Municipal secondary trading showed a touch of weakness for the third day as end-of-month repositioning and the May 15th tax deadline looms while New Jersey's transportation deal was a blow out and ICI reported another week of multi-billion inflows into municipal bond mutual funds.
Municipals exhibited a cautious tone Wednesday heading into the Fed’s announcement that it would keep rates steady for the near term and the pricing of the $1.57 billion New Jersey Transportation Trust Fund deal, which was oversubscribed by as much as 20 times and repriced to lower yields, was the day's focus.
At the conclusion of the FOMC's two-day meeting Wednesday, Chairman Jerome Powell confirmed the Fed's intention to keep rates and its monthly bond buying program steady, which was largely expected.
"The muni market seemed to be operating with little to no concern over this week's FOMC policy meeting as benchmark tax-exempt yields held steady versus a softer tone for Treasuries," said Jeffrey Lipton, head of municipal credit and market strategy and municipal capital markets at Oppenheimer & Co.
While the triple-A benchmarks were cut 1 to 1.5 basis points, the primary market took the day’s news in stride and investors gravitated toward the New Jersey deal, despite some historic spread compression for the issuer and bumps on the deal in a repricing.
"The primary is being priced right with demand in complete support of product and there just doesn't seem to be enough supply to satiate market appetite," Lipton said, adding that secondary spreads continue to tighten with ratios becoming even richer.
Municipal to UST ratios closed at 58% in 10 years and 68% in 30 years on Wednesday, according to Refinitiv MMD while ICE Data Services had the 10-year at 59% and the 30 at 69%.
Traders said the New Jersey deal largely set the tone for the market.
A New York trader said there was strong demand for the forward delivery bonds, which are rated Baa1 by Moody’s Investors Service and BBB by Standard & Poor’s.
“The fact that it's a lower-rated transaction is interesting because typically forwards are in the single or double-A rated category,” the trader said.
Judging by the appetite for attractively priced paper, however, he said the forward delivery bonds were highly sought after, as well as the non-forward bonds.
The $582 million of Series A refunding bonds saw bumps of eight to 11 basis points from initial pricing wires. The forward delivery bonds were also bumped in a repricing.
The oversubscribed New Jersey deal is typical in the current market backdrop, where large lower investment-grade deals are few , according to John Mousseau, president of Cumberland Advisors.
“The market sees the Federal government for now as a gigantic backstop to the market,” Mousseau said. “All incremental yield is being gobbled up. The market is now rich on a nominal basis, as well as a relative basis, and you can tell because coupon spreads are almost non-existent.”
Investors continue to pour money into the funds with the Investment Company Institute Wednesday reporting another week of inflows with $2.517 billion coming into long-term municipal bond mutual funds, after $2.289 billion the previous week. This is the seventh week of inflows with only one week of outflows so far in 2021 and a total of more than $33 billion for the year.
ICI also reported $450 million of inflows into exchange-traded funds for the week ending April 22. In the previous week, ETFs saw $505 million of inflows.
“We have seen positive bond inflows for 48 of the last 49 weeks, which has given munis much strength,” a second New York trader said.
“That said, taxable equivalent yields of munis are well below taxable munis and corporates, and many strategists are suggesting to sell tax-exempts and buy taxables,” the second trader said.
But at the same time, he said potential policy changes affecting municipal issuance could boost demand even more going forward.
“There is lots of optimism that tax-exempt advanced refundings will return, adding about $100 billion to the calendar in 2022,” he noted.
"As the tax debate gathers steam, some combination of higher taxes is likely to come, and such scenario only enhances the value of the muni tax-exemption, for both individual and corporate buyers," Lipton said. "For now, we are not sure just how much additional downside potential there is for ratios, but we can say that the muni asset class has proven to be quite surprising," he added.
In the primary, Citigroup Global Markets Inc. repriced $1.57 billion of refunding and forward delivery bonds for the New Jersey Transportation Trust Fund Authority (Baa1/BBB/BBB+/). The $582 million of Series A refunding bonds saw bumps of eight to 11 basis points from initial pricing wires. Bonds in 2025 with a 5% coupon yield 0.65% (-8), 5s of 2026 at 0.81% (-8), 5s of 2031 at 1.70%, 4s of 2036 at 2.00% (-11), callable in 6/15/2031.
The second, $590 million of Series AA forward delivery transportation program bonds, saw bumps of two to five basis points, with 5s of 2023 at 0.93%, 5s of 2026 at 1.37% (-2), 5s of 2031 at 2.17% (-3), 5s of 2036 at 2.53% (-3), 5s of 2038 at 2.59% (-5), callable in 6/15/2032.
The third, $305.7 million of Series 2022 A forward delivery transportation system refunding bonds saw two to five basis point bumps, with 4s of 2038 at 2.74% (-5), 4s of 2041 at 2.89% (-2) and 4s of 2042 at 2.90% (-5), callable in 6/15/2032.
The authority will priced $116.2 million of fixed-rate program notes in a 2014 Series BB-2 remarketing structure, with bonds in 2030 with a 5% coupon yielding 1.58%, 5s of 2031 at 1.70% and 5s of 2034 at 1.84%.
Morgan Stanley & Co. priced for retail investors $352 million of state revolving fund green and sustainability bonds for the Massachusetts Clean Water Trust (Aaa/AAA/AAA/NR). The first series, $142.8 million of state revolving fund bonds in Series 23 A green bonds, saw 3s of 2022 at 0.07%, 4s of 2026 at 0.41%, 5s of 2031 at 1.03%, 5s of 2036 at 1.28% and 5s of 2041 at 1.48%. The second, $209 million of Series 23B sustainability bonds saw 5s of 2022 at 0.07%, 5s of 2026 at 0.41%, 5s of 2031 at 1.03%, 5s of 2036 at 1.28%. Bonds in 2037-2041 were not offered to retail.
First quarter trade volume falls
The Municipal Securities Rulemaking Board said the par amount traded in the first quarter totaled $599.4 billion, lower than fourth quarter 2020 volume of $632.2 billion and significantly lower than first quarter 2020 volume of $1.04 trillion, which was impacted by the COVID-19 pandemic-related market dislocation in March 2020. The total number of trades also decreased, by about 15.2% to 2.04 million compared to the same period in 2020,
Telling of first quarter strength, customer buying activity accounted for 36% of the 2.04 million trades in the first quarter, customer sales accounted for 28% and inter-dealer trades made up 37%.
A Puerto Rico Sales Tax Financing Corporation (COFINA) zero coupon 2051 maturity was the most active in terms of par traded with nearly $8 billion of trading during the quarter, while a 2.25 of 2051 New York City Transitional Finance Authority tax-exempt subordinate bond sold in early February had the most trades at 1,303.
Secondary market trading showed a slightly weaker tone.
Oregon 5s of 2023 traded at 0.10%-0.09%. Delaware 5s of 2024 at 0.16% versus 0.11% Thursday. California 5s of 2025 at 0.34%-0.31% (inter-dealer) and 0.28% (sale to customer). San Francisco City and County 5s of 2025 at 0.24% (same as original). Wisconsin 5s of 2026 traded at 0.48% versus 0.45% Tuesday. North Carolina 5s of 2027 at 0.58%.
North Carolina 5s of 2029 at 0.87%. Maryland 5s of 2029 at 0.83% (0.93% on 4/6). New York City TFA 5s of 2029 at 1.03%.
New York Dorm PITs 5s of 2031 at 1.19% versus 1.18% Thursday. New York City waters 5s of 2031 at 1.05% versus 1.01% Tuesday. Washington 5s of 2032 at 1.15% versus 1.08% Thursday. New York City GOs 5s of 2033 at 1.39%.
Delaware 2s of 2036 at 1.62%-1.58%.
Texas waters 3s of 2040 at 1.60%-1.50%. New York City waters 5s of 2048 traded at 1.77% versus 1.86% on 4/13.
Scales
On Refinitiv MMD’s AAA benchmark scale, yields were cut a basis point across the curve, to 0.06% in 2022 and 0.09% in 2023. The yield on the 10-year rose one basis point to 0.95% and the 30-year to 1.57%.
The ICE AAA municipal yield curve showed yields up one basis point to 0.07% in 2022 and 0.10% in 2023. The 10-year maturity at 0.96%, up one basis point, while the 30-year rose to 1.56%.
The IHS Markit municipal analytics AAA curve showed yields rise one basis point to 0.07% in 2022 and 0.10% in 2023, the 10-year up one to 0.93% and the 30-year rise one to 1.57%.
The Bloomberg BVAL AAA curve showed yields steady at 0.04% in 2022 and 0.06% in 2023, with the 10-year up one to 0.92%, and the 30-year yield rise one to 1.56%.
The three-month Treasury note was yielding 0.02%, the 10-year Treasury was yielding 1.61% and the 30-year Treasury was yielding 2.29% near the close. Equities lost ground with the Dow losing 147 points, the S&P 500 fell 0.04% and the Nasdaq lost 0.20% near the close.
Better economy doesn’t influence FOMC
Acknowledging economic improvement and the progress in vaccinating the public, the Federal Open Market Committee held rates at the zero lower bound and will continue asset purchases at current levels, sticking to its stance that recovery is “far from complete,” and inflation will be “transitory.”
“Amid progress on vaccinations and strong policy support, indicators of economic activity and employment have strengthened,” the post-meeting statement noted, including “sectors most adversely affected by the pandemic,” which “remain weak but have shown improvement.”
The statement also said, “risks to the economic outlook remain.” Last time, the FOMC termed risks as “considerable.”
"The Fed is sounding decidedly more upbeat on the economy but is in absolutely no rush to start debating modifications to its policy trajectory,” said Brian Coulton, Fitch's chief economist. “We now think the Fed will start to discuss tapering over the summer but the actual taper probably still won’t happen until the turn of the year."
But in his press conference, Federal Reserve Board Chair Jerome Powell responded to a question about whether it was time to talk about talking about tapering, saying, “it is not time yet to have a conversation about tapering.” He added it will be “some time” until the Fed sees the further progress needed to begin those discussions.
When asked if the Fed would raise rates if inflation increases before the labor market reaches full employment, Powell said, “It seems unlikely we would see inflation while there’s so much slack in the employment market.
“Powell wriggled out of that by stating he expects expectations to rise only after actual inflation has increased, which of course ignores the inflation already evident outside of CPI (or PCE),” said Markus Schomer, chief economist at PineBridge Investments. “This is the biggest weakness in the Fed’s framework. People’s inflation expectations are driven by a broader sense of price movements while the Fed concentrates on a narrow corner of the inflation backdrop.”
Powell wouldn’t define how many months would be a “string” of good employment readings, he noted there has been one and more would be needed for the Fed to take notice.
“The Fed cannot acknowledge the strong, record-breaking economy without starting the tapering or policy normalization debate,” Schomer said, adding “it seems the FOMC didn’t even talk about scaling back MBS purchases in spite of a booming housing market where inflation is running above 10%.”
He also criticized the Fed’s preferred measure of inflation, the personal consumption expenditures, which he called “the weakest of all the inflation indicators.”
“Every other sectoral inflation measure,” Schomer said, “PPI in the industrial sector, HPI or house prices in the housing market, and various asset prices in the financial sector are screaming inflation!”
“Powell and the Fed have made it very clear that they want to see the white in inflations eyes, before they make any moves or changes,” said Daniela Mardarovici, co-head of multisector/core plus fixed income at Macquarie Investment Management. “Everyone is overthinking these nuances regarding transitory.”
Bethany Payne, portfolio manager at Janus Henderson, said, “With such elevated debt levels and relatively short maturities, the U.S. is more vulnerable to a future increase in rates than many other countries — an issue which could move to the fore if the growth recovery remains strong and inflation moves toward or above the 2% target, although any uptick in inflation should be transitory.”
“No changes need to be made, so its statement simply reflects the progress reflected in its comment about strengthening activity and weaker sectors showing improvement,” said Steve Skancke, chief economic advisor at Keel Point.
Jeff MacDonald, head of fixed income strategies at Fiduciary Trust International said that the challenge for the Fed will come if the recovery in growth and inflation "aggressively exceed" the Fed's expectations.
"If the reopening and recovery accelerate meaningfully and the virus comes under control in short order, discussion of an adjustment to the $120 billion in monthly purchases on the Fed balance sheet could begin to take place within months."
He added that for now, the market is "taking the Fed at its word," and not pricing in a first hike until late ’22 or more probably early ’23.
"Aggressive moves in growth and inflation in the near term could challenge that timeline which could introduce uncertainty into the minds of market participants regarding how long the Fed can maintain this level of accommodation.”
Lynne Funk and Aaron Weitzman contributed to this report.
