Volatility in risk assets has led investors to the safety of bonds, according to Subadra Rajappa, Societe Generale’s head of U.S. rates strategy.
With the yield on the 10-year Treasury back below 3%, “the inversion of the 2s/5s Treasury curve is a cause for concern,” she said in a report released last week. “We are neutral on duration but recommend positioning for a sell-off conditionally.”
Rajappa said it was hard to ignore the recent inversion of the 2s/5s and the 3s/5s yield curves last week, following a sharp decline in equities and widening of credit spreads.
“Yield curve inversion has consistently been a good predictor of recessions, and there is no reason to believe that this time will be different,” she said, adding that while the inversion of the 2s/5s curve is a concern, economic fundamentals remain strong.
“Recent Fed speakers have reaffirmed the December rate hike, which is fully priced in, but beyond that, the market is less willing to price in rate hikes for 2019,” she said. “The market is now pricing in a pause for 2019 following the December rate hike.”
She said that an analysis by the Cleveland Fed on the probability of a recession calculated from the yield curve shows that the probability of a recession next November has risen to 20.3% from 16.6% in October, a modest uptick. This is very much in line with probabilities observed in mid-2006, when the Fed delivered its last rate hike in the 2004-06 cycle, according to Rajappa.
“It is important to keep in mind that recessions are hard to predict. Although the 2s/10s curve started to invert in 2006, the economy did not go into a recession until 2008,” she said. “The Fed will likely pause or even cut rates to avert a sharp slowdown leading to a recession. In addition to the curve, some of the other leading indicators for a recession are also starting to show signs of stress, chief among them being the equity markets and credit spreads. But economic fundamentals remain strong.”
Secondary market
Municipal bonds were mixed on Monday, according to a late read of the MBIS benchmark scale. Benchmark muni yields dipped less than one basis point in the one- to 17-year maturities, rose less than a basis point in the 19- to 30-year maturities and remained unchanged in the 18-year maturity.
High-grade munis were stronger, with yields calculated on MBIS' AAA scale decreasing as much as one basis point across the curve.
Municipals were steady on Municipal Market Data’s AAA benchmark scale, which showed the yield on both the 10-year muni general obligation and on the 30-year muni maturity remaining unchanged.
Treasury bonds were stronger amid continued stock market volatility. In late trade, the Treasury 30-year was yielding 3.122%, the 10-year yield stood at 2.850%, the five-year was at 2.706%, the two-year was at 2.713% while the Treasury three-month bill stood at 2.388%.
On Monday, the 10-year muni-to-Treasury ratio was calculated at 83.5% while the 30-year muni-to-Treasury ratio stood at 99.1%, according to MMD. The muni-to-Treasury ratio compares the yield of tax-exempt municipal bonds with the yield of taxable U.S. Treasury with comparable maturities. If the muni/Treasury ratio is above 100%, munis are yielding more than Treasury; if it is below 100%, munis are yielding less.
Prior week's actively traded issues
Revenue bonds comprised 56.65% of total new issuance in the week ended Dec. 7, according to
Some of the most actively traded munis by type in the week were from Illinois issuers.
In the GO bond sector, the Chicago Board of Education 5s of 2046 traded 54 times. In the revenue bond sector, the Chicago O’Hare 5s of 2048 traded 52 times. And in the taxable bond sector, the Chicago O’Hare 4.472s of 2049 traded 35 times.
Primary market
Topping the new issue slate this week is a $1.7 billion deal from the Dormitory Authority of the State of New York. Bank of America Merrill Lynch is set to price the DASNY state personal income tax revenue bonds on Tuesday. The offering consists of Series 2018A tax-exempt PITs and Series 2018B taxable PITs. The deal is rated Aa1 by Moody’s Investors Service and AA-plus by S&P Global Ratings.
In the competitive arena on Tuesday, the Washington Suburban Sanitary District, Md., is selling $390 million of consolidated public improvement bonds of 2018. Proceeds will be used to finance various water and sewer improvements. The financial advisor is Wye River Group and the bond counsel is McKennon Shelton. The deal is rated triple-A by Moody’s, S&P and Fitch Ratings.
Bond Buyer 30-day visible supply at $11.15B
The Bond Buyer's 30-day visible supply calendar decreased $107.0 million to $11.15 billion for Monday. The total is comprised of $2.34 billion of competitive sales and $8.81 billion of negotiated deals.
Prior week's top underwriters
The top municipal bond underwriters of last week included JPMorgan Securities, Bank of America Merrill Lynch, Morgan Stanley, Wells Fargo Securities and Citigroup, according to Thomson Reuters data.
In the week of Dec. 2 to Dec. 8, JPMorgan underwrote $3.2 billion, BAML $1.3 billion, Morgan Stanley $1.1 billion, Wells $477.9 million and Citi $444.4 million.
Previous session's activity
The Municipal Securities Rulemaking Board reported 44,711 trades on Friday on volume of $13.29 billion.
California, New York and Texas were the municipalities with the most trades, with the Golden State taking 18.588% of the market, the Empire State taking 12.236% and the Lone Star State taking 7.992%.
Prior week's top FAs
The top municipal financial advisors of last week included Swap Financial Group, PFM Financial Advisors, Frasca & Associates, Municipal Capital Markets Group and Hilltop Securities, according to Thomson Reuters data.
In the week of Dec. 2 to Dec. 8, Swap advised on $1.7 billion, PFM $1.3 billion, Frasca $1.0 billion, Municipal Capital $902.0 million and Hilltop $434.1 million.
Data appearing in this article from Municipal Bond Information Services, including the MBIS municipal bond index, is available on The Bond Buyer Data Workstation.
