Kudlow: 'Not worried about the yield curve inverting'

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Munis were weaker Monday as the market waited for the week’s supply to start flowing and Larry Kudlow, the president’s assistant on economic policy, downplayed the risk of an inverted yield curve, which would signal a weaker economy ahead.

The U.S. economic boom that everybody thought was impossible is underway and there’s little risk of a recession, Kudlow said at the Economic Club of New York in Manhattan. Lower taxes and a rollback in regulation have made the U.S. economy the hottest in the world today, he said.

“It’s the incentive model. It’s capital formation,” said Kudlow, who is also director of the National Economic Council. “If you lower tax rates, ease up on regulations and cut taxes, the economy will grow.”

He also said that he wasn’t worried about the yield curve. “The probability of a recession is very low,” he said.

Talking tariffs, another concern for investors, Kudlow said the free trade system is a pro-growth policy that has broken down and needs to be fixed.

“Free trade has to be fair trade,” Kudlow said.

He told the group that a trade deal has been done with Mexico, is being done with Canada and that the U.S. stands ready to talk to China any time that county wants to have meaningful negotiations.

Primary market
Retail investors got the first shot at the biggest deal of the week on Monday as Citi priced the Texas Water Development Board’s $1.59 billion of State Water Implementation Revenue Fund for Texas bonds for them ahead of institutional pricing on Tuesday. The deal carries top ratings from both S&P Global Ratings and Fitch Ratings.

The municipal bond market is ready and waiting for the biggest sale of the week on Tuesday, Ipreo estimates volume will inch up to $7.05 billion, from the revised total of $6.94 billion sold in the past week, according to updated figures from Thomson Reuters. The calendar for the week ahead is composed of $5.28 billion of negotiated deals and $1.77 billion in competitive sales.

The biggest competitive sale of the week will take place on Tuesday, when the Maryland Department of Transportation sells $605.355 million of consolidated transportation bonds, which are rated AA1 by Moody’s, AAA by S&P and AA-plus by Fitch.

Monday’s deals:
TWDB’s $1.59 billion for retail investors

Secondary market
Municipal bonds were weaker on Monday, according to a late read of the MBIS benchmark scale. Benchmark muni yields rose as much as two basis points in all 30 maturities.

High-grade munis were weaker, with yields calculated on MBIS' AAA scale rising as much as one basis point in all 30 maturities.

Municipals were weaker on Municipal Market Data’s AAA benchmark scale, which showed the yield on both the 10-year muni general obligation and the yield on 30-year muni maturity rising by one basis point.

On Friday, the 10-year muni-to-Treasury ratio was calculated at 84.4% while the 30-year muni-to-Treasury ratio stood at 101.5%, according to MMD. The muni-to-Treasury ratio compares the yield of tax-exempt municipal bonds with the yield of taxable U.S. Treasury with comparable maturities. If the muni/Treasury ratio is above 100%, munis are yielding more than Treasury; if it is below 100%, munis are yielding less.

Prior week's actively traded issues
Revenue bonds comprised 56.73% of total new issuance in the week ended Sept. 14, up from 56.60% in the prior week, according to Markit. General obligation bonds made up 38.13%, up from 38.08% while taxable bonds accounted for 5.14%, down from 5.32%.
Some of the most actively traded munis by type in the week ended Sept. 14 were from California, Texas and Puerto Rico issuers.

In the GO bond sector, the California 5s of 2028 traded 21 times. In the revenue bond sector, the Texas 4s of 2019 traded 94 times. And in the taxable bond sector, the Puerto Rico Government Development Bank 5s of 2023 traded 17 times.

Prior week's top underwriters
The top municipal bond underwriters of last week included Morgan Stanley, RBC Capital Markets, JPMorgan, Bank of America Merrill Lynch and Stifel, according to Thomson Reuters data.

In the week of Sept. 9 to Sept. 15, Morgan Stanley underwrote $1.76 billion, RBC $1.28 billion, JPMorgan $1.25 billion, BAML $741 million and Stifel $526 million.

Treasury auctions discount rate bills
Tender rates for the Treasury Department's latest 91-day and 182-day discount bills were higher, as the $48 billion of three-months incurred a 2.125% high rate, up from 2.110% the prior week, and the $42 billion of six-months incurred a 2.290% high rate, up from 2.265% the week before.

Coupon equivalents were 2.166% and 2.349%, respectively. The price for the 91s was 99.462847 and that for the 182s was 98.842278.

The median bid on the 91s was 2.100%. The low bid was 2.080%.

Tenders at the high rate were allotted 4.51%. The bid-to-cover ratio was 2.94.

The median bid for the 182s was 2.270%. The low bid was 2.240%.

Tenders at the high rate were allotted 32.91%. The bid-to-cover ratio was 3.09.

Gary E. 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 Ziad Saba at 212-803-6079 for more information.

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Primary bond market Secondary bond market Larry Kudlow Texas Water Development Board Maryland Department of Transportation
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