It was a quiet and uneventful Friday as the municipal market viewed the higher-than-expected growth in the jobs report as an indicator of economic recovery ahead and it prepared for the coming of more than $9 billion of tax-exempt and taxable supply combined next week.
California will dominate the primary market with its $1.8 billion sale of various purpose general obligation and refunding bonds.
The deal is the largest amid expectations of $7.5 billion of new tax-exempt issuance — $2.4 billion more than the year’s weekly average, according to IHS Markit Ipreo and The Bond Buyer.
The anticipated volume is up from total sales of $7.07 billion this week.
There are $6.6 billion in municipal bond sales scheduled for negotiated sale next week, according to Ipreo, versus a revised $4.9 billion that were sold this week, according to Refinitiv.
Competitive sales next week total $2.3 billion, compared with $2.1 billion this week.
The stronger-than-expected unemployment report triggered little movement throughout the municipal yield curve on Friday.
The short end of the generic, triple-A general obligation yield curve was unchanged in 2022 and 2023; lowered by one basis point in 2024 and between 2030 and 2051; and lowered by two basis points between 2025 and 2029.
In early trading, the 10-year Treasury benchmark yield, meanwhile, spiked to a new high of 1.62% — one basis point higher than last week during the sell-off — on the news that U.S. employers added 379,000 jobs in February, which is the most since October and a sign of a strengthening economy.
At the close of trading, the 10-year Treasury benchmark ended at a yield of 1.549% and the municipal to Treasury ratio in 10 years was 71%, compared to 72% the prior day.
The employment report showed at least 4.1 million Americans have been out of work for more than six months, accounting for 41.5% of the unemployed population in February. Another 3.5 million have permanently lost their jobs.
The increase in hiring last month lowered the unemployment rate to 6.2% from 6.3%.
But, while last month’s gain was a dramatic increase from the 166,000 jobs added the prior month and a December decline of 306,000, the economy needs to regain 9.6 million jobs to return to pre-pandemic levels.
“The tone of the market seems to have improved dramatically,” JB Golden, portfolio manager at Advisors Asset Management, said Thursday, as the correction reflects the broader interest-rate backdrop now that “frothy” valuations have eased.
Thursday and Friday's market indicated steadiness against a backdrop of higher Treasury rates.
“Municipals are now firmly ahead of the Treasury market on a taxable equivalent basis, offer a better return than the dividend yield of the S&P 500, offer safety not found in corporates, political risk has shifted from a headwind to a tailwind, and the continued supply constraints provide some cover against higher interest rates,” Golden said.
With the reset in yields in the rear view, valuations — especially relative to Treasury — will likely support continued robust demand, he added.
“The correction in municipals, in my opinion, was a healthy correction as the market was getting out over the skis a bit,” Golden said. “It removed one of the more concerning overhangs in the form of much more attractive valuations.”
Ratios dipped this week with the 10-year muni/UST reported at 72% and the 30-year at 77% Friday, according to Refinitiv MMD. ICE Data Services showed ratios at 70% in 10 years and 78% in 30.
“It looks very much like the credit cycle in municipals has rolled over with downgrades easing,” Golden said. “The market bid for short-term paper remains robust amid a broad aversion to interest-rate risk.”
Golden said he is seeing a strong steepening of the Treasury curve with front-end rates held down by Federal Reserve accommodation, while the longer-end of the curve is moving up much faster on improving growth prospects and increasing inflation expectations.
“We have been avoiding new issuance in the midst of some of the strongest fund and ETFs flows in the history of the municipal market pre-correction,” he added.
While funds flows have turned negative, with Refinitiv Lipper reporting $600 million of outflows Thursday, Golden said the asset class offers a combination of income and safety not available in the Treasury or investment-grade corporate markets and that should support continued demand.
Other market technicals are also indicative of strength ahead for municipals.
“With constrained supply providing some insulation against broader interest-rate volatility, the relative outperformance versus corporates and, especially the Treasury market, could continue,” he added. “I would not be surprised to see them as the best performing investment-grade fixed-income asset class at year end."
There is currently a post-correction window of opportunity in the municipal market that could lead to an extended period of strong performance and positive market technicals ahead, Jeff MacDonald, head of fixed-income strategies at Fiduciary Trust International, noted on Friday.
Now that the unpleasant sell-off has abated, the municipal market has adopted a more orderly tone, he said.
"The municipal market right now is a little more attractive and in step with the taxable market," and the themes of moderate supply, solid inflows and strong appetite for tax-exempt income — haven't disappeared, he said.
Those themes are still in place, but the market needed to adjust to the moves in the Treasury market, which is typical behavior for the municipal market, MacDonald said.
"Before the correction, municipal prices were very rich; we were not aggressive buyers and not stretching or reaching for credit risk," he said, adding the market lacked yield compensation.
Post correction yields have drifted higher and he is finding attractive bonds — but still remain selective and not taking on additional credit and interest rate risk — as more opportunities are available now than two to three weeks ago.
"The market feels better and more stable now past this adjustment," he added.
That bodes well for next week’s new issues as they should appeal to the buyside crowd — whose demand for municipal bonds hasn’t abated, sources said.
New deals should be well received given the higher yields and higher than average weekly volume, sources noted.
Employment report
February nonfarm payrolls vastly exceeded expectations, and the numbers for the two previous months were revised upward, reflecting economic re-opening as vaccinations grow, but still well below pre-pandemic levels, suggesting the Federal Reserve will continue its accommodative policy.
Nonfarm payrolls grew by 379,000 in February, following a revised 166,000 in January, first reported as 49,000 added.
Economists polled by IFR Markets expected 165,000 new jobs.
The “report exceeds even the more optimistic forecasts, indicating that the economy is set for a fast recovery,” said Christian Scherrmann, U.S. economist at DWS Group, but “the labor market remains far from where it was before the crisis and we expect that complete healing — the basis for any rate hikes by the Fed — will take time, well into 2023.”
He noted that while the unemployment rate ticked down, this “could be misleading,” since “it does not account for people that have left the labor force,” so the real unemployment rate may be around 10%, as the Fed has suggested.
“The current labor market recovery is far from complete,” Scherrmann said. “The momentum built up in February, however, gives hopes that the recovery will be quite impressive in the course of 2021.”
And while stimulus and vaccinations will be beneficial, “For the time being, however, this first very optimistic report should not give the Fed reasons to act quickly.”
“The employment picture brightened substantially,” according to Marvin Loh, senior global macro strategist at State Street. “Workers in the accommodation and food services sectors made up the bulk of the gains, adding 321,000 to their rolls, mostly reversing the lost positions that were reported over the winter.”
But despite this growth, 2 million fewer people are employed in the sector compared to prior to the pandemic, he said. “The broader vaccination of the population will undoubtedly accelerate gains in this sector over the coming months, although it will take until the summer before we are able to get a clearer picture on the scarring that has occurred.”
With 9 million jobs lost to the pandemic still not recovered, Loh said, “there remains considerable slack in the jobs market,” which usually is “a major headwind for the economy and inflation. But the stimulus expected “will ease those pressures.”
Stifel Chief Economist Lindsey Piegza sounded some caution. "While no one data point can signal the U.S. economy is out of the woods," she said, "coupled with recent gains in auto and retail spending and manufacturing as well as robust housing market activity, ongoing positive monthly job creation will work to boost confidence and drive higher expectations for more solid growth in the coming months and quarters."
Scott Ruesterholz, portfolio manager at Insight Investment, said, “The fact that the modest reopening seen in February led to such a strong rebound in leisure employment is an encouraging sign that payroll growth should accelerate materially over the next quarter as the pace of reopening picks up amid mass vaccination.”
Despite the gains, he added, “the leisure sector still has 3 million fewer employees than one year ago, even with this gain, so there is still a long journey to normal.”
“It won’t be long before a more widespread reopening occurs, and roughly 4 million leisure and hospitality jobs could quickly come back online over the remainder of 2021,” the Payden & Rygel economics team noted.
Federal Reserve Board Chair Jerome Powell made that point earlier in the week, noting that while the economy is better off than was projected, the labor market still has far to go.
And while the numbers are encouraging and suggest “we are turning a corner,” Diane Swonk, Grant Thornton chief economist noted, “It would take more than two years at the current pace of job gains to recoup what we lost to the pandemic, let alone the jobs that would have been created absent the pandemic.”
The unemployment rate dipped to 6.2% from 6.3%.
“That is encouraging, but we still view that headline figure as misleading about the true state of the labor market," said Luke Tilley, chief economist at Wilmington Trust. "The total labor force is down 4.2 million people from the pre-pandemic peak, and those people are not included in the unemployment rate.”
He pointed to the 13.3 million people reporting no work or “restricted hours due to their employer being closed or losing business because of the pandemic.”
While the labor market improved in the month, it “remains weak overall. Declining COVID cases, stronger spending of stimulus funds were a key part of the acceleration.”
The participation rate remains an issue, said Sarah House, senior economist at Wells Fargo Securities. As the pandemic eases and the economy “more fully re-opens this summer, participation … will rebound strongly, but some individuals won’t easily find their way back to the labor force, which will keep the Fed biased toward staying accommodative for longer even as inflation risks mount.”
Average weekly hours fell to 34.6 from 34.9 and earnings climbed 0.2%.
Also released Friday, the international trade deficit widened to $68.21 billion in January from $66.97 billion in December.
Economists expected a $67.5 billion shortage.
Exports of $191.94 billion were outpaced by imports of $260.16 billion. The $221.1 billion of goods imported were a record.
The trade deficit with China declined 3.2% to $27.2 billion in the month.
Secondary market
High-grade municipals were largely steady compared to the prior day, according to final readings on Refinitiv MMD’s AAA benchmark scale. Short yields remained steady at 0.08% in 2022 and 0.13% in 2023. The 10-year and 30-year each fell one basis point to 1.11% and 1.76%, respectively.
The 10-year Treasury ended at 1.549% and the 30-year Treasury was yielding 2.28% at the close.
By the close of trading at 3 p.m. when the MMD AAA GO scale was set, the DJIA was up 504 points at 31,428 while the S&P 500 rose 65 points to 3,834 and the Nasdaq climbed 176 points to 12,899.
Primary market
Next week’s new issuance should appeal to the buyside crowd whose demand for municipal bonds hasn’t abated despite the recent fund outflows during the selloff, municipal sources said.
New deals should be well received given the higher yields and higher than average weekly volume, sources noted.
The highlight of the week — the California GO deal — is slated to be priced by BofA on Thursday with serials and term bonds structured as $881 million of Series 1 bonds and $970.9 million in a refunding series.
That deal will be followed by a $573 million New York City Municipal Water Finance Authority offering of water and sewer system second general resolution revenue bonds priced by Loop Capital Markets on Wednesday. The deal consists of Series 2021 DD serials due in 2025, 2026, 2029, 2031, 2033, 2036, and 2038 and will have a retail order period on Tuesday, followed by institutional pricing on Wednesday.
A $417 million Massachusetts Port Authority deal of serial and term revenue bonds scheduled for pricing by Citigroup on Wednesday.
The deal is made up of $359.1 million of Series 2021E bonds subject to the alternative minimum tax with serials in 2024 to 2041 and term bonds in 2046 and 2051. The Series 2021 D non-AMT bonds are $57.7 million of serials from 2024 to 2041 and terms in 2046 and 2051.
Other large deals next week include $313 million of Wisconsin transportation revenue and taxable refunding bonds in a serial and term structure of slated for pricing on Wednesday by Morgan Stanley & Co.
A $296 million Union County, N.C. serial and term revenue bond issue with serials maturing from 2023 to 2051 is slated to be priced by Baird on Wednesday, while a $254.9 million city and county of San Francisco taxable GO bonds issue is slated for pricing by Morgan Stanley on Thursday.
Elsewhere in the negotiated market, a $246 million Wichita Falls, Texas, Independent School District sale of unlimited tax school building bonds insured by the Texas Permanent School Fund will be priced by FHN Financial Capital Markets on Tuesday.
The California School Finance Authority will sell $237 million of state aid intercept notes in a structure that includes $79 million of Series A1 tax-exempt paper; $126.9 million of Series A2 and $37.2 million of Series B, both taxable notes. The deal will be priced by RBC Capital Market on Wednesday.
The Jackson Laboratory will sell $203 million of taxable corporate CUSIP bonds in a deal being priced by Barclays Capital Inc. on Wednesday.
The Clifton Higher Education Finance Corp. will sell $195.6 million of taxable variable rate education revenue bonds insured by the Texas Permanent School Fund Guarantee program and structured as a 2050 bullet through Baird on Tuesday.
The Board of Regents of the Texas A&M University System will sell $173,8 million of revenue financing system bonds in Series 2021A as serial bonds from 2022 to 2041 and term bonds in 2046 and 2051. The deal will be negotiated by RBC Capital Markets on Thursday.
The San Diego County Regional Transportation Commission, meanwhile, will sell $169.7 million of sales tax revenue bonds, limited tax bonds, in a taxable refunding Series 2021 maturing from 2025 to 2039. Wells Fargo Securities will price the offering on Wednesday.
Wisconsin will sell $166.2 million of transportation revenue refunding bonds on Wednesday in a Series 1 taxable refunding as well as $146 million of transportation revenue refunding bonds in Series 2021 A, both priced by Morgan Stanley.
That will be followed by a $161.5 million California Community Housing Agency offering of essential housing revenue bonds on Wednesday priced by Jefferies.
Howard University is selling $152.7 million of taxable corporate CUSIP bonds in a deal priced by Barclays.
A $148.1 million sale of taxable GO refunding bonds by the Southwestern Community College District is slated for pricing by Morgan Stanley on Wednesday.
The San Mateo-Foster School District will sell $145 million of Series A and B GO bonds priced by RBC Capital.
The Ohio Water Development Authority will sell $100 million of drinking water assistance fund revenue bonds in Series 2021 A serials from 2030 to 2034 and terms from 2035 to 2039 priced by Huntington Securities Inc.
In the competitive market, meanwhile, among the largest deals is a two-pronged offering from the Virginia Public Building Authority consisting of $264.8 million serial revenue bonds in a Series A-1 and $275 million in Series A-2 from the slated for bids on Tuesday.
In addition, the competitive market will also see Anne Arundel County, Maryland, selling $256 million of GO bonds on Wednesday consisting of $187.1 million of consolidated general improvement Series 2021 and $69.2 million consolidated water and sewer Series 2021.
Anne Arundel will also sell a $158.2 million of GO bonds consisting of $110 million consolidated general improvement refunding Series 2021 and $47.3 million of consolidated water and sewer series refunding Series 2021.
$219.6 million Las Vegas of GO limited tax water refunding bonds will be sold competitively on Wednesday.
$140 million of Omaha, Nebraska, Public School District #001 GOs will sell on Wednesday.
Meanwhile, on Thursday the New York City Education Construction Fund will sell $100.9 million of revenue bonds in Series 2021 A.
