see a risk-off trade from people selling their riskier assets and buying higher-quality assets, like municipals.” .

In the primary Tuesday, Columbus, Georgia (Aa2/AA+//) sold $130.075 million of general obligation sales tax bonds, Series 2022, to Jefferies with 5s of 1/2023 at 0.85%, 5s of 2027 at 1.43% and 5s of 2032 at 1.70%, noncall.

The rest of the week’s primary begins pricing Wednesday, with a mix of credits. The New York Metropolitan Transportation appeared on the competitive calendar with two deals, $175.09 million at 10:45 a.m. and $207.85 million at 11:15 a.m. Wednesday.

Munis experienced negative returns and underperformed Treasuries last week led by continued fund outflows, said Peter Block, managing director of credit strategy at Ramirez & Co.

Muni to Treasury ratios are marginally cheaper as a result of the underperformance. Credit and structure-related spreads are greater in some areas, particularly for sub-5% coupons, he said.

The municipal to UST ratio five-year was at 76%, 85% in 10 and 90% in 30, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the five at 74%, the 10 at 86% and the 30 at 91% at a 3:45 p.m. read.

Block anticipates munis to continue to underperform for a few more weeks, especially if new-issue supply rises to $10 billion to $12 billion per week as investors reassess their muni holdings.

“Fortunately, many issuers are cautious on the market at this time, given the unsettled macro backdrop. Many deals are on week-to-week status given sensitive refunding savings targets,” he said.

For the time being, municipal bonds are attempting, if unsuccessfully, to recoup from historic losses in January, said Jeffrey Lipton, head of municipal credit and market strategy and municipal capital markets at Oppenheimer & Co LLC.

“As we consider municipal bond performance, there is certainly plenty of red, although the losses being posted for UST securities are almost double the negative returns currently being earned month-to-date by munis,” he said.

The Bloomberg Municipal Index is at negative 0.61% for the month and negative 3.33% year to date, while high-yield sits at negative 0.41% for February and negative 3.20% through 2022. Taxable munis saw losses of 1.41% so far in February and 3.91% for the year while the Municipal Impact Index has seen losses of 0.73% this month and 4.11% in 2022.

While February appears to be less painful for munis than January, the near-term picture will be influenced by market sentiment and, if they materialize, reducing anxieties about Central Bank policies, Lipton said.

In contrast to 2021, he said outsized withdrawals from mutual funds are at levels not seen since March 2020.

He does expect episodic outflows to continue until more clarity and stability return to the markets, which may take some time, but he also doesn’t anticipate a long period of persistent withdrawals.

Muni participation has been shaky among both retail and institutional buyers, as well as primary market interest, with many new deals categorized as day-to-day. And with higher rates — up around 60 basis points on the 10-year and 50 on the 30-year since the start of 2022 — retail may be slowly returning to the asset class.

“At these higher entry points, there is retail emergence, but again with a very selective bias with respect to structure and we would argue for a cautious and thoughtful deployment of cash,” he said.

Given the number of unknowns, the institutional business has likewise been quiet. Aside from the rising interest rates, he said the growing geopolitical risk has given corporate buyers pause. Security selection and suitable valuations have become critical components of the investing arithmetic, especially as the more desired ratio values have returned to historical norms, presenting investment opportunities at specific rating levels.

As interest rates rise, higher-quality and premium bonds might offer investors with a protective tilt. Although the bond market sell-off appears to be slowing, he believes there is still room for munis to outperform USTs and corporate bonds, Lipton said.

“For now, we remain committed to our initial call of modestly positive performance for munis by year-end, yet we are mindful that out-sized disruptions in the Treasury market could upend our outlook and catalyze more systemic outflows,” he said. “At the heart of the resiliency backdrop is a favorable credit profile for munis that is likely to improve further as well as what we expect to be a constructive technical environment.”

Secondary trading
Washington 5s of 2023 at 0.99%. Georgia 5s of 2023 at 0.83%. NYC TFA 5s of 2024 at 1.23%-1.21%.

Wake County, North Carolina 5s of 2027 at 1.43%, same as original. California 5s of 2026 at 1.43%. California 5s of 2027 at 1.44%-1.48% versus 1.51% on Thursday. University of Washington 5s of 2028 at 1.60%-1.58%. Florida PECO 5s of 2028 at 1.55%-1.54%.

Washington 5s of 2029 at 1.59%, 5s of 2030 at 1.63% and 5s of 2031 at 1.68%.

Norfolk, Virginia 5s of 2035 at 1.80%-1.76%. Los Angeles DWP 5s of 2037 at 1.98%-1.97%.

NYC TFA 4s of 2047 at 2.58%. NYC waters 5s of 2052 at 2.33%-2.32% versus 2.36%-2.35% Friday.

AAA scales
Refinitiv MMD’s scale were unchanged at the 3 p.m. read: the one-year at 0.84% (unch) and 1.11% (unch) in two years. The five-year at 1.41% (unch), the 10-year at 1.65% (unch) and the 30-year at 2.02% (unch).

The ICE municipal yield curve saw strength 10 years and outthe long end: 0.85% (unch) in 2023 and 1.15% (+1) in 2024. The five-year at 1.38% (-1), the 10-year was at 1.67% (-1) and the 30-year yield was at 2.04% (-3) in a 3:30 p.m. read.

The IHS Markit municipal curve saw bumps: 0.83% (unch) in 2023 and 1.10% (unch) in 2024. The five-year at 1.40% (-2), the 10-year at 1.65% (-2) and the 30-year at 2.04% (-2) at a 3 p.m. read.

Bloomberg BVAL was unchanged: 0.85% (unch) in 2023 and 1.08% (unch) in 2024. The five-year at 1.41% (unch), the 10-year at 1.65% (unch) and the 30-year at 2.02% (unch) at a 4 p.m. read.

Treasuries were mixed while equities sold off.

The two-year UST was yielding 1.537% (+7), the five-year was yielding 1.845% (+3), the 10-year yielding 1.926% (flat), and the 30-year Treasury was yielding 2.232% (-1) near the close. The Dow Jones Industrial Average lost 482 points or 1.41%, the S&P was down 1.02% while the Nasdaq lost 1.23% near the close.

Economy
Inflation continues to erode consumer confidence as purchasers’ expectations for price pressure grows and their shopping plans don’t include big-ticket items.

The consumer confidence index slipped to 110.5 in February from 111.1 in January, which was better than the 109.8 expected by economists polled by IFR Markets.

The present situation index climbed to 145.1 from 144.5 while the expectations index fell to 87.5 from 88.8.

With expectations off, first half growth will likely moderate, said Lynn Franco, senior director of economic indicators at The Conference Board. “Concerns about inflation rose again in February, after posting back-to-back declines. Despite this reversal, consumers remain relatively confident about short-term growth prospects. While they do not expect the economy to pick up steam in the near future, they also do not foresee conditions worsening. Nevertheless, confidence and consumer spending will continue to face headwinds from rising prices in the coming months.”

Indeed, fewer consumers said they’d buy a home, car, major appliance or take a vacation in the next half year.

Respondents now expect inflation at 7.0% a year from now, up from 6.8% last month.

“Consumer confidence is weakening but the growth story for the year still remains intact,” said Edward Moya, senior market analyst at OANDA. “The headwinds are visible to everyone but the weakness is modest at best. The economy and the consumer are still on solid footing and that should support a strong economic recovery once inflationary pressures that are stemming from geopolitical tensions abroad subside.”

While consumer confidence is usually high in tight labor markets, Wells Fargo Securities Senior Economist Tim Quinlan and Economic Analyst Sara Cotsakis said, “the highest inflation in 40 years may be too much of a problem to overlook.”

With the latest retail sales figures posting the largest rise “since the stimulus-fueled surge in March of last year,” they said, it suggests “a contradiction: consumers say they feel lousy, but they do not act like it.”

Separately, the Federal Reserve Bank of Philadelphia’s nonmanufacturing survey improved in February, with the employment index also gaining, but the price indexes hit record highs, suggesting “widespread increases in prices for inputs and the firms’ own goods and services.”

The Federal Reserve Bank of Richmond said manufacturing activity in the district “softened in February,” on drops in shipping and new orders, which both had negative index readings this month.

Employment rose and prices moderated, but remained elevated. “Firms continued to report increasing wages while also citing challenges finding workers with the necessary skills,” the report said. “Firms expect this challenge to last for at least the next six months as the expectations index remained in negative territory.”

The Richmond Fed said the service sector improved in the month, with little change in hiring while prices continued to climb.

Also released Tuesday, home prices grew 18.8% on an annual basis in December, the same pace as in November, while the 10-city composite rose 17.0% and the 20-city jumped 18.6% on an annual basis. For the month, the national index grew 0.9%, while the 10-city rose 1.0% and the 20-city increased 1.1%.

Primary to come:
Virginia Small Business Financing Authority (Baa1///BBB) is set to price Thursday $1.109 billion of federally taxable subordinate lien revenue refunding notes, Series 2022, and tax-exempt, alternative minimum tax senior lien revenue and refunding bonds, Series 2022. J.P. Morgan Securities.

The Nature Conservancy, Virginia (Aa2///) is set to price Thursday $412 million of taxable green corporate CUSIP bonds, consisting of $350 million of Series 2022A and $62 million of Series 2022B. J.P. Morgan Securities.

Wisconsin (Aa1/AA+//AAA) is set to price daily $236.975 million of taxable general obligation refunding bonds of 2022, Series 2, serials 2023-2032 and 2037. UBS Financial Services.

The District of Columbia Water and Sewer Authority (Aa2/AA+/AA/) is set to price Thursday $367.07 million, consisting of $78.765 million of green public utility subordinate lien bonds, Series 2022B; $99.370 million of public utility subordinate lien bonds, Series 2022C-1; and $188.935 million of federally taxable public utility subordinate lien revenue and revenue refunding bonds, Series 2022D. Goldman Sachs & Co.

State of New York Mortgage Agency (Aa1///) is set to price Thursday $171.695 million of social homeowner mortgage revenue bonds, consisting of $115.02 million of non-alternative minimum tax bonds, Series 242, serials 2027-2034, terms 2037, 2042, 2047 and 2052; $18.27 million of alternative minimum tax bonds, Series 243, serials 2022-2027; and $38.405 million of non-alternative minimum tax bonds, Series 244, terms 2037 and 2041. RBC Capital Markets.

Duneland School Building Corp., Indiana (/AA+//) is set to price Thursday $167.22 million of ad valorem property tax mortgage bonds, Series 2022, serials 2023-2042, insured by Indiana State Aid Intercept Program. Raymond James & Associates.

Wisconsin (Aa1/AA+//AAA/) is set $125.62 million of forward-delivery general obligation refunding bonds of 2023, Series 1, serials 2024 and 2027-2028. UBS Financial Services.

Liberty Hill Independent School District, Texas (Aaa///) is set to price Thursday $121.37 million of unlimited tax school building bonds, Series 2022, serials 2023-2056, insured by Permanent School Fund Guarantee Program. Raymond James & Associates.

Arizona Industrial Development Authority is set to price daily $113.4 million of senior federally taxable sustainability-linked revenue bonds, Series 2022A. Goldman Sachs & Co.

Georgetown Independent School District, Texas (Aaa/AAA//) is set to price daily $103.88 million of taxable unlimited tax refunding bonds, Series 2022-A, insured by Permanent School Fund Guarantee Program. FHN Financial Capital Markets.

Competitive:
Anchorage, Alaska (/SP-1+//) is set to sell $150 million of 2022 general obligation tax anticipation notes, at 11 a.m. eastern Wednesday.

Oakland, California is set to sell $20.14 million of taxable general obligation bonds (Measure KK), Series 2022C-2, at 11:30 a.m. eastern Thursday.

Oakland, California is set to sell $192.175 million of tax-exempt general obligation bonds (Measure KK), Series 2022C-1, at 11:30 a.m. Thursday.

Gwinnett County School District, Georgia (Aaa/AAA//) is set to sell $35 million of general obligation sales tax bonds, Series 2022A, at 11 a.m. Thursday.

Gwinnett County School District, Georgia (Aaa/AAA//) is set to sell $230 million of general obligation sales tax bonds, Series 2022B, at 11 a.m. Thursday.

Christine Albano contributed to this report.

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