Munis sold off Tuesday as tensions in the Middle East continued, with little sign of easing in the near future, as U.S. Treasuries pared some early morning losses and equities were down.
MMD's scales was cut three to 10 basis points, with the largest losses 15 years at its 12:30 p.m. reading. MMD's 10-year is at 2.66%-2.68% and the 30-year is at 4.24%-4.26%.
The ICE AAA yield curve was cut eight to 10 basis points, and Bloomberg BVAL was cut five to six basis points at noon.
Muni yields moved higher largely in sympathy with the Treasury market, given the expectations for heightened inflation fears, "and that's obviously bleeding into the municipal market," said Chris Brigati, managing director and CIO at SWBC.
Monday saw a more muted tone, but Tuesday munis are playing a little bit of a catch-up to the backup in rates, he said.
"The longer the conflict goes on, or the more intense it becomes, we're going to see these spikes because of inflation concerns," he said.
"I can't sound surprised given the turn of events that we've got," said Pat Luby, head of municipal strategy at CreditSights.
Redemptions and reinvestment demand in March are down significantly from last year, and Luby would have expected dealers to have some "merchandise on the shelves" to help sell into reinvestment demand, he said.
However, the situation in the Middle East and its effect on oil, and potentially inflation and rates, has the muni market taking a pause, per Luby.
"Unless there is firm evidence of demand stepping in at a particular level, I would expect dealers to be very reluctant to really get aggressive in here. It'll be interesting to see how the calendar holds in if the new issue calendar comes in, and underwriters need to price deals to a discount, some new-issue buyers [may] play it close to the vest and try to get some good deals in here this week," he said.
While it's unclear whether any deals will be delayed at this point, the market is still functioning well, and recent deals have been five to 10 times oversubscribed, Brigati said.
"The demand for paper and the fact that SMAs and the buying base, ETFs included, have been active and aggressive and making sure they're putting in their orders and trying to get filled, it means they have a ton of cash, and they're not seeing redemptions," he said.
There are at least two to three more weeks before demand slows due to "tax time in April," Brigati said.
In the high-yield market Monday, some generic benchmark names like Buckeyes and COFINAs were only off three to four basis points. However, there were very few high-yield trade prints Monday, said Justin Horowitz, senior portfolio manager at Birch Creek.
On Tuesday, some of the high-yield generic benchmark names in the early morning were off another five to six basis points, in line with MMD's cuts at its 10:20 a.m. reading, he said.
For example, New Jersey tobacco, subordinated bonds traded Monday and again Tuesday, about five basis points cheaper, and COFINA bonds were sold to a customer Tuesday three basis points cheaper than where a dealer bought bonds, according to Horowitz.
"So if you assume a three basis point bid-ask, that would be about six basis points weaker on the day," he said.
Over the last two days, there has been some weakness in the large benchmark names that "likely might be from some of the trading accounts or dealers that kind of use some of these benchmark names as just like general muni exposure, and then they hedge them with Treasury," Horowitz said.
"When Treasuries are off, and they sell these cheaper, it's not necessarily reflective of kind of the broader market. Sometimes these types of trades will lead the broader market, and so you'll see trades in these benchmark names happen first because they're the most liquid, and everybody owns them. They're easy. You have pretty high liquidity on them, and then you'll start to see some of these less common names lag behind," he noted.
"So far, no flight-to-safety in USTs has occurred; rather, bond yields are higher via an initial spike in oil prices that continues," said Matt Fabian, president of Municipal Market Analytics. Inflation sentiment grew after last week's high PPI read and perhaps the expected budget deficit widening, he added.
Because of geopolitical events that have led to surging oil prices and increased inflationary pressures, the market is starting to reduce bets on rate cuts, said Chris Low, chief economist at FHN Financial.
The likelihood of a Fed rate cut at its March meeting was close to or at zero percent, said Ron Banaszek, co-head of public finance and lead underwriter at Blaylock Van.
"But does this potentially, depending on how long this lasts and where things end up, potentially put any pressure on our inflation numbers, and what does that do for the long term of rates?" he asked.
"There is now one full cut priced in this year, plus a 50% chance of a second. Rates are still expected to drop, but later," Low said. "In effect, this is the intersection of the pop in oil due to the war in Iran and the Federal Open Market Committee's new show-me attitude toward inflation. There is zero patience on the FOMC for looking beyond one-off or temporary inflation pressure. Until inflation falls, the Fed will not cut."
