An historical analysis of periods when the Federal Reserve tightened monetary policy shows that parts of the municipal yield curve respond differently, depending upon economic conditions, the shape of the curve moving into the tightening cycle and the manner in which the Fed raises interest rates.

“Some investors are concerned about the impact a tighter monetary policy could have on bond yields. Since rates and bond prices are inversely related, investors continue to evaluate their fixed-income allocations,” Chris Barron, vice president at Nuveen Asset Management, wrote in a report released on. “Some are shortening portfolio duration to minimize the potential impact of rising rates (duration measures sensitivity to changes in rates). Others see yield increases as an opportunity to lengthen portfolios, given more attractive relative yields. Which is right?”

Nuveen’s analysis shows the short end of the curve wasn’t necessarily the least risky or the long end the most volatile. In the past three rising rate environments, Nuveen said that a "hypothetical investor" who stayed the course through the tightening cycle may have experienced positive total returns regardless of position on the yield curve.

“Investors have access to more information and advice than ever before. It’s sometimes difficult to separate high quality, long-term investment advice from knee-jerk trading suggestions and commentary that is thinly veiled entertainment,” Barron wrote.

“As a result, investors expect rates to rise and many are shouting the old saw that ‘rising rates are bad for bond investors.’ … The analysis demonstrates that this is not necessarily the case. In each of the last three rising rate environments, economic conditions and the pace and scale of Fed activity affected various parts of the curve differently. There was, though, one common theme: patient investors who held portfolios through the rising rate cycle generated positive returns.”

Primary market
Citigroup held a second day of retail orders on New York City’s $850 million of Fiscal 2018 Series F Subseries F-1 tax-exempt general obligation bonds and $67.88 million of Fiscal 2004 Series A Subseries A2 ahead of the institutional pricing on Wednesday.

NYC is also competitively selling $133.49 million of Fiscal 2018 Series F Subseries F-2 taxable) GOs and $116.51 million of Fiscal 2018 Series F Subseries F-3 taxable GOs on Wednesday.

The deals are rated Aa2 by Moody’s Investors Service and AA by S&P Global Ratings and Fitch Ratings.

Barclays Capital priced the California Statewide Communities Development Authority’s $100 million of Series 2018 revenue bonds for the Huntington Memorial Hospital. The deal is rated A-minus by S&P.

Since 2008, the California SCSDA has sold about $17.1 billion of securities, with the largest volume in 2009, when it sold $4.12 billion and the lowest, excluding this year, in 2013, when it sold $516 million.

Crews & Associates received the written award on Springdale, Ark.’s $188 million of Series 2018 sales and use tax refunding and improvement bonds on Tuesday.

The issue was insured by Build America Mutual and rated AA by S&P with an underlying rating of A-plus.

In the competitive arena, the Florida Board of Education sold $146.47 million of Series 2018A full faith and credit public education capital outlay refunding bonds.

Citigroup won the bonds with a true interest cost of 3.1108%. The deal is rated Aa1 by Moody’s and AAA by S&P and Fitch.

Tuesday’s bond offering

New York:
Click here for Day 2 of the New York City retail pricing

Click here for Day 1 of the New York City retail pricing

Click here for the New York City Series 2004 retail pricing

California:
Click here for the SCDA pricing

Florida:
Click here for the Board of Education sale

Arkansas:
Click here for the Springdale, Ark., final pricing

Previous session's activity
The Municipal Securities Rulemaking Board reported 40,713 trades on Monday on volume of $9.04 billion.

California, New York and Texas were the states with the most trades, with the Golden State taking 17.642% of the market, the Empire State taking 11.049% and Lone Star State taking 9.312%.

Are munis poised for a stronger Q2?
Despite previous issues surrounding supply and demand, municipals are poised for a potentially stronger second quarter, according to Jeffrey Lipton, managing director of credit research at Oppenheimer & Co.

“We continue to believe that fund flows will demonstrate more positive conviction as we move throughout the year once technical normalization sets in,” Lipton wrote in a weekly municipal report.

“If muni market technicals can find equilibrium and if flows can move more decisively positive, munis would be well-poised to outperform U.S. Treasuries in 2018 and there is still an opportunity for munis to deliver single digit positive returns,” he wrote.

Lipton said in order for ratios to move lower, expectations for a normalized technical backdrop would need to play out with municipal outperformance of U.S. Treasuries.

“This would likely include better new issue participation by banks and P&C insurance companies coupled with contained unwinding of existing muni holdings by these same institutional participants,” he wrote.

Municipal recovery is linked to Fed policy expectations, according to Lipton.

“Although inflation may eventually hit the 2% target, we do not envision breakout expansion that would require the FOMC to pursue a more aggressive tightening regiment,” Lipton said in his report. He forecasts a total of three rate hikes this year.

Lipton suggests current yields available on short maturities are compelling for the more defensive investor preferring to apply a barbell strategy.

"Such buyers may have more immediate cash needs or perhaps are positioning to redeploy assets to take advantage of intermittent weakness on the long end,” he wrote.

“As the muni technical landscape normalizes, and we think that it will, then perhaps general performance figures may show a positive trajectory throughout the next couple of quarters,” Lipton wrote. “If this scenario occurs, then perhaps we may see a scaling back in support for high yield munis,” Lipton added. “The support can be even further diluted if high yield spreads continue to compress.”

Treasury sells 3-year notes, 4-week bills
The Treasury Department auctioned $30 billion of three-year notes with a 2 3/8% coupon at a 2.450% high yield, a price of 99.784450. The bid-to-cover ratio was 2.85.

Tenders at the high yield were allotted 90.13%. All competitive tenders at lower yields were accepted in full. The median yield was 2.407%. The low yield was 2.200%.

Treasury also auctioned $45 billion of four-week bills at a 1.620% high yield, a price of 99.874000.

The coupon equivalent was 1.645%. The bid-to-cover ratio was 3.25. Tenders at the high rate were allotted 83.54%. The median rate was 1.600%. The low rate was 1.580%.

Gary Siegel contributed to this report.

Data appearing in this article from Municipal Bond Information Services, including the MBIS municipal bond index, is available on The Bond Buyer Data Workstation. Click here for a brief tour of the Workstation, or contact Vanessa Kim at 212-803-8474 for more information.

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