Municipals were slightly weaker in light trading Monday but still outperformed U.S. Treasuries which climbed higher for the third day, putting the five-year at a high for the year and moving the 30-year back over 2%.
Triple-A benchmarks cut yields by a basis point or two across the curve, with more pressure out long in sympathy with the weaker UST.
Ratios fell further on Monday. Municipal-to-Treasury ratios were at 50% in five years, at 67% in 10 years and 77% in 30 years, according to Refinitiv MMD's 3 p.m. read. ICE Data Services had the five-year at 49%, the 10 at 70% and the 30 at 79%.
Market participants gained some needed clarity following last week's second-to-last Federal Open Market Committee meeting for 2021, as the Fed's balance sheet tapering cycle is set to begin later this month.
While not surprising, the decision did eliminate some uncertainty, according to Jeff Lipton, managing director of credit research at Oppenheimer Inc.
“We remain confident that the Fed stands ready to take appropriate action necessary to thwart more systemic inflation, and we maintain our view that the upside risks to persistent and more permanent inflation should be carefully evaluated,” Lipton said.
The impact of this inflationary pressure upon UST bond prices may be felt after some counter-intuitive yield movement, he said. Despite conflicting messaging, the bond market could be signaling a period of slower economic growth and elevated inflation, but Lipton doesn’t believe there will be the onset of meaningful stagflation.
Over the recent trading sessions, the muni market held to a very tight trading range after exhibiting noted price support last week. Lipton said, such “stepping out” has contributed to muni outperformance month-to-date with positive returns.
“Last week provided a true test of muni market resiliency given that investors needed to digest a double-digit calendar, which could portend heavier weekly volume between now and year-end given the arrival of holiday lulls in issuance, which effectively limit available marketing time,” he said.
Munis are outperforming UST month-to-date, coming on the heels of three consecutive months of negative performance. Now that the higher tax narrative has subsided, market behavior can be more reflective of technical conditions. If technical expectations play out, positive returns can realistically be attained for November and December, Lipton said.
Munis can enter 2022 from a position of strength, he added. Just prior to the renewed favorable tone, there was a “meaningful cheapening” in relative value ratios that placed 10- and 30-year benchmark ratios at 76% and 86%, respectively. These ratios have since retreated to below 70% and 80%, respectively. At the fuller valuations, investors were able to capture better relative value, he said.
“In our view, it would likely take an outside influence beyond the control of the muni bond market to derail the positive momentum. Fed policy along with Fed leadership and evolving fiscal policy could very well influence market sentiment as well as yield curve behavior,” Lipton said. “While we do not envision ‘liftoff’ occurring before the end of the tapering sequence, developing inflationary conditions and labor market performance will be closely watched for signs of a more accelerated tightening cycle.”
While consumer price index data showed inflation trending at a 30-year high and Treasuries sold off considerably on the news, municipal yields wavered but ultimately finished relatively unchanged for the week, noted a weekly market note from Nuveen. Nuveen agrees it is in the Fed's hands now to fight inflation.
"One reason for this stability is the strong demand for tax-exempt income. CPI is only a snapshot, and we believe the Fed has time to control inflation first by tapering purchases, then raising short-term interest rates," the report said. "The onus is on the Fed to show that it intends to aggressively fight inflationary pressures. Otherwise, we could see more upward pressure on interest rates in both Treasuries and municipal bonds."
Secondary trading
California 5s of 2022 at 0.17% versus 0.12%-0.11% Wednesday. Georgia 5s of 2022 at 0.16%. Georgia 5s of 2023 at 0.28%-0.27% versus 0.23%-0.21% on 11/5. Washington 5s of 2023 at 0.28%-0.27%. New York City TFA 5s of 2023 at 0.30% versus 0.23% Wednesday.
Minnesota 5s of 2024 at 0.38%. New York Dorm NYU 5s of 2026 at 0.63% versus 0.59% Wednesday.
Texas water 5s of 2031 at 1.20%-1.19%. Charlotte, North Carolina, 5s of 2032 at 1.16% versus 1.12% original. New York City 5s of 2033 at 1.34%-1.33%. Cincinnati 5s of 2034 at 1.28%-1.27%.
Georgia 4s of 2038 at 1.40%-1.39% versus 1.36%-1.35% Tuesday. District of Columbia 5s of 2046 at 1.61%-1.59% versus 1.57% original. New York EFC 4s of 2046 at 1.78%-1.77%, the same as Friday.
AAA scales
According to Refinitiv MMD, the one-year was steady at 0.15% in 2022 while the rest of the scale was cut a basis point to 0.25% in 2023, 1.09% in 10 and 1.54% in 30.
The ICE municipal yield curve showed yields rise two basis points to 0.18% in 2022 and to 0.27% in 2023. The 10-year maturity rose three to 1.11% and the 30-year yield was up two to 1.58%.
The IHS Markit municipal analytics curve showed short yields flat at 0.15% in 2022 and 0.22% in 2023. The 10-year yield sat at 1.06% and the 30-year yield stayed at 1.54%.
The Bloomberg BVAL curve showed short yields steady at 0.16% in 2022 and 0.21% in 2023. The 10-year yield rose one basis point to 1.10% and the 30-year yield was up one to 1.57%.
Treasuries were weaker and equities also saw losses.
The five-year UST was yielding 1.261%, the 10-year at yielding 1.627%, the 20-year at 2.051% and the 30-year Treasury was yielding 2.016% near the close. The Dow Jones Industrial Average lost 54 points or 0.54%, the S&P was down 0.12% while the Nasdaq lost 0.16% near the close.
Inflation debate continues
Inflation remains the primary economic topic of discussion.
Federal Reserve Bank of Minneapolis President Neel Kashkari warned against overreacting to price pressures, since they will likely prove transitory.
“We need to take it very seriously, but my view is we also need to not overreact to some of these temporary factors even though the pain is real,” Kashkari said on the “Face the Nation” television show. “The high prices that families are paying, those are real and people are experiencing that pain right now.”
Meanwhile, Treasury Secretary Janet Yellen, also appearing on the show, blamed the COVID-19 pandemic for price pressures.
“If we want to get inflation down,” she said, “I think continuing to make progress against the pandemic is the most important thing we can do.”
But, if you look deep into the numbers and the causes of inflation, David Kelly, chief global strategist at JPMorgan Funds, said, “the ‘transitory’ argument is largely correct,” with inflation measured by the consumer price index falling to 2.3% year-over-year by the last quarter of next year.
“This is not to argue that the super-easy monetary and fiscal policies of the pandemic should be maintained as the pandemic winds down,” Kelly said. “While easy policies were in order at the height of the emergency, keeping them in place as the economy moves to full recovery would only increase distortions in the economy and capital markets, reducing long-term economic growth and increasing the risk of financial shocks.”
But all eyes should be on the Federal Reserve, said Steve Chiavarone, portfolio manager and equity strategist at Federated Hermes. “We think policymakers have been behind the curve and this is a risk.”
If the Fed anticipated instead of responding to price pressures “would have made it easier for the central bank to move at a slower/gentler pace if inflation proves stickier” than expected.
Taking that “approach in the last several cycles helped the economy avoid inflation and supported longer expansions,” Chiavarone said. “But it appears too late for that. Instead, by potentially starting taper late (relative to today’s high inflation readings) and with rate liftoff unlikely until June at the earliest, there’s reason to be concerned about the potential for a faster, more disruptive rate cycle.”
Separately, manufacturing activity “grew strongly in New York State,” the November Empire State Manufacturing Survey indicated.
The general business conditions index soared to 30.9 in November from 19.8 the month before, while the employment index grew at a record pace, jumping to 26.0 from 17.1.
Both the prices paid and prices received indexes climbed in the month, remaining at or near record levels.
Optimism slipped, with the future general business conditions index down to 36.9 from 52.0 in October.
Primary to come
Mississippi (Aa2/AA/AA/) is set to price $1.225 billion of general obligation bonds, consisting of $198.85 million of tax-exempt GOs, $126.89 million of taxable GOs, and $900 million of taxable refunding GOs. Wells Fargo Corporate & Investment Banking.
Grand Canyon University (Ba1///) is set to price on Thursday $1.2 billion of taxable corporate CUSIP bonds. Barclays Capital Inc.
The California Health Facilities Financing Authority (Aa3/AA-/AA-/) is set to price on Wednesday $1.05 billion of Cedars-Sinai Health System revenue bonds, serials 2037-2041. Barclays Capital Inc.
The Cedars-Sinai Health System (Aa3/AA-AA-/) is also set to price on Wednesday $300 million of taxable corporate CUSIP bonds. Barclays Capital Inc.
The Metropolitan Water Reclamation District of Greater Chicago (/AA/AAA/) is set to price on Tuesday $500 million of general obligation limited and unlimited tax, tax-exempt, green and taxable bonds. J.P. Morgan Securities LLC.
The Port of Houston Authority, Harris County, Texas, (Aa3/AA+//) is set to price on Tuesday $315.95 million of first lien revenue bonds, serials 2022-2041, terms 2046, 2051. Siebert Williams Shank & Co., LLC.
The CSCDA Community Improvement Authority (nonrated) is set to price on Tuesday $197.675 million of 777 Place-Pomona essential housing revenue bonds. Goldman Sachs & Co. LLC.
Cook County, Illinois, (A2/A+/AA-/) is set to price on Wednesday $193.19 million of general obligation refunding bonds, serials 2022-2028. Loop Capital Markets.
The CSCDA Community Improvement Authority (nonrated) is set to price on Wednesday $177.825 million of Millennium South Bay-Hawthorne revenue bonds. Stifel, Nicolaus & Company, Inc.
Clark University, Massachusetts, (A2///) is set to price $156 million of taxable refunding bonds on Wednesday. Goldman Sachs & Co. LLC.
Colorado (Aa2/AA-//) is set to price on Wednesday $149.56 million of Building Excellent Schools Today certificates of participation, serials 2022-2046. RBC Capital Markets.
Maricopa County, Arizona, (A3/A-/BBB+/) is set to price on Tuesday $144.4 million of pollution control revenue refunding bonds (Southern California Edison Company). Morgan Stanley & Co. LLC.
Katy Independent School District, Texas, (Aaa/AAA//) is set to price $133.495 million of unlimited tax school building bonds, PSF guarantee, serials 2022-2051. Huntington Securities, Inc.
Bellevue, Washington, (Aaa/AAA//) is set to price on Tuesday $122.73 million of limited tax general obligation taxable delayed delivery refunding bonds. RBC Capital Markets.
The Public Finance Authority, Wisconsin, (/AA-/AA/) is set to price on Tuesday $113.97 million of Bayhealth Medical Center Project tax-exempt and taxable revenue bonds. PNC Capital Markets LLC.
The Forsyth County School District, Georgia, (Aaa/AAA//) is set to price on Tuesday $109.575 million of taxable general obligation refunding bonds, serials 2022-2033. Citigroup Global Markets Inc.
The Michigan Finance Authority (Aaa//AAA/) is set to price on Tuesday $107.585 million of drinking water revolving fund revenue bonds, serials 2023-2042. Citigroup Global Markets Inc.
Farmington, New Mexico, (A3/A-/BBB+/) is set to price on Tuesday $103.46 million of pollution control refunding revenue bonds (Southern California Edison Company Four Corners Project). J.P. Morgan Securities LLC.
Farmington is also set to price $100 million of pollution control refunding revenue bonds (Southern California Edison Company Four Corners Project), serials 2029. Barclays Capital Inc.
Georgia Tech Foundation is set to price on Thursday $100 million of taxable corporate CUSIP bonds, term 2051, indications of interest on Wednesday. Barclays Capital Inc.
The California Statewide Communities Development Authority is set to price $100 million of Southern California Edison Company pollution control refunding revenue bonds on Tuesday. J.P. Morgan Securities LLC
Competitive calendar
King County, Washington, (Aaa/AAA/AAA/) is set to sell $494.9 million of taxable limited tax general obligation bonds at 10:45 a.m. Tuesday.
King County will also sell $30.555 million of limited tax general obligation bonds at 11:15 a.m. Tuesday.
The San Francisco Public Utilities Commission (Aa2/AA//) is set to sell $266.265 million of green wastewater revenue SSIP bonds at 10 a.m. Tuesday.
The issuer will also sell $38.735 million of wastewater revenue bonds non-SSIP at 10:30 a.m. Tuesday.
Day-to-day calendar
Main Street Natural Gas (Aa2//AA-/) remains on the day-to-day calendar with $750 million of gas supply revenue bonds, Series 2021A, serials 2023-2031, term 2052. RBC Capital Markets.
The California Community Choice Financing Authority (A2///) is on the day-to-day calendar with $556.030 million of clean energy project revenue climate bond certified green bonds. Goldman Sachs & Co. LLC.
The Arizona Industrial Development Authority is on the day-to-day calendar with $177.97 million of revenue bonds (NewLife Forest Restoration Project), consisting of $110.045 million of senior federally taxable series 2021A (sustainability-linked bonds), term 2041 and $67.925 million of subordinate federally taxable series 2021B (sustainability-linked bonds), term 2046. Goldman Sachs & Co.
The Successor Agency to the Redevelopment Agency of the City and County of San Francisco (/AA///) is on the day-to-day calendar with $107.34 million of taxable third-lien tax allocation social bonds, 2021 Series A (affordable housing projects), serials 2023-2031, insured by Assured Guaranty Municipal Corp. Citigroup Global Markets.
