Municipals were firmer Tuesday on the short end, while U.S. Treasury yields saw larger gains five years and out. Equities closed in the black as the markets digested more Fedspeak.
While Federal Reserve members have continued to emphasize the need to continue tightening, comments from San Francisco Fed President Mary Daly indicated a “pause is on the table.”
Over the weekend, Atlanta Fed President Bostic voiced support for a further 75-100 basis point of further tightening and for a deceleration in the pace of rate hikes beginning at the December meeting, a report from Berenberg Capital Markets noted.
“The Fed’s November meeting minutes released this Wednesday will frame the contours of the internal debate around the FOMC and will likely point to broad support around the committee for a significantly higher terminal funds rate than that suggested by the Fed’s September SEPs (4.6%),” the report said.
“We look for another 100 basis points of Fed tightening before a pause in 2Q and project the economy tips into a mild recession by 4Q,” noted J.P. Morgan economists. They believe tightening should continue at least through next year and expect Treasury yields “to fall and the curve to steepen, but look for a more limited yield decline relative to prior cycles. High grade credit spreads should tighten while high yield spreads widen, they said.
Municipals have been outperforming UST for weeks now. Munis were bumped up to six basis points Tuesday while U.S. Treasuries saw yields fall up to seven on the long bond. Ratios were little changed.
The three-year muni-UST ratio Tuesday was at 63%, the five-year at 72%, the 10-year at 77% and the 30-year at 94%, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the three at 64%, the five at 68%, the 10 at 76% and the 30 at 93% at a 4 p.m. read.
Selling pressure in the secondary has fallen over the past few weeks and bids wanteds dipped Monday to $1.575 billion after hitting a high of $2.008 billion last week.
Last week, triple-A benchmark yields “rallied strongly last week [with] more customers looking both to monetize potential tax swaps and to buy paper before what appears to be expected year-end rally momentum,” said Matt Fabian, a partner at Municipal Market Analytics.
A year-end rally could well occur, he said, given “the availability of product and yield at historically attractive levels.” However, the Fed may keep hiking rates into year-end, thus “creating a material downside performance risk for current buyers,” he said.
He noted “the offered curve has swung well back into relative richness/overbought territory,” which could be “explained by strong demand alone or, more plausibly, strong demand effects being multiplied by thin market liquidity and thus achieving less sustainable prices.”
Tax-exempt scarcity is “endemic and reasonably worsening into year-end, in particular, if mutual fund outflows … become sustained inflows on the strength of year-end marketing pitches,” Fabian said.
Bond Buyer 30-day visible supply sits at $10.54 billion while net negative supply is at $17.509 billion, per Bloomberg.
Even if the three-week rally, which has dropped offered curve yields by around 50 basis points, “winds up not being a permanent pivot back to a net buying sentiment, the power behind it (as fueled by supply scarcity) is allowing it to run farther and longer than otherwise,” he said.
This would present “a confusing signal to investors accustomed to reading the muni market’s often momentum-driven price action,” he noted.
“While mutual fund outflows slowed last week — a positive sign — and tax-exempts dramatically outperformed the taxable market when such could not be readily explained by an approaching holiday or late day adjustment in Treasuries,” according to Fabian said.
Additionally, he said, fund NAVs have recouped around 20% of year-to-date losses in the last three weeks.
“Further, trading data suggest that dealers have been caught short with respect to customer interest and have been compelled to source bonds from the Street: showing demand strength,” he said.
More supply scarcity ahead
Lower supply in 2022 has somewhat helped the market avoid larger losses, many participants have said. Ramirez & Co. has joined the chorus of lower supply expectations for 2023, as well.
Peter Block, managing director of credit strategy at Ramirez, expects that 2022 will end with gross supply of around $370 billion of long-term bonds, a decline of roughly 23% year-over-year, made up of around 85% tax-exempt bonds and around 15% taxable bonds.
Tax-exempt supply in 2022 has declined about 12% year-over-year to around $315 billion while taxable volume declined about 55% year-over-year to $55 billion.
New money was off — down 6% at $325 billion — while refunding volume fell off of the proverbial cliff, “down 66% to around $46 billion driven by the horrendous macro rates backdrop,” he said.
“Concerns about inflation and tight labor market conditions forced the Fed to adopt a much more hawkish stance in 2022, as it embarked on an aggressive tightening cycle,” said Barclays strategists.
This caused USTs to rise more than 200 basis points year-to-date and rates have been volatile, “driven by recession fears and geopolitical tensions,” resulting in lower supply, they said.
Supply has been lower this year in general. October volume declined 40.3% year-over-year, as issuers dealt with extremely volatile rates, market fatigue and the upcoming Federal Open Market Committee meeting.
Barclays strategists said recently, “hurt by higher rates and market volatility, this year’s municipal supply will likely decline nearly 20% from 2021’s pace, about 10% more than we projected last year.”
For next year, Ramirez & Co. forecasts of $380 billion of long-term bonds, an immaterial year-over-year change of positive 2.7% versus 2022 mostly driven by still relatively healthy, but essentially flat new-money issuance of $329 billion (up 1% year-over-year), per Block.
The firm expects tax-exempts to increase overall by 9% to $343 billion (90% of issuance) and for taxable munis to decline for the second year by around 33% to $37 billion (10% of issuance). He expects the growth to be mostly driven by new-money.
“Our view of muted issuance in 2023 primarily reflects continuation of uncertainty and volatility amidst what we expect to be a continued high rate environment,” Block said.
Market expectations for peak fed funds rates of around 4.5%-5% “continue to push further into 2023 as the U.S. economy retains extraordinary strength amidst very high, albeit moderating inflation,” he said.
The primary risk to the forecast, he said, is “if inflation decelerates, causing peak rates to decline precipitously near term.”
Additionally, the majority of the around $90 billion of new bonds approved on Nov. 8 around the country “will likely not see the light of day until at least the end of the year, but more likely 2024 onward,” he said.
San Francisco city and county 5s of 2024 at 2.64%. Washington 5s of 2024 at 2.79%.
North Carolina 5s of 2025 at 2.70%-2.69% New York EFC waters 5s of 2025 at 2.65% versus 2.68% Monday. Texas 5s of 2025 at 2.85%-2.82%.
Washington 5s of 2026 at 2.78%-2.75%. Maryland 5s of 2029 at 2.91% versus 2.95% Friday. Alexandria, Virginia, 5s of 2029 at 2.84%. Maryland 5s of 2030 at 2.78%.
Washington 5s of 2033 at 3.01%. Iowa green 5s of 2042 at 3.59%-3.58%. California 5s of 2042 at 3.62%.
New York Dorm PITs 5s of 2046 at 4.17%-4.10%. New York City waters 5s of 2047 at 4.15%-4.12% versus 4.27% original.
Refinitiv MMD’s scale was bumped up to six basis points: the one-year at 2.68% (-6) and 2.69% (-6) in two years. The five-year at 2.76% (-5), the 10-year at 2.89% (-2) and the 30-year at 3.59% (unch).
The ICE AAA yield curve was bumped one to four basis points: 2.72% (-2) in 2023 and 2.73% (-2) in 2024. The five-year at 2.77% (-3), the 10-year was at 2.90% (-4) and the 30-year yield was at 3.69% (-2) at a 4 p.m. read.
The IHS Markit municipal curve was bumped up to six: 2.68% (-6) in 2023 and 2.70% (-6) in 2024. The five-year was at 2.77% (-3), the 10-year was at 2.88% (-3) and the 30-year yield was at 3.59% (unch) at a 4 p.m. read.
Bloomberg BVAL was bumped up to six basis points: 2.69% (-5) in 2023 and 2.72% (-6) in 2024. The five-year at 2.75% (-5), the 10-year at 2.86% (-1) and the 30-year at 3.58% (unch) at 4 p.m.
Treasuries were better.
The two-year UST was yielding 4.531% (-3), the three-year was at 4.298% (-2), the five-year at 3.951% (-7), the seven-year 3.884% (-6), the 10-year yielding 3.759% (-7), the 20-year at 4.062% (-7) and the 30-year Treasury was yielding 3.827% (-7) at the close.
Goldman Sachs & Co. priced for the Tennergy Corporation, Tennessee, (Baa1///) $557.515 million of gas supply revenue bonds, Series 2022A, with 5.25s of 12/2023 at 4.47%, 5.5s of 12/2027 at 4.90%, 5.5s of 12/2030 at 5.10% and 5.5s of 10/2053 at 5.15%.
Citigroup Global Markets priced for the Massachusetts Housing Finance Agency (Aa1/AA+//) $200 million of taxable social single-family housing revenue bonds, Series 226, with all bonds pricing at par: 4.542s of 6/2023, 4.962s of 6/2027, 5.012s of 12/2027, 5.475s of 6/2032, 5.525s of 12/2032, 5.705s of 12/2037, 5.836s of 12/2042, 5.916s of 12/2047 and 5.562s of 12/2052.
Massachusetts to sell $700 million in competitive market
The Commonwealth of Massachusetts is set to sell $700 million of general obligation bonds the week of Nov. 28 in the competitive market, per MuniOS.
The commonwealth, rated Aa1/AA/AA+/, plans to sell on Nov. 29 in two series. Proceeds will be used to reimburse the Commonwealth for various capital expenditures.