Municipals were steady along with the U.S. Treasury market as the investors geared up for month-end as well as summer reinvestment season amid solid demand.
High-grade bonds on triple-A general obligation benchmarks were little changed to firmer in spots on some scales.
"The calendar is manageable at about $7 billion and municipal fund flows remain positive, which along with reinvestment dollars in June and July, should allow munis to continue to outperform Treasuries," a New York trader said Monday.
With an early close on Friday ahead of the Memorial Day holiday, most of the week's primary calendar will be priced on Tuesday and Wednesday, a second New York trader pointed out.
"The Treasury market is steady this morning with a heavy corporate calendar, so the market is focused on the Treasury direction," the first New York trader said.
Municipal to UST ratios closed at 63% in 10 years and 68% in 30 years on Monday, according to Refinitiv MMD. ICE Data Services saw ratios on the 10-year at 62% and the 30-year at 69%.
No large deals were priced Monday and the secondary market was equally quiet, with very few trades, the second trader noted. "There is nothing moving the needle one way or the other," he said.
"The market has the feel of almost a summer Friday; there's just not a lot going on," he said. "With the short week, a pretty light calendar, and a pretty quiet Treasury market —all those things kind of combined are leading to a quiet session today."
Seasonal strength
Buyside analysts said the current market dynamics are ripe for a brisk and busy summer reinvestment season.
"Low supply coupled with healthy demand often helps to increase bond prices, which leads to lower borrowing and refinancing costs for issuers, but lower yields and fewer options for lenders," Matthew Gastall, executive director and head of wealth management municipal research, and Daryl Helsing, vice president of wealth management global investments at Morgan Stanley Wealth Management said in a monthly report.
The current market offers not only an increased supply of taxable options, but securities supported by essential public entities, which are often highly creditworthy, and are also more common, Gastall and Helsing noted in the report. Taxable municipal bonds, they said, provide such investors with an additional option to diversify positioning, reduce volatility, increase portfolio credit quality, and enhance returns.
"As more supply has been issued as taxable, instead of tax-exempt, debt amidst a backdrop of very healthy demand, this delicate imbalance has thus intensified and may even accelerate this summer," the analysts said.
The 30-day visible supply of municipal bonds totaled $10.816 billion, which is up $219.2 million from the previous session, according to Bond Buyer data. There are $3.780 billion of competitive bonds scheduled, which is up $167.3 million, and $7.034 billion of negotiated bonds, which is up $51.9 million.
"Overall, issuers have continued to leverage the current environment to borrow and refinance, while investors have enjoyed some of the strongest relative account performance experienced in decades," according to Morgan Stanley.
Given the low expected supply between June and August, net supply is expected to exceed gross supply by $45 billion, according to Peter Block, managing director of credit strategy at Ramirez & Co.
That figure, "all else equal, will continue to maintain an extremely firm pricing environment," he said in a weekly report on Monday.
He said the firm expects total gross supply for 2021 to be $441 billion, of which $312 billion, or 71%, is expected to be tax-exempt.
Secondary market
On Refinitiv MMD’s AAA benchmark scale, yields were steady at 0.10% in 2022 and 0.14% in 2023, the 10-year stayed at 1.01% and the 30-year dropped one basis point to 1.57%.
The ICE AAA municipal yield curve showed yields at 0.11% in 2022 and 0.16% in 2023, the 10-year stayed at 1.01% while the 30 sat at 1.59%.
The IHS Markit municipal analytics AAA curve showed yields at 0.10% in 2022 and 0.13% in 2023, the 10-year sat at 0.98% and the 30-year at 1.57%.
The Bloomberg BVAL AAA curve showed yields steady at 0.08% in 2022 and 0.10% in 2023, 0.97% in the 10-year, down one basis point and the 30-year sat at 1.58%, also down one.
The 10-year Treasury was yielding 1.61% and the 30-year Treasury was yielding 2.30% near the close. Equities were up with the Dow up 186 points, the S&P 500 rose 0.99% and the Nasdaq gained 1.41% near the close.
Is sustained inflation near?
While the Federal Reserve sticks to its belief that inflation will prove to be transitory, not all economists are on board.
“Surging costs from commodities to shipping to wages are consistent with a world emerging from a pandemic and rushing to restock inventories as companies desperately try to meet pent up consumer demand,” said Bryce Doty, senior vice president and senior portfolio manager at Sit Fixed Income Advisors, LLC.
Although inflationary pressures should ease next year, inflation expectations are climbing, he said, with investors seeing average inflation of 2.5% for the next decade, as measured by “the gap in yield between TIPS that earn the rate of inflation and traditional 10 maturity treasury yield.”
Some cost increases will remain, Doty said, and “more ‘sticky’ inflation is coming.” He pointed to higher salaries, which will force companies to raise prices, and he doesn’t see wage hikes to be “transitory.”
And, if corporate taxes are raised, those costs will also be passed on to consumers.
Given these beliefs, Doty sees the Fed tapering asset purchases “in the next couple of months.”
But BCA Research disagrees, “We are very much in the camp that expects inflation to rise significantly over the long haul. Over the next one or two years, however, we would fade inflationary fears.”
In their note, BCA says, the core consumer price index “likely overstates underlying inflationary pressures,” since COVID “threw all sorts of prices out of whack.”
“Median CPI, trimmed-mean CPI, and sticky price CPI all remain well contained,” they write. “Similarly, relatively clean measures of wage growth, such as the Atlanta Fed Wage Tracker, do not point to an imminent wage-price spiral.”
The Fed, they conclude, “can afford to sustain exceptionally easy monetary policy. That should keep growth at an above-trend pace and continue to support to equity valuations.”
Andy Schneider, U.S. economist at BNP Paribas, noted, “demographics still weigh towards a deflationary bias.”
For inflation to be sustained, he said, there needs to be “a tight labor market that fosters wage growth, inflation expectations rising, and sustained aggregate demand.”
Supply has yet to catch up with the increase in demand as the economy reopened, he added, and this will determine economic progress. "We do think that supply ultimately responds sufficiently, especially on the labor side, to get to the ‘substantial further progress’ for tapering to begin in the first half of 2022.”
Tom Porcelli, managing director and chief U.S. economist at RBC Capital Markets, sees the Fed tapering by the end of the year.
Inflation will be a key in the Fed’s decision to start normalizing, he said, although monetary policy alone won’t push inflation to 2%.
“It’s hubris to think monetary policy can achieve a blunt 2% inflation,” he said.
In data released Monday, the Federal Reserve Bank of Chicago’s National Activity Index slipped to positive 0.24 in April from an unrevised positive 1.71 in March.
The CFNAI-MA3, the three-month moving average, fell to positive 0.07 in April from a revised positive 0.35 in March, first reported as positive 0.54, while the diffusion index dropped to positive 0.22 from a revised positive 0.32, originally reported as positive 0.40.
A zero reading suggests growth at its average rate. “An increasing likelihood of a period of sustained increasing inflation has historically been associated with values of the CFNAI-MA3 above +0.70 more than two years into an economic expansion,” according to the release.
Primary market to come
In the competitive market, Loudoun County, Virginia, (Aaa/AAA/AAA/) is set to sell $156.5 million of unlimited tax general obligation bonds, 2021-2040, at 10:15 a.m. Tuesday.
The New Jersey Infrastructure Bank (/AAA//) is set to sell $118.6 million of environmental infrastructure green bonds, 2022-2043, at 10:30 a.m. Tuesday.
Frisco, Texas, ISD is set to sell $90 million of unlimited tax general obligation bonds, serials 2022-2043, at 11 a.m. Tuesday.
In the negotiated market, the Washington Metropolitan Area Transit Authority (/AA/AA/AA+) is set to price on Tuesday $874 million of dedicated revenue green bonds (Climate Bond Certified). BofA Securities will run the books.
Main Street Natural Gas, Inc. (//AA/) is on the day-to-day calendar with $771.6 million of gas supply revenue bonds, Series 2021A, serials 2022-2028, term 2051, puts due 12/01/2028. RBC Capital Markets is head underwriter.
The University of Nebraska Facilities Corp. (Aa1/AA//) is set to price on Wednesday $344.79 million of university facilities program bonds, $260.6 million of series 2021A, and $84.2 million of green Series 2021B. BofA Securities is lead underwriter.
The California Public Finance Authority (////) is set to price on Wednesday $307.9 million of Enso Village Project senior living revenue and refunding green bonds, Series 2021A,B-1,B-2,B-3&C. Ziegler will run the books.
Houston Combined Utility System (/AA/AA/) is set to price on Wednesday $259.5 million of first lien revenue refunding bonds, serials 2022-2041, terms 2046, 2051. UBS Financial Services Inc. is lead underwriter.
The System is also set to price on Wednesday $100.3 million of taxable first lien revenue refunding bonds, Series 2021B, serials 2021-2038. UBS Financial Services Inc. is head underwriter.
The CSCDA Community Improvement Authority (////) is set to price on Wednesday $216.9 million of essential housing revenue bonds, (Union South Bay) Series 2021 A-1 & A-2 (social bonds) consisting of $35 million Series A-1, serial 2045 and $181.9 million of Series A-2, serial 2056. Stifel, Nicolaus & Company, Inc. is head underwriter.
The Alaska Municipal Bond Bank (A1/A+//) is set to price $201.7 million of general obligation and refunding taxable bonds on Wednesday. BofA Securities is bookrunner.
Ohio (Aa2/AA//) is set to price on Tuesday $151 million of major new infrastructure project revenue bonds, $92.7 million of exempts and $58.2 million of taxables. BofA Securities is head underwriter.
The North Carolina Medical Care Commission (////) is set to price $149.8 million of health care facilities first mortgage revenue bonds (Lutheran Services for the Aging), Series 2021 A&C, consisting of $114.2 million of Series A, serials 2022-2031, terms 2036, 2041, 2051. The second, $35.6 million of Series C, serials 2022-2031, terms 2036, 2042. Truist Securities Inc. is lead underwriter.
Hawaii (Aa2/AA+//) is set to price on Thursday $145.7 million of highway revenue bonds. Morgan Stanley & Co. LLC is bookrunner.
The City of El Segundo, Los Angeles County, (/AA+//) is set to price on Wednesday $144.1 million of taxable pension obligation bonds. J.P. Morgan Securities LLC is head underwriter.
The E-470 Public Highway Authority (A2/A//) is set to price on Tuesday $138.6 million of senior revenue refunding bonds, Series 2021B (SOFR index term rate bonds). Morgan Stanley & Co. LLC will run the books.
The Leander Independent School District, Texas, (/AAA//) is set to price on Tuesday $130.1 million unlimited tax refunding bonds, Series 2021A and taxable Series 2021B, Permanent School Fund guarantee program. Raymond James & Associates, Inc. is head underwriter.
The Wisconsin Housing and Economic Development Authority (Aa2/AA//) is set to price $128.1 million of home ownership revenue bonds, 2021 Series A (non-AMT social bonds), serials, 2021-2032, term 2052. RBC Capital Markets is lead underwriter.
The Florida Development Finance Corp. (////) is set to price $103.9 million of solid waste disposal revenue bonds (Waste Pro USA, Inc. Project), Series 2021, serials 2033. Citigroup Global Markets Inc. is set to run the books.
The South San Francisco Public Facilities Financing Authority (/AA+//) is set to price on Wednesday $100 million of lease revenue bonds, Series 2021A. Stifel, Nicolaus & Company, Inc. is lead underwriter.
