Municipals were firmer Tuesday ahead of the conclusion of the July Federal Open Market Committee meeting where a three-quarter point rate hike is likely, while U.S. Treasuries were weaker and equities sold off.
Triple-A curves saw yields fall up to five basis points, depending on the scale, while U.S. Treasuries rose up to three basis points three years and in near the close after larger losses earlier in the session.
Muni-UST ratios were at 66% in five years, 84% in 10 years and 98% in 30 years, according to Refinitiv MMD's 3 p.m. read. ICE Data Services had the five at 65%, the 10 at 87% and the 30 at 98% at a 3:30 p.m. read.
The primary was very light Tuesday. J.P. Morgan Securities priced for the Michigan Finance Authority $149.325 million of state aid revenue notes, Series 2022A. The first tranche, $83.320 million of Series A1, saw 5s of 7/2023 at 1.96%, noncall. The second tranche, $66.005 million of Series A2, saw 5s of 8/2023 at 1.98%, noncall.
In the competitive market, Essex County, New Jersey, (//AA+/) sold $55.928 million of tax-exempt general obligation utility bonds to Jefferies, with 4s of 8/2023 at 1.48%, 3s of 2027 at 1.95%, 4s of 2032 at 2.48% and 4s of 2037 at 3.30%, callable 8/15/2030.
Supply is paltry as investors sit on the sidelines, waiting to see how much the Fed will hike rates. The consensus appears to be another 75 basis point rate hike, though a full point hike could be on the table.
“There’s a lot of there's a lot of waiting around right now,” said Tom Kozlik, head of municipal research and analytics at HilltopSecurities.
The good news, though, is whether it's three quarters or a full point rate hike, the market may not have such a severe reaction to the Fed's decision, analysts say.
A larger reaction from the Fed was more appropriate after the June inflation data came out, but Kozlik said that hasn't been the case in recent weeks, as the market is more accepting of what is it’s been seeing in the data now.
“There was a lot of drama leading up to the last Fed meeting in June, [but] there doesn't seem to be as much drama leading up to this one," he said.
"A Fed meeting where they’re potentially raising rates by 75 basis points isn’t a run-of-the-mill Fed meeting, because it's not, but there's as not as many questions and drama now as there was last month," he noted. "So perhaps that's a good sign.”
Another rate hike, between 50 and 75 basis points, is anticipated for September, but much will depend on the summer's remaining economic data. There are some indications that inflation may start to slow down, which would allow the Fed to proceed more slowly.
Additionally, the U.S. Treasury curve is still inverted, which has historically indicated that a recession is approaching. This makes it even more difficult for the Fed to control inflation without sending the economy into a downturn.
However, munis have a long runway before trouble if a recession hits, said Cooper Howard, fixed income strategist focused on munis at Charles Schwab.
"The ample amount of fiscal aid and the economic recovery since the onset of COVID have all boosted muni coffers," he said. "If there is a slowdown in the economy, state and local governments, in general, have ample cushion to manage through a slowdown in revenues."
Additionally, Howard said "revenues have historically started to slow long after the onset of a recession." For instance, during the 2007/2008 credit crises, revenues didn’t start substantially declining until 2010, he noted.
Better liquidity last week didn’t improve “municipals’ price torpor,” as the Municipal Securities Rulemaking Board par traded was over $70 billion for the first time since late June, according to Matt Fabian, a partner at Municipal Market Analytics.
“Trading action was elevated, it appears, by an uptick in institutional selling, in particular on Friday, which may reflect funds raising cash ahead of an expected Fed hike this week or in anticipation of a seasonal increase in supply next month,” Fabian said.
Last week, mutual funds returned to outflows, with investors pulling $698.782 million out of municipal bond mutual funds, per Refinitiv Lipper data, versus the $206.127 million of inflows the week prior. He noted that mutual funds seem to be selling low coupon bonds.
With respect to supply, current projections are low, "perhaps issuers eschewing Fed-related volatility: a potential mistake, as it may be setting up material tax-exempt outperformance,” he said.
This is because August's tax-exempt reinvestment is up to $37.5 billion, which is “larger than any monthly total for tax-exempt issuance so far this year” and approximately equal to last year’s peak, also in August.
Bond Buyer 30-day visible supply sits at $8.84 billion while net negative supply is at $20.299 billion, per Bloomberg data.
Returns for July are in the black for municipals. The Bloomberg Municipal Index is showing positive 1.74%, high-yield at 2.44%, taxables returning 1.06% and the Impact Index at positive 1.94%.
Secondary trading
Maryland 5s of 2023 at 1.47%. NYC 5s of 2025 at 1.89% versus 1.92% Monday.
Wake County, North Carolina, 5s of 2031 at 2.27% versus 2.39%-2.35% on 7/19. Maryland 5s of 2033 at 2.45%-2.46% versus 2.53% on 7/22 and 2.60% on 7/19. District of Columbia 5s of 2033 at 2.64% versus 2.85%-2.82% on 7/15 and 2.92% original (on 7/13).
District of Columbia 5s of 2036 at 2.82%-2.80% versus 2.90% Monday and 3.04% original (on 7/13). NYC TFA 5s of 2036 at 3.09%. Metropolitan Government of Nashville and Davidson County, Tennessee, 5s of 2037 at 2.87% versus 2.92%-2.91% Monday and 2.97%-2.96% on 7/22.
South Carolina 5s of 2041 at 2.88% versus 2.95%-2.94% on 7/22. NYC TFA 5s of 2043 at 3.50%. Washington 5s of 2044 at 3.22%-3.20% versus 3.29% on 7/22 and 3.33%-3.34% on 7/20.
NYC TFA 5s of 2051 at 3.70%-3.65%. LA DWP 5s of 2051 at 3.26% versus 3.29% on 7/18 and 3.31% on 7/15.
AAA scales
Refinitiv MMD’s scale was bumped up to five basis points at 3 p.m. read: the one-year at 1.40% (unch) and 1.67% (-3) in two years. The five-year at 1.91% (-3), the 10-year at 2.34% (-5) and the 30-year at 2.94% (-5).
The ICE municipal yield curve was bumped up to four basis points: 1.42% (flat) in 2023 and 1.69% (-2) in 2024. The five-year at 1.90% (-4), the 10-year was at 2.39% (-4) and the 30-year yield was at 2.97% (-3) at 3:30 p.m..
The IHS Markit municipal curve also saw bumps: 1.40% (unch) in 2023 and 1.69% (-3) in 2024. The five-year was at 1.92% (-3), the 10-year was at 2.34% (-5) and the 30-year yield was at 2.94% (-5) at a 3 p.m. read.
Bloomberg BVAL was bumped two to six basis points: 1.40% (-2) in 2023 and 1.66% (-3) in 2024. The five-year at 1.93% (-4), the 10-year at 2.38% (-5) and the 30-year at 2.94% (-4) at 3:30 p.m.
Treasuries were weaker on the short end.
The two-year UST was yielding 3.054% (+3), the three-year was at 3.004% (+3), the five-year at 2.898% (+2), the seven-year 2.879% (+1), the 10-year yielding 2.798% (flat), the 20-year at 3.269% (+1) and the 30-year Treasury was yielding 3.021% (flat) at 3:45 p.m.
Primary to come:
The Belton Independent School District, Texas, (/AAA//) is set to price Thursday $168.750 million of unlimited tax school building bonds, Series 2022, serials 2023-2052. BOK Financial Securities.
The Unified School District No. 489, Kansas, (/A+//) is set to price Thursday $143.500 million of general obligation refunding and improvement bonds, Series 2022-B. Piper Sandler & Co.
Pinal County, Arizona, (/AA/AA/) is set to price Thursday $115.560 million of taxable green pledged revenue obligations, Taxable Series 2022. Stifel, Nicolaus & Co.
The California Community College Financing Authority is set to price next week $107.575 million of Napa Valley College Project student housing revenue bonds, consisting of $93.905 million of senior bonds, Series A, terms 2032 and 2060, and $13.670 million of subordinate bonds, Series C term 2060. Citigroup Global Markets.
