Muni primary market supply is down this week due to the Federal Open Market Committee meeting, as technicals have started to weaken.
"September and October reinvestment flows will be substantially lower than during the summer months, while fund inflows have slowed meaningfully — an unsurprising development given the sharp rise in Treasury yields," Barclays strategists said.
Concurrently, investor bid-wanted activity has begun to increase, indicating rising selling pressure, while long-dated dealer inventories keep increasing, they said.
"With supply remaining elevated and demand showing signs of moderation, we believe muni-Treasury ratios may continue to drift wider in the near term before presenting a more compelling entry point for relative-value buyers," Barclays strategists said.
Supply falls to an estimated $10.298 billion this week, with $8.71 billion of negotiated deals on tap and $1.589 billion of competitives, according to LSEG.
The New Jersey Transportation Trust Fund Authority leads the negotiated calendar with $1.668 billion of transportation program bonds.
The competitive calendar is led by New York State with $317.175 million of GOs in two series.
Issuance this week is down from last week's $15-plus-billion new-issue calendar, partly due to the FOMC meeting.
Friday's Consumer Price Index report all but cemented the possibility of the Federal Reserve hiking rates this week, as odds surged to 90% for a rate hike by midday Friday.
However, the question remains: does the committee have enough votes to raise rates? At the last FOMC meeting, the Fed held interest rates steady, but there were three dissents, said Chris Lanouette, portfolio manager at CIBC.
"Prior to the Fed's blackout period, more governors [were] coming around to the idea of raising rates, so I think from a credibility standpoint, the market would like to see them move 25 [basis points]," he said.
If there is no rate hike — which could cause stocks and bonds to sell off — the Fed loses credibility, said Peter Block, managing director of credit strategy at Ramirez.
"People will be concerned that the Fed's not doing enough if they don't," he said.
Market activity is largely fueled by inflows into some of the larger institutional funds, said Tim Iltz, fixed income credit and market analyst at HJ Sims.
"As long as we continue to see that, where we're anticipating that, there should be a strong reception, but at what levels? That's more the consideration whether dealers are going to have to cut on their offerings [this] week or whether we're able to continue to see the strong support that we have," he said.
Given how strong inflows have been this year — despite moderating over the past two weeks — and what the market is seeing in terms of seasonality, issues should be well-received this week, Iltz said.
However, some refunding deals could struggle, Block said.
Last week, rate-sensitive deals were "blown out of the water" last week by the
But for this week, the performance will be "idiosyncratic," as it depends on how much room they have, Block said.
