Munis were little changed Tuesday as U.S. Treasuries firmed and equities ended higher after a cooler-than-expected inflation print.
Muni yields were changed up to two basis points, depending on the curve, while UST yields fell two to 10 basis points, with the largest gains on the front end.
Munis were fairly stable, but overall financial markets were pleasantly surprised by the softer consumer price index print, leading to gains in USTs and equities, said Peter Block, managing director of credit strategy at Ramirez.
In the muni market, the primary market took the focus Tuesday as the Aquarion Water Authority came to market with $2.372 billion of water system revenue bonds, $294 million of which are BAM-insured.
The mega deal, the largest ever from a Connecticut issuer, bumped the new-issue calendar to $12.8 billion. If the deal is excluded, the calendar falls to a more manageable $10 billion to $11 billion, Block said.
The Aquarion deal is joined this week by two other sizable deals: the New York State Thruway Authority's $2.444 billion state personal income tax revenue bonds, and the New Jersey Turnpike Authority's $1.06 billion turnpike revenue bonds in two deals.
These mega deals show a market moving toward larger deals, upsized in part by inflation-driven cost increases, Block said.
"I would almost say the $2 billion deal is the new $1 billion deal," he said.
New-issue market
In the primary market Tuesday, BofA Securities priced for the Aquarion Water Authority $2.372 billion of water system revenue bonds. The first tranche, $1.079 million of Series 2026A bonds (A1/A-//), saw 5s of 8/2029 at 3.02%, 5s of 2031 at 3.24%, 5s of 2036 at 3.57%, 5.25s of 2041 at 3.97% and 5.25s of 2046 at 4.10%, callable 8/2036.
The second tranche, $600 million of Series 2026B bonds (A1/A-//), saw 5.25s of 2029 at 3.01%, 5.25s of 2031 at 3.20% and 5.25s of 2033 at 3.37%, noncall.
The third tranche, $143.224 billion of Series 2026C capital appreciation bonds (A1/A-//), saw zeros of 8/2047 at 5.08%, zeros of 2051 at 5.24% and zeros of 2055 at 5.33%.
The fourth tranche, $293.38 million of Series 2026D subordinate bonds, saw 5s of 8/2030 at 3.29% (A2/BBB+//), 5s of 2031 at 3.38% (A2/BBB+//), 5s of 2036 at 3.79% (A2/BBB+//), 5.25s of 2041 at 3.93% (A2/AA//) and 5.25s of 2042 at 3.96% (A2/AA//), callable 8/2036.
The fifth tranche, $255.776 million of Series 2026E subordinate capital appreciation bonds, saw zeros of 8/2043 at 4.73% (A2/AA//), zeros of 2046 at 5.05% (A2/AA//), zeros of 2051 at 5.41% (A2/BBB+//) and zeros of 2053 at 5.49% (A2/BBB+//).
Ramirez priced for Quincy, Massachusetts, $361.781 million of general obligation bond anticipation notes, with 5s of 8/2027 at 2.82%, noncall.
In the competitive market, the Broward County School District, Florida, sold $247.29 million of tax anticipation notes to BofA Securities, with 4s of 6/2027 at 2.65%, noncall.
CPI release
After the consumer price index release, UST bonds rallied Tuesday, said Jennifer Timmerman, senior investment strategy analyst at Wells Fargo Investment Institute, "with yields on the short end of the curve sliding the most. Market participants are dialing back near-term Fed rate hike expectations, though Fed-fund futures data continues to fully price in a rate hike by year-end."
FHN Financial Chief Economist Chris Low said, "Before the release, fed funds futures showed 36% odds of a July hike and now suggest the odds are just 14.4%."
"We maintain the view that market pricing of Fed policy is too hawkish, and that bond yields should fall from their current elevated levels," said Ulrike Hoffmann-Burchardi, CIO Americas and global head of equities at the UBS Chief Investment Office. "This creates an opportunity for investors to lock in attractive portfolio income by adding to quality fixed income, especially in the short- to medium-maturity segments."
