Municipals were little changed Monday as the market awaits the larger new-issue calendar and participants position themselves ahead of the Federal Reserve meeting.
After a week of U.S. Treasury strength, rates rose Monday bringing the 10-year back to 1.50% after hitting 1.43% Thursday, a three-month low. Municipals did not follow and few participants anticipate any rate volatility in the market through the summer.
“If rates remain in check, it is hard to see a near-term catalyst for a possible selloff,” according to a report from Barclays strategists Mikhail Foux, Clare Pickering and Mayur Patel.
However, municipal to UST ratios of about 60% “is not a normal state of affairs. Many investors bought in anticipation of higher taxes for both individual investors and corporations. If that does not materialize, high-quality munis will adjust to a more normal ratio regime, but, in our view, this is unlikely to happen during the summer months, when spreads will likely continue grinding tighter and yield curves continue flattening.”
Municipal to UST ratios were at 59% in 10 years while the 30-year was at 63%, according to Refinitiv MMD. ICE Data Services had the 10-year muni-to-Treasury ratio at 59% while the 30-year muni-to-Treasury ratio stood at 65%.
The new-issue calendar kicks off with nearly $2 billion of taxable personal income tax bonds from the Dormitory Authority of the State of New York. Investors will also see several large healthcare deals, some nonrated, and two sizable taxable competitive deals from Pennsylvania and Illinois.
High yield municipal bond yields decreased by 11 basis points on average last week, noted John Miller, head of municipals at Nuveen.
“Credit spreads are less than 200 basis points, and we expect further compression ahead,” Miller wrote.
Inflows totaled $814 million last week, and year-to-date flows of $12.6 billion mark a record pace, he said.
“While new-issue deal flow remains well above average, it cannot satisfy investor demand,” Miller said. “Deals are routinely massively oversubscribed and market access to new issuance is becoming increasingly valuable.”
Secondary trading and scales
Trading showed little movement from Friday’s levels. Texas 5s of 2022 traded at 0.05%, the same as Friday. Arlington County, Virginia, 5s of 2023 were at 0.11%. California 5s of 2023 traded at 0.10%. Hawaii 5s of 2024 at 0.28%. Wake County, North Carolina, 5s of 2024 at 0.17%.
Baltimore County 5s of 2026 at 0.42%. Wisconsin 5s of 2027 at 0.54% versus 0.56% original. Wisconsin 5s of 2027 at 0.66% versus 0.69% original.
New York City water 5s of 2031 at 0.93%. NYC TFA 5s of 2031 at 1.05%.
Massachusetts clean water 5s of 2035 at 1.08%. Arlington County, Virginia, 5s of 2041 at 1.26%, the same as Friday.
New York Dorm PIT 5s of 2049 traded at 1.65%.
High-grade municipals were unchanged on Monday, according to Refinitiv MMD’s AAA. Short yields were steady at 0.06% and 0.08% in 2021 and 2022. The yield on the 10-year remained at 0.89% while the yield on the 30-year was steady at 1.39%.
The ICE AAA municipal yield curve showed short maturities steady in 2022 at 0.04% and 0.07% in 2023. The 10-year maturity was flat at 0.89% and the 30-year yield was unchanged at 1.41%.
The IHS Markit municipal analytics AAA curve showed short yields at 0.06% and 0.09% in 2021 and 2022, respectively, with the 10-year at 0.87% and the 30-year yield at 1.41%.
Bloomberg BVAL AAA curve showed short yields at 0.05% and 0.07% in 2021 and 2022, with the 10-year at 0.86% and the 30-year yield at 1.41%.
In late trading, the 10-year Treasury was yielding 1.50% and the 30-year Treasury was yielding 2.19%. Equities were mixed, with the Dow Jones losing 214 points, the S&P 500 down 0.20% and the Nasdaq up 0.31%.
FOMC preview
Most analysts expect the Federal Open Market Committee will alter its Summary of Economic Projections and perhaps begin to talk about tapering, without offering clues when they’ll begin cutting back on asset purchases.
“The Fed is in an excellent position to do nothing at its FOMC meetings this week,” said Steven Skancke, chief economic advisor at Keel Point.
Despite its repeated statements “that it has no intention to change its bond buying or interest rate policies until after it sees inflation hitting and exceeding its 2% target, and employment gains happening repeatedly for several months at a level to bring the labor market broadly back to 4% unemployment by the end of the year, financial and business markets have been looking for hints about when the Fed may actually start to telegraph a timetable for its action,” Skancke said.
But the market reaction to the consumer price index last week, he said, “confirms what the Fed already expected: there are no immediate signs of inflation problems brewing.”
Therefore, the Fed can hold off at this meeting, Skancke said.
“We are getting closer to an unavoidable monetary policy inflection point,” said Christian Scherrmann, U.S. economist at DWS Group. “The June meeting is not going to deliver a change of course immediately. The Fed has made it clear that big policy changes will come in small steps. Markets will be watching very carefully for any hint of an emerging discussion on tapering or changing Fed views on inflation.”
While some Fed officials expressed concern about rising inflation, “it seems the majority remain in the camp that judges the current inflation temporary or transitory,“ he said. “Many key measures of economic performance remain far below the ambitious goals set by the Fed, at least for now.“
The Morgan Stanley U.S. economics and global macro strategy team said it’s not time to remove accommodation, but “many FOMC participants believe it is time to provide themselves more flexibility as conditions evolve into the summer and fall.”
Stifel Chief Economist Lindsey Piegza, agreed. “While no policy adjustment is expected in June nor an announcement of a timeline for an eventual adjustment to policy, at least some Fed members will expectedly push for a discussion in the coming months regarding an eventual rollback of emergency measures.”
Joe Boyle, fixed income product manager at Hartford Funds, also doesn’t expect any clues to tapering. “[Federal Reserve Board Chair Jerome] Powell will continue to delay giving a definitive timeframe of when they will begin tapering their assets purchasing program,” he said. “I don’t expect guidance until the fourth quarter of this year or even first quarter of next year.”
Not expecting any policy changes, David Kelly, chief global strategist at JPMorgan Funds, says the Summary of Economic Projections will be the highlight of the meeting. “These numbers are in need of revision.”
The June projections showed the Fed meeting its economic goals by the end of 2023, and raising the fed funds rate the following year, he noted. “If, after reassessing their forecasts for the economy … the Fed maintains this extraordinarily dovish stance, then the risk of a boom-bust recession will have increased to a substantial degree.”
“We expect little change in the FOMC’s dovish statement or median fed funds interest rate projections,” said Scott Anderson, chief economist at Bank of the West Economics. “We do see an upward revision to 2021 GDP growth and inflation forecasts from the FOMC, but little change in the projections for 2022 and beyond.”
Not expecting major changes, the economics team at Wells Fargo Securities said “a few Fed officials could very well pull forward projections for when interest rates are likely to rise.”
The SEP should inflation slowing in 2022, a path most FOMC officials will view “as consistent with inflation running ‘moderately above 2% for some time’ to make up for lower inflation periods. However, given the marked pickup in inflation recently, we expect FOMC officials will signal that risks around inflation are increasingly tilted toward the upside.”
Greg McBride, chief financial analyst at Bankrate, noted in the previous SEP, 14 Fed participants saw rates staying at the zero lower bound through 2022 and 11 through 2023. “If this changes materially with the June update, it will call into question the Fed’s commitment to hold rates steady until the economy gets close to full employment.”
The only data that came out Monday, consumers see inflation of 4.0% in the next year, up from April’s 3.4% projections, the Federal Reserve Bank of New York’s survey of consumer expectations showed.
The three-year inflation projection grew to 3.6% from 3.1%.
Earnings growth expectations are crawling closer to pre-pandemic levels at the one-year mark, as it gained to 2.5%.
“The increase at both horizons is particularly pronounced among respondents age 60 and over and among those with a high school degree or less,” the Fed said.
Primary market
The Dormitory of the State of New York (/AA+/AA+/) is set to price $1.858 billion of taxable and tax-exempt state personal income tax general purpose revenue bonds. Jefferies LLC is head underwriter.
The Port of Seattle is set to price $811 million of refunding bonds on Thursday with first lien revenue refunding bonds and intermediate lien revenue and refunding bonds and consists of Series 2021 (Aa2/AA-/AA/) and Series 2021 A, B, C and D (A1/A+/AA-/). Barclays Capital Inc. is bookrunner.
The AdventHealth Obligated Group (Aa1/AA/AA/) is set to price $710 million of hospital revenue refunding bonds in two offerings led by J.P. Morgan Securities on Tuesday. The deal is composed of the Colorado Health Facilities Authority’s $420 million of Series 2021A hospital revenue bonds and the Kansas Development Finance Authority and the Orange County Health Facilities Authority’s $240 million of Series 2021 B&C hospital revenue bonds.
In the short-term sector, JPMorgan will price Riverside County, Calif.’s (NR/SP1+/F1+/) $340 million of tax and revenue anticipation notes on Tuesday.
The San Mateo-Foster City Public Financing Authority is set to price on Tuesday $350.8 million of 2021 wastewater revenue notes, $63.1 million of Series 2021A Estero Municipal Improvement District (Aa2/AA//), $273.3 million of Series 2021B City of San Mateo (Aa2/AA-//) and $14.3 million of Series A refunding bonds (Aa2///). BofA Securities is head underwriter.
The Commonwealth Financing Authority, Pennsylvania, (A1/A/A+/) is set to price on Wednesday $343.5 million of revenue bonds. Piper Sandler & Co. is lead underwriter.
The Idaho Energy Resources Authority (Aa2//AA/) is set to price on Tuesday $309.3 million of Bonneville Corporation Project No. 2 taxable transmission facilities revenue refunding bonds. TD Securities (USA) LLC is bookrunner.
The New York State Environmental Facilities Corporation (Aaa/AAA/AAA/) is set to price on Tuesday $286.9 million of State Clean Water and Drinking Water Revolving Funds Revenue Bonds (New York City Municipal Water Finance Authority Projects – Second Resolution Bonds) Series 2021 A, Subordinated SRF Bonds, Serials 2022-2041. Ramirez & Co., Inc. is head underwriter.
The Oklahoma Municipal Power Authority (/A/A/) is set to price on Thursday $261.1 million of taxable power supply system revenue refunding bonds, serials 2025-2047. BofA Securities is lead underwriter.
The Metropolitan Water District of Southern California (/AA+/AA+/) is set to price $222.1 million of taxable variable rate subordinate revenue refunding bonds on Tuesday. BofA Securities will run the books.
Norfolk, Virginia, (/AAA//) is set to price $210.8 million of taxable general obligation bonds on Tuesday. BofA Securities is lead underwriter.
The Santa Monica-Malibu Unified School District SFID No. 1 (Aa1/AA+//) is to price on Thursday $194 million of general obligation bonds, election of 2018. Raymond James & Associates, Inc. is head underwriter.
The University of South Carolina (Aa2//AA/) is set to price on Tuesday $181.9 million of Campus Village Project taxable higher education revenue bonds. Barclays Capital Inc. will run the books.
Lee County, Florida, (A2//A/A+) is set to price on Thursday $140.8 million of AMT airport revenue refunding bonds. BofA Securities is head underwriter.
The Yamhill County Hospital Authority (////) is set to price on Wednesday $132.6 million of revenue and refunding bonds. Ziegler is head underwriter.
The Los Rios Community College District (Aa2/AA//), California, is set to price on Wednesday $130 million of general obligation bonds, serials 2022-2035. UBS Financial Services Inc. is lead underwriter.
Forsyth County, North Carolina, (Aa1/AA+/AA+/) is set to price on Thursday $125.2 million of taxable limited obligation bonds. PNC Capital Markets LLC is head underwriter.
The Philadelphia Authority for Industrial Development (Aa2/AA//) Is set to price on Thursday $125 million of Children’s Hospital of Philadelphia Project hospital revenue refunding bonds. J.P. Morgan Securities LLC will run the books.
The city of Charleston, South Carolina, (Aaa/AAA//) is set to price on Tuesday $125.3 million of waterworks and sewer system refunding revenue bonds, serials 2022-2035. Wells Fargo Securities is head underwriter.
In the competitive arena, the South Carolina Transportation Infrastructure Bank is selling $395.09 million of revenue refunding bonds in two offerings on Tuesday consisting of $340.18 million of Series 2021B bonds and $54.91 million of Series 2021A bonds. PFM Financial Advisors is the financial advisor; Burr Forman McNair is the bond counsel.
The Pennsylvania Higher Educational Facilities Authority (Aa3//A+/) is set to sell $145.7 million of taxable state system of higher education revenue bonds at 11 a.m. eastern.
On Thursday, New Mexico is selling $307.665 million of Series 2021A severance tax bonds. Fiscal Strategies Group and Public Resources Advisory Group are the financial advisors. Rodey, Dickason and Sherman & Howard are the bond counsel.
The University of Illinois is set to sell $137.48 million of taxable facility systems revenue bonds at 11:30 a.m. eastern.