Municipals were little changed in secondary trading, as eyes turned toward the primary market's large revenue deals from the New York State Thruway Authority and the Colorado Health Facilities Authority.
The 2/10 U.S. Treasury curve significantly inverted after the June consumer price index report came in hotter than expected at 9.1%, further stoking recession fears and leading some analysts to say a 100 basis point hike could be on the table. Equities ended in the red.
Muni to UST ratios on Tuesday were at 66% in five years, 84% in 10 years and 97% in 30 years, according to Refinitiv MMD's 3 p.m. read. ICE Data Services had the five at 65%, the 10 at 86% and the 30 at 98% at a 3:30 p.m. read.
The Investment Company Institute reported investors pulled $1.061 billion from muni bond mutual funds in the week ending July 6 compared to the $1.369 billion of outflows in the previous week.
In the competitive market, the New York State Thruway Authority (/AA+/AA+/) sold $2.181 billion of personal income tax revenue bonds in six deals.
The authority sold $402.010 million of PITs, Series 2022A, Bidding Group 2, to Wells Fargo Bank, with 5s of 3/2033 at 2.91%, 5s of 2037 at 3.24% and 5s of 2039 at 3.33%, callable 9/15/2032.
It also (/AA+/AA+/) sold $383.085 million of PITs, Series 2022A, Bidding Group 3, to BofA Securities, with 5s of 3/2040 at 3.52%, 5s of 2042 at 3.59% and 4s of 2044 at 4.08%, callable 9/15/2032.
The New York State Thruway Authority (/AA+/AA+/) sold $410.740 million of PITs, Series 2022A, Bidding Group 5, to BofA Securities, with 4s of 3/2049 at 4.27% and 4.125s of 2052 at 4.30%, callable 9/15/2032.
The authority sold $160.810 million of taxable PITs, Series 2022B, to BofA Securities, with all bonds pricing at par: 3.375s of 3/2024, 3.65s of 2027 and 3.85s of 2028, noncall.
Additionally, it sold $464.285 million of PITs, Series 2022A, Bidding Group 2, to J.P. Morgan Securities and $360.365 million to , Series 2022A, Bidding Group 4. Details were not yet available.
In the negotiated market, J.P. Morgan Securities priced for the Colorado Health Facilities Authority (Aa1/AA+//) $961.950 million of Intermountain Healthcare revenue bonds. The first tranche, $466.585 million of bonds, Series 2022A, saw 5s of 5/2024 at 1.87%, 5s of 2027 at 2.29%, 5s of 2032 at 2.84%, 5s of 2047 at 3.68%, 5s of 2052 at 3.80% and 4s of 2052 at 4.19, callable 5/15/2032.
The second tranche, $197.700 million of long-term bonds, Series 2022B, saw 5s of 5/2062 at 2.36%, callable in 2/17/2062 at 101.304%.
The third tranche, $197.665 million of long-term bonds, Series 2022C, saw 5s of 5/2062 at 2.68%, callable in 8/15/2027 at 102.274%.
The fourth tranche, $100 million of floating rate notes, Series 2022D, saw were priced at SIFMA +55 basis points.
Estrada Hinojosa & Co. priced for Harris County, Texas, (Aaa//AAA/) $424.205 million of revenue refunding bonds. The first tranche, $99.570 million of tax & subordinate lien revenue refunding bonds, Series 2022A, saw 5s of 8/2026 at 2.07%, 5s of 2027 at 2.17% and 5s of 2032 at 2.71%, noncall. The second tranche, $237.770 million of unlimited tax road refunding bonds, Series 2022A, saw 5s of 10/2023 at 1.62%, 5s of 2027 at 2.18%, 5s of 2032 at 2.72%, 4s of 2037 at 3.55%, 4s of 2042 at 3.85%, 5s of 2047 at 3.5% and 4s of 2047 at 3.98%, callable 10/1/2031. The third tranche, $86.865 million of permanent improvement refunding bonds, Series 2022A, saw 5s of 10/2023 at 1.62%, 5s of 2027 at 2.18% and 5s of 2031 at 2.67%, noncall.
Ramirez & Co. priced for the Klein Independent School District, Texas, (Aa1/AA//) $145.340 million of unlimited tax schoolhouse bonds, Series 2022, with 5s of 8/2023 at 1.59%, 5s of 2027 at 2.09%, 5s of 2032 at 2.65%, 5s of 2037 at 3.11%, 4s of 2042 at 3.83% and 4s of 2047 at 100%, callable 8/1/2032.
The municipal market was quiet in the secondary and focused on the primary Wednesday, letting the news of CPI shake out elsewhere.
“Leading into this week, market participants were determined to seek direction from the much anticipated CPI for June,” Jeff Lipton, managing director and head of municipal credit and market strategy and municipal capital markets.
“Prior to Wednesday's print, retail participation was quite active with a firming market tone,” he added.
“Today’s CPI report surprised to the upside, with June’s inflation catapulting to its highest level in 40 years at 9.1%, surpassing market expectations of 8.8%,” said Greg Bassuk, CEO at AXS Investments.
But while inflation is above 9%, James Knightley, ING chief international economist, said it’s “the breadth of the price pressures that is concerning for the Federal Reserve.”
“With supply conditions showing little sign of improvement the onus is on the Fed to hit the brakes via higher rates to allow demand to better match supply conditions,” he said, noting the recession threat is rising.
This likely translates into a three-quarter rate hike in July with half-point moves in September and November, followed by a quarter hike in December taking the Fed funds range to 3.50%-3.75% by year-end, Knightley said.
The higher-than-projected June inflation “reinforces expectations of more aggressive Fed rate hikes and the likelihood of exacerbating recessionary fears that could meaningfully hamper the market’s ability to gain stronger footing,” Bassuk said.
Just as the markets sharply declined on last month’s unexpected CPI levels, Bassuk “anticipates a similar downward market pressure on June’s CPI overshoot.”
Recent weeks, he noted, “have seen near-record market outflows in stocks and bonds, while bearish sentiment indicators have been high."
“That’s an exceedingly reflective preview of how July markets may behave as this high-price environment continues to dominate the U.S. and global markets,” Bassuk said.
“There are small pockets of interest out there, however,” Tom Kozlik, head of municipal research and analytics at HilltopSecurities Inc., said of municipals.
Kozlik expects supply to likely continue to be down in July — and for all of 2022 for that matter — a “fitting” match for the current market tone.
“That being said, I am still seeing neutral to positive technical indicators,” albeit not as strong as mid-May, he said.
But, some investors are putting money to work, according to Kozlik, who believes municipals are still investible — despite the expectation that rates are going higher.
“It is not just whether there will be a 75 point hike in July, I think some may expect there is a chance — even if it is small — that the Fed goes even higher, faster,” Kozlik said.
After last Friday's jobs number and Wednesday's CPI number, Kozlik said most market participants are expecting the Fed to continue its push to higher rates.
“This argument may have gained strength today — especially because the BoC just tightened by 100 basis points,” he said.
Secondary trading
North Carolina 4s of 2023 at 1.30%-1.24% versus 1.27%-1.02% Tuesday and 1.41%-1.15% Monday. Washington 5s of 2024 at 1.73% versus 1.72% Tuesday and 1.74% Monday. Massachusetts 5s of 2025 at 1.80%-1.79%. Florida Board of Education 5s of 2025 at 1.79%.
California 5s of 2027 at 2.05%-2.03%. Connecticut 5s of 2028 at 2.30%. Loudoun County, Virginia 5s of 2031 at 2.50%-2.49%.
Washington 5s of 2040 at 3.09% versus 3.14% Monday. LA DWP 5s of 2041 at 3.17% versus 3.14% Tuesday. South Carolina 5s of 2042 at 2.94%-2.92%.
LA DWP 5s of 2051 at 3.35%.
AAA scales
Refinitiv MMD’s scale was bumped four basis points on inside three years at the 3 p.m. read: the one-year at 1.40% (-4) and 1.70% (-4) in two years. The five-year at 2.00% (unch), the 10-year at 2.44% (unch) and the 30-year at 2.98% (unch).
The ICE municipal yield curve was mixed: 1.45% (flat) in 2023 and 1.735 (+1) in 2024. The five-year at 1.99% (-1), the 10-year was at 2.48% (flat) and the 30-year yield was at 3.04% (+1) at a 4 p.m. read.
The IHS Markit municipal curve was bumped four basis points two years and in: 1.40% (-4) in 2023 and 1.72% (-4) in 2024. The five-year at 2.00% (unch), the 10-year was at 2.44% (unch) and the 30-year yield was at 2.98% (unch) at a 3 p.m. read.
Bloomberg BVAL was little changed: 1.45% (unch) in 2023 and 1.73% (unch) in 2024. The five-year at 2.02% (-1), the 10-year at 2.49% (unch) and the 30-year at 3.00% (unch) near the close.
Treasuries were mixed.
The two-year UST was yielding 3.145% (+9), the three-year was at 3.143% (+6), the five-year at 3.017% (flat), the seven-year 2.998% (-4), the 10-year yielding 2.910% (-6), the 20-year at 3.346% (-7) and the 30-year Treasury was yielding 3.073% (-9) at 3:30 p.m.
Primary to come:
The Massachusetts Development Finance Agency (A1///) is set to price Thursday $361.510 million of Northeastern University issue revenue refunding bonds, Series 2022. Morgan Stanley & Co.
CPI on fire; Some say 100bp hike possible
Wells Fargo Securities senior economist Sarah House and economist Michael Pugliese said, “It will take at least several consecutive monthly inflation readings of slowing price growth for the Federal Reserve to start to believe that it has the current inflation episode in check.”
But today's CPI release, they said, “offers monetary policymakers zero reassurance that they are on that path at present.” A 75 basis point rate hike at the upcoming Federal Open Market Committee meeting in late July “appears to be the floor rather than the ceiling for what the central bank will do to combat this relentless price pressure,” they said.
Olu Sonola, head of U.S. regional economics at Fitch Ratings, echoed their thoughts. "The 9.1% headline print was higher than expected — a pandemic peak that solidifies the case for another 75 basis point increase in the Fed funds rate later this month,” he said.
“While core inflation continues to show signs of moderation, with the lowest year-over-year increase in six months,” Sonoloa said “the sharp pickup in energy inflation was the primary catalyst for the elevated print.”
However, he said “the recent 20% pullback in the price of oil is sustained, it bodes well for the future trajectory of energy inflation and the headline print.”
“The pace of core services inflation, which tends to be a lot more sticky, continues to accelerate, which will not be reassuring to the Fed at all," Sonola said. "In fact, it will be sobering. It may move the Fed into even more hawkish territory.”
The CPI print "is not what the Federal Reserve wanted to see,” said Andy Sparks, head of portfolio management research at MSCI.
“Accelerating inflation puts more pressure on the Fed to aggressively raise rates — perhaps even by 100 basis points — at its July meeting and to regain its credibility in being able to control inflation,” he said.
But, he said, “placing too much emphasis on today’s CPI, the Fed runs the risk creating a sense of panic” and “runs the risk of overshooting and pushing an economy that had been showing signs of weakness into a full scale recession.”
“A consistent, transparent and credible policy is ultimately what market participants are looking for from the Fed,” Sparks noted.
KC Mathews, executive vice president and chief investment officer at UMB Bank, noted “the Fed will continue to aggressively hike rates, getting short rates to 3.50% to 3.75% by the end of the year.”
This swift Fed action will curb inflation, he said, but it “puts economic activity at risk increasing the probability of a recession late this year or early in 2023.”
“There are clear signs of an economic slowdown, which will dampen price pressures and help the Fed with its mission to curb inflation,” he added.
