Municipal bonds had a day to remember on the one-year anniversary of the official designation of the COVID-19 pandemic rampage, while President Biden's signature sealed a $1.9 trillion stimulus package that will buoy state and local budgets across the country and put raw dollars into taxpayer hands.
Yields fell another three basis points on triple-A benchmarks, California repriced to much lower yields — by double digits — in institutional pricing and Refinitiv Lipper reported more than $1 billion of inflows, reversing last week's outflows.
"If there was a day to have the stars align, it just might be March 11, 2021," a New York trader said. "Biden signed the stimulus. It is quite clear the benefits it will have on this sector, not just to state and local government budgets, but also to direct spending that is likely to occur. While some investors might not want to see muni yields on the downward slope once again, the technicals are quite clear at the moment that there was nowhere else to push them."
One of the big stories in recent months has been the precipitous decline in relative value, noted Kim Olsan, senior vice president of FHN Financial.
"After starting last September well above 100%, the 10-year AAA/UST ratio is now below 80%," she noted in a morning commentary. They fell to 67% Thursday. The low of 2021 was 54% on Feb. 16, just before the sell-off.
U.S. Treasuries, which were little changed on the day, moved the municipal to UST 10-year lower to 67% and the 30-year fell to 72%, according to Refinitiv MMD. ICE Data Services showed ratios at 65% in 10 years and 74% in 30. Bloomberg BVAL had the 10-year at 68% and the 30 at 78%.
"Demand for tax-exempt product (on the macro theme of tax sheltering) could hold the ratio in its current range for the foreseeable future," Olsan said.
How much supply this supply-starved market can handle in what is typically a reinvestment cycle — projections for maturing or called bonds have increased in recent weeks, now totaling $20 billion in the next 30 days.
That figure is below the average for monthly supply, potentially creating higher supply feeding into more tepid demand, Olsan said.
"With just four weeks until the April 15 tax filing date, secondary selling is accelerating for cash raises," Olsan noted. "Daily par value posted for sale via Bloomberg’s bid system has exceeded $500 million for five straight days — potentially testing current yields and commitments at tightening spreads (although postings have a heavy short-term concentration)."
But supply the market will have next week with $2.089 billion of Dormitory Authority of the State of New York personal income tax bonds, $635 million of New York State GOs,
In the primary Thursday, BofA Securities priced for institutions a $1.86 billion GO offering for California (Aa2/AA-/AA/) with large bumps from the retail scales.
The first series, $881 million, saw 4s of 2022 at 0.14% (-3 bps from retail), 5s of 2031 at 0.77% (down a whopping 24 basis points; callable in 2026), 5s of 2036 at 1.43% (-13 bps), 3s of 2046 at 2.28% (-13), 5s of 2046 at 1.76% (-13), 3s of 2046 at 2.28%, 2.5s of 2049 at 2.56% (-8) and 3s of 2049 at 2.31% (-13). The second series, $966 million of non-callable GOs, saw 5s of 12/2021 at 0.09% (-3), 5s of 2022 at 0.14% (-3), 5s of 2026 at 0.63% (+2) and 5s of 2031 at 1.19% (-12).
Arkansas (Aa1/AA//) sold $268.8 million of general obligation bonds to JPMorgan Securities. Bonds in 2022 with a 5% coupon yield 0.07% and 5s of 2023 at 0.11%.
A $100.98 million New York City Educational Construction Fund was won by BofA Securities on Thursday in the competitive market — and offered attractive yields to the generic market.
The deal, which is rated Aa3 by Moody’s Investors Service and AA-minus by Standard & Poor’s, was priced with a 2022 maturity with a 5% coupon to yield 0.15% — nine basis points cheaper than the generic triple-A general obligation scale; 5% coupons in 2026 were priced to yield 0.61% and in 2031 to yield 1.30%. The 2036 maturity with 4% coupon was priced to yield 1.75%, while the 20-year bond with a 4% coupon was priced with a 2% yield — 55 basis points cheaper than where the triple-A general obligation scale closed on Thursday.
Secondary trading
Traidng showed a strengthened market with Baltimore County, Maryland 4s of 2022 trading at 0.09%, Maryland GOs, 5s of 2022 at 0.10%-0.09%. Texas waters, 5s of 2023, at 0.18%-0.14%.
Montgomery County, Maryland 4s of 2027 at 0.67%. Maryland 5s of 2033 at 1.16%.
Baltimore County, Maryland 5s of 2035 traded aat 1.25%-1.24% versus 1.42%-1.41% Thursday and their original of 1.43%. Maryland 5s of 2035 also trading much tighter with 5s of 2035 at 1.26% versus 1.41% on Feb. 26 and 1.39% original.
Washington 5s of 2046 exchanged dealer hands at 1.69% then sold to a customer at 1.58%. This versus 1.82%-1.81% on Tuesday and 1.88% Monday. Original yield, 1.46%. Out longer, New York City TFA 2.25s of 2051 traded at 2.54% versus 2.63% Monday.
Refinitiv Lipper reports $1.09B inflow
In the week ended March 10, weekly reporting tax-exempt mutual funds saw $1.092 billion of inflows. It followed an outflow of $600.044 million in the previous week.
Exchange-traded muni funds reported inflows of $231.736 million, after inflows of $181.222 million in the previous week. Ex-ETFs, muni funds saw inflows of $860.686 million after outflows of $786.266 million in the prior week.
The four-week moving average remained positive at $620.074 million, after being in the green at $1.008 billion in the previous week.
Long-term muni bond funds had inflows of $663.006 million in the latest week after outflows of $667.421 million in the previous week. Intermediate-term funds had inflows of $167.189 million after inflows of $69.248 million in the prior week.
National funds had inflows of $1.065 billion after outflows of $455.823 million while high-yield muni funds reported inflows of $429.806 million in the latest week, after outflows of $721.728 million the previous week.
Claims fall, but remain high
Initial jobless claims dropped more than expected in the week, as reopening continued slowly, but the total remains higher than any week before the COVID crisis hit.
Claims fell to 712,000 in the week ended March 6 from an upwardly revised 754,000 a week earlier, which had been originally reported as 745,000. The number just above the pandemic low of 711,000 in November.
“This is the least awful it has been over the past year,” is how Tim Quinlan, senior economist at Wells Fargo Securities, termed it.
Economists expected 725,000 claims in the week.
Continued claims declined to 4.144 million in the week ended Feb. 27 from 4.337 million a week earlier.
“The downward trend with jobless claims remains and expectations are growing that the labor market is about to takeoff,” said Edward Moya, senior market analyst at OANDA. “The deep freeze impact that hit many jobs in the South is behind us and the future is looking bright due to the coronavirus vaccine rollout success.”
This summer, leisure and hospitality jobs should see a big rebound if reopening continues, he added.
“The downward trend should accelerate, and claims should fall below 600,000 by April,” Moya said.
FOMC preview
The Federal Open Market Committee meets March 16-17, and while it won’t change the fed funds rate or its asset purchases, it could “make some technical moves to try and lift rates at the short end of the curve,” according to Luke Tilley , chief economist at Wilmington Trust.
With much liquidity in the system and more on its way, “the Treasury is mandated to draw down its pile of cash by this coming August,” he added, “that could add to the pressure at the short end of the curve and some bills into negative territory.”
Among the options for the Fed, Tilley said, is increasing the Interest on Excess Reserves (IOER) or Reverse Repo program “to push up on rates from below.” Another possibility is a twist, with the Fed “selling short-term securities and buying longer-dated ones.”
If either or both happen, he said, “they would stress these are technical maneuvers in reaction to unique circumstances weighing on short-term rates.”
Or, the Treasury could get an extension beyond August on the requirement to draw down cash balance, Tilley suggested.
Bond market participants, he said, “have aligned their inflation expectations with the Fed’s new operating policy as measured by TIPS breakevens. The 5-year inflation breakeven just above 2.5% reflects the Fed’s desire to get inflation above their longer-term goal, while the 5-year forward breakeven (years 6 through 10 of the next ten years) shows an expectation that inflation would come back down to roughly 2%. That is precisely what the Fed is attempting to engineer with the new policy.”
But despite that, the Fed still has concerns. “The Fed’s biggest fear, and the thing they lose sleep over, is the prospect of long-term inflation expectations drifting inexorably higher,” he said. If business and consumers expect accelerating inflation, it could be “a non-virtuous self-fulfilling prophecy that would need to be addressed quickly.”
As long as long-term inflation expectations stay low, the Fed can work to get shorter-term levels above the 2% target, according to Tilley.
Tame consumer price index reading this week will allow the Fed to keep things as is, according to Steven Skancke, chief economic adviser at Keel Point and former White House and Treasury Department staff member. “As a result of the favorable pricing data, the 10-year Treasury yield also pulled back, having touched above 1.6% earlier this week, compared to 0.55% last August and 1.11% just prior to the January FOMC meeting,” he said. “This reduces pressure on the Fed to start a yield-curve management program which some analysts have advocated.”
But the panel remains focused on the ailing labor market, with about 20 million Americans still collecting unemployment benefits and 5 million out of the labor force as a result of COVID disruptions, Skancke said.
But other issues await. “The next big challenge for the FOMC and Fed Chair Jerome Powell will be to navigate concerns that the Fed’s policy shift of looking at average inflation rates will not work or will be misinterpreted,” he said. The reaction to Powell’s recent “comments about interest rates and inflation are a reminder of this topic’s sensitivity, especially to financial markets.”
Secondary market
High-grade municipals were stronger across the curve, according to Refinitiv MMD. Short yields fell two basis points to 0.06% in 2022 and to 0.07% in 2023. The 10-year fell three basis points to 1.02% and the 30-year fell three basis points to 1.65%.
The ICE AAA municipal yield curve showed short maturities at 0.07% in 2022 and 0.10% in 2023. The 10-year fell three basis points to 0.98% while the 30-year yield fell three to 1.68%.
The IHS Markit municipal analytics' AAA curve showed yields steady at 0.06% in 2022 and 0.11% in 2023 with the 10-year at 0.98%, and the 30-year at 1.66%, both two basis points lower.
The Bloomberg BVAL AAA curve showed yields at 0.05% in 2022 and at 0.09% in 2023, while the 10-year fell three to 0.97%, and the 30-year yield fell three to 1.67%.
The 10-year Treasury ended at 1.52% and the 30-year Treasury was yielding 2.27% near the close. The Dow was up 188 points while the S&P 500 rose 1.04% and the Nasdaq rose 2.24%.
Chip Barnett and Christine Albano contributed to this report.
