A weaker tone ahead of FOMC, lighter calendar

Bonds

Municipals were a touch weaker to close out the week ahead of a smaller new-issue calendar and the Federal Open Market Committee meeting. U.S. Treasuries closed out weaker while equities were in the red.

Triple-A yields rose one to three basis points, depending on the curve, while USTs rose three to four.

The two-year muni-to-Treasury ratio Friday was at 62%, the three-year was at 64%, the five-year at 66%, the 10-year at 69% and the 30-year at 89%, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the two-year at 64%, the three-year at 65%, the five-year at 66%, the 10-year at 70% and the 30-year at 90% at 4 p.m.

“As more and more investors are joining the soft-landing camp, municipal credit spreads have continued to tighten,” Barclays PLC wrote in a weekly report. This is especially notable for high yield, they said, which continues outperforming investment grade munis.

“The spread differential between the IG and HY indices has declined about 15bp since the wides reached in July and about 35bp since early April,” said Barclays strategists Mikhail Foux, Clare Pickering and Mayur Patel.

The high-yield index is up 3.4% year-to-date versus 1.3% for investment grades.

But municipal yields have continued trading in narrow trading ranges, “largely following Treasuries,” they said. “Notably, the front-end has been performing better, and yield curves have meaningfully steepened: the 3s5s slope is still slightly inverted, but the 5s10s has finally dis-inverted and is currently at the steepest level since early spring.”

Heavier supply in that part of the curve, “especially issuance of mandatory put bonds, is one of the reasons the front-end of the yield curve has somewhat re-steepened,” they said.

“As U.S. rates continue trading in relatively narrow trading ranges and muni supply is more robust (but definitely not overwhelming), the market will likely trade sideways,” they said. “We are still looking for a better entry point, and recommend erring on the side of caution for now.”

A BofA Global Research report, though, noted that elevated muni rates and muni/Treasury ratios “make tax-exempt munis more attractive” and both institutional and retail investors “have been active in the market in the high rates environment.”

“Muni rates moved very little over the past two weeks, though credit spreads continue to narrow,” the report, led by BofA strategists, Ian Rogow and Yingchen Li, said.

The decline of secondary market trading volume in September “shows the market is quite poised, despite elevated market yields,” they said.

“Historically — and during this tightening cycle — high secondary market trading volumes correlate well with investors’ stress and thus more selling activity,” they said.

Peak secondary volumes in May 2022 occurred when the Fed indicated its first 75 basis point rate hike to come, “which was a surprise to the market.”

A subsequent decline in volume coincided with a strong summer rally while rapidly rising volumes in September 2022 “coincided with an increasingly hawkish Fed that executed an extra 75 bp rate hike,” they wrote.

“We believe investors should take advantage of the current high rates environment: investors should pick and choose bonds selectively in the coming weeks in anticipation of this tightening cycle’s end after November,” BofA strategists said.

The calendar is estimated at $4.193 billion during the FOMC week. It’s led by the San Diego Unified School District with $670 million of dedicated unlimited ad valorem property tax GOs. The largest competitive deal is from Cape May County, New Jersey (Aa1///), which is set to sell $96 million of GOs at 11 a.m. eastern Wednesday.

Bond Buyer 30-day visible supply sits at $8.95 billion.

AAA scales
Refinitiv MMD’s scale saw two to three basis point cuts: The one-year was at 3.25% and 3.13% in two years. The five-year was at 2.90%, the 10-year at 3.00% and the 30-year at 3.94% at 3 p.m.

The ICE AAA yield curve was cut up to one basis point: 3.29% (+1) in 2024 and 3.20% (unch) in 2025. The five-year was at 2.93% (+3), the 10-year was at 2.98% (+2) and the 30-year was at 3.96% (+1) at 4 p.m.

The S&P Global Market Intelligence (formerly IHS Markit) municipal curve saw cuts: 3.26% (unch) in 2024 and 3.14% (unch) in 2025. The five-year was at 2.94% (+3), the 10-year was at 3.00% (unch) and the 30-year yield was at 3.93% (unch), according to a 4 p.m. read.

Bloomberg BVAL was cut up to one basis point: 3.28% (+1) in 2024 and 3.19% (+1) in 2025. The five-year at 2.93% (+1), the 10-year at 2.94% (+1) and the 30-year at 3.98% (unch) at 4 p.m.

Treasuries were weaker.

The two-year UST was yielding 5.04% (+3), the three-year was at 4.72% (+4), the five-year at 4.446% (+4), the 10-year at 4.33% (+4), the 20-year at 4.60% (+4) and the 30-year Treasury was yielding 4.419% (+3) at the close.

Primary market to come:
The San Diego Unified School District is set to price Wednesday $670 million of dedicated unlimited ad valorem property tax GOs, consisting of $23.655 million of taxable green Election of 2018 bonds (Aa2///), Series G-1, serial 2024; $51.345 million of green Election of 2018 bonds (Aa2//AAA/AAA/), Series G-2, serials 2024-2028; $275 million of green Election of 2018 bonds (Aa2//AAA/AAA/), Series G-3, serials 2024-2043, terms 2048 and 2053; $16.435 million of taxable sustainability Election of 2022 bonds (Aa2///), Series A-1, serial 2024; $8.565 million of sustainability Election of 2022 bonds (Aa2//AAA/AAA/), Series A-2, serials 2024-2028; and $295 million of sustainability Election of 2022 bonds (Aa2//AAA/AAA/), Series A-3, serial 2048, term 2053. Citigroup Global Markets. 

The Patriots Energy Group Financing Agency (A1///) is set to price next week $578.720 million of gas supply revenue bonds, consisting of $567 million of tax-exempt bonds, Series 2023A-1, and $13 million of taxable bonds, Series 2023A-2. Goldman Sachs.

Philadelphia (A1/A+/A+/) is set to price Tuesday $575 million of water and wastewater revenue bonds, Series 2023B. Goldman Sachs.

The Washington State Housing Finance Commission (/BBB//) is set to price Tuesday $328.165 million of partially tax-exempt social municipal certificates, Series 2023-1, Class X, serial 2037. Citigroup Global Markets.

The Washington State Housing Finance Commission (/BBB//) is set to price Tuesday $328.165 million of social municipal certificates, Series 2023-1, Class A, serial 2037. Citigroup Global Markets.

The New Jersey Educational Facilities Authority (A2/A-/A/) is set to price Monday $262.765 million of revenue bonds, consisting of $185.220 million of Higher Education Capital Improvement Fund issue, Series 2023A, serials 2024-2043, terms 2048 and 2053, and $77.545 million of Higher Education Equipment Leasing Fund Program issue, Series 2023A, serials 2024-2033. Siebert Williams Shank.

The Minneapolis-St. Paul Metropolitan Airports Commission (/A+/A+/) is set to price Tuesday $170.925 million of subordinate airport revenue refunding bonds, consisting of $162.400 million of governmental/non-AMT bonds, Series 2023A, serials 2025-2035, and $8.525 million of private activity/AMT bonds, Series 2023B, serials 2025-2026. Ramirez & Co.

Competitive:
Cape May County, New Jersey (Aa1///), is set to sell $96 million of GOs at 11 a.m. eastern Wednesday.

Jessica Lerner contributed to this report.

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