Munis started off quiet this week ahead of some big deals on tap, with new issuance totaling nearly $8 billion.
Triple-A yield curves were little changed on the day while U.S. Treasuries were stronger. Ratios were slightly higher with the five-year muni-to-UST ratio at 49% in five years, 72% in 10 and 82% in 30, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the five at 49%, the 10 at 75% and the 30 at 82%.
Volatility in U.S. Treasuries and the rate selloff has allowed ratios to “outperform meaningfully, and even last week’s record supply has not put pressure on the secondary market,” according to Barclays.
“Investors have a lot of cash, and will get an additional $25 billion to $30 billion in coupon payments and bond redemptions next month,” Barclays strategists Mikhail Foux, Clare Pickering and Mayur Patel said in a weekly report. While the supply pipeline is expected to be on the heavy side this week, after it “should quickly dissipate until the New Year.”
“In our view, tax-exempts should continue doing relatively well for the remainder of the year,” they said.
On the sector level, aside from local general obligation and industrial development spreads that have been “dramatically affected by recent taxable issuance, investors should be able to find the best opportunities in the healthcare and transportation sectors that have not fully recovered from the selloff, and might present a good tactical opportunity for bullish taxable muni investors who are positioning for 2022,” the report said.
For taxable munis, Barclays noted “meaningful spread widening in the past two weeks,” although as typically happens at times of increased volatility, “this asset class has outperformed corporates, proving its strong defensive characteristics.”
“Notably, after the recent lull, issuers have started again tapping the market with taxable advance refundings, as they don’t seem to believe that tax-exempt refundings are coming back any time soon,” the report said. “Consequently, taxable issuance should remain on the heavy side early in Q1 ’22, in our view, although we don’t see robust issuance negatively affecting taxable credit spreads.”
Coming off the influx of weekly new issue at $19.5 billion, supply this week returns to a modest $7.7 billion, of which $6.3 billion, or 82.1%, is tax-exempt, according to a market update from Ramirez & Co.
This is led by a $800 million general obligation offering from Connecticut, $672.48 million of World Trade Center bonds from the New York Liberty Development Corp. and $500 million of revenue bonds for the Brightline Florida Passenger Rail Expansion project from the Florida Development Finance Corp.
Total gross supply year-to-date is $452.8 billion, down 3.7% year-over-year, of which only 75.2%, or $340.4 billion is exempt.
In December, analysts expect gross supply at $40 billion and to end 2021 at $464 billion, down 1.3% year-over-year. The net 30-day visible supply is down $15.2 billion, reflecting $8.1 billion of new issue against the negative $23.2 billion of reinvestment.
For 2022, the report projects “a baseline of 2.5% year-over-year increase in gross supply in 2022 to about $476 billion.”
The overall supply increase is driven by a 4.7% year-over-year increase in exempts, which offsets a 3.3% decline in taxables. The gross supply number is buoyed by a 17.4% increase in current refundings due to the significantly higher issuance in 2012 than 2011. New money is expected to dip slightly by 3.2%.
“If anything, new money will be impacted by the infrastructure bill and we will revise accordingly if so,” the report says.
Fed data shows small drop in muni market it Q3
In the Fed Flow of Funds for the third quarter, there were no major changes in buying patterns compared with the first half of the year. The total size of the municipal market declined by about $40 billion in Q3, and was roughly unchanged in 2021, Barclays noted.
“Mutual funds remained the main driving force for municipals, followed by banks (mainly regionals), while muni holdings of direct retail and money markets have continued shrinking,” Barclays said. “Other than that, changes in muni investments in Q3 were quite small and mostly negative, as insurers continued trimming their holdings slightly, while dealers added a bit.”
AAA scales
Refinitiv MMD’s scale was unchanged: the one-year at 0.15% and 0.25% in 2023. The 10-year sat at 1.03% and at 1.48% in 30.
The ICE municipal yield curve showed yields were unchanged at 0.17% in 2022, 0.29% in 2023 and 1.05% in 2031. The 30-year yield was down one basis point at 1.49%.
The IHS Markit municipal analytics curve was steady: 0.18% in 2022 and at 0.26% in 2023. The 10-year was at 1.02% and the 30-year at 1.49% as of a 3 p.m. read.
Treasuries were stronger and equities were in the red.
The five-year UST was yielding 1.214%, the 10-year at yielding 1.426%, and the 30-year Treasury was yielding 1.815% at the close.
FOMC preview
The market will be watching the Federal Open Market Committee meeting this week as the panel plans to discuss an acceleration in taper and produces a new Summary of Economic Projections.
“The Fed appears to be moving toward an accelerated taper,” noted Gary Pzegeo, head of fixed income at CIBC Private Wealth U.S., and last week’s consumer price index offered “nothing … to dissuade that momentum.”
Morgan Stanley researchers “expect to see a sea change in the SEP dot plot alongside the accelerated taper announcement. Near-term forecasts are likely to be revised higher, along with some adjustments to the trajectory for inflation and unemployment over the medium term.”
The dot plot, they expect, will project two rate increases next year, “three and a half hikes in 2023, and three hikes in 2024.” That compares with their own projections for quarterly 25” basis point rate hikes starting in September next year, with a pause in September 2023 [a] halt [in] reinvestments before resuming hikes in December.”
The Fed “will likely signal a more hawkish tilt,” said JPMorgan Funds Chief Global Strategist David Kelly and market insights research analyst Stephanie Aliaga. “Unfortunately, they will likely justify this purely as a reaction to current stronger readings on inflation and a tighter labor market, rather than acknowledging the economic damage caused by years of inappropriately negative real interest rates.”
And despite projections of rate hikes, it will leave “negative real short-term interest rates for years to come,” Kelly and Aliaga said. While monetary policy is not responsible for the levels of inflation, slowing economic growth won’t erase all of the price pressure.
But if inflation fades, they said, “the Fed may well abandon its attempts to raise real interest rates. This would be unfortunate because the really pernicious effects of years of super low interest rates have been on asset prices rather than consumer inflation where Fed policy has promoted dangerous asset bubbles, worsened economic inequality and enabled a massive misallocation of resources.”
The SEP will have revised jobless rate (4.3% in the fourth quarter, down from 4.8%) and higher year-over-year headline PCE inflation projections (5.4% from 4.2%), they said.
“The Summary of Economic Projections could also show a faster and steeper path for federal funds rate hikes than previously projected,” they said, suggesting it could predict three hikes next year and four in 2023.
But whatever the projections, Kelly and Aliaga said, they should be viewed “with a degree of skepticism.” Even if rates are raised quarterly, that would put the fed funds rate target at a range of 1.75% to 2.00% at the end of 2023, “well below its 2.25%-2.50% peak reached in late 2018 and, importantly, likely still below core inflation.”
Slower inflation and economic growth next year could curb the Fed’s enthusiasm for “tightening policy, particularly if we see a sharp financial market correction or some shock that threatens the expansion,” they said. “Fed members have displayed their dovish feathers too often at this stage for us to mistake them for a flock of hawks.”
In any case, Kelly and Aliaga said, “failing to return monetary policy to a neutral stance would be a mistake.”
The SEP “will be historic and make news,” according to Grant Thornton Chief Economist Diane Swonk. “We are expecting a majority — maybe even a plurality — of meeting participants to pencil in at least one rate hike. Some could have four rate hikes planned for 2022. Those shifts, coupled with higher forecasts for inflation and lower forecasts for unemployment, will mark the first time the FOMC has openly acknowledged a need to chase, instead of preempt, inflation since the 1980s.”
BNP Paribas expects the dot plot to forecast eight hikes through 2024, with two next year, said Luigi Speranza, chief global economist, BNP Paribas Markets 360. “Upward revisions to inflation and downward revisions to unemployment should crystallize the shift of the FOMC in a more hawkish direction,” he said.
But BNP sees a hike in June, with seven more through 2023 and they “will be watching out for any new details on quantitative tightening from either the press conference or the minutes of the December meeting.”
Consumers see inflation running hotter next year, but cooling a bit over three years, according to the Federal Reserve Bank of New York’s Survey of Consumer Expectations. Respondents see one-year inflation rising 6.0% in the November survey, up from the 5.7% jump expected a month earlier, while three-year expectations slipped to 4.0% from 4.2%, the first time it has dropped since June.
Primary to come
Connecticut (Aa3/A+/AA-/AA) is set to price Tuesday $800 million of general obligation bonds, consisting of $500 million of general obligation bonds, Series 2022A, serials 2023-2035 and $300 million of social general obligation bonds, Series 2022B, serials 2035-2042. Barclays Capital.
The New York Liberty Development Corp. (Aa3/A+/A+/) is set to price Tuesday $672.48 million of liberty revenue refunding bonds, 1WTC-2021, serials 2040-2044. Siebert Williams Shank & Co.
The Florida Development Finance Corp. is (Aaa///) is set to price Tuesday $500 million of revenue bonds (Brightline Florida Passenger Rail Expansion Project), Series 2021A. Morgan Stanley & Co.
Broward County, Florida, (Aa3///) is set to price Tuesday $489.82 million of tourist development tax revenue bonds, Series 2021 (Convention Center Expansion Project). Morgan Stanley & Co.
Quincy, Massachusetts, (/AA//) is set to price $475 million of taxable general obligation pension bonds, serials 2022-2039. Ramirez & Co.
The Port Authority of New York and New Jersey (Aa3/A+/A+/) is set to price Wednesday $420 million of taxable consolidated bonds. Ramirez & Co.
The California Statewide Communities Development Authority Community Improvement Authority is set to price Wednesday $375.56 million of essential housing revenue bonds, consisting of $111.75 million of Series A-1, serial 2048; $136.305 million of Series A-2A, serial 2058; $50.13 million of Series A-2B, serial 2058 and $77.375 million of Series 2021B, serial 2058. Citigroup Global Markets.
The California Statewide Communities Development Authority Community Improvement Authority is set to price Wednesday $196.495 million of social essential housing revenue bonds (Escondido Portfolio), consisting of $60 million of Series A-1, $97.245 million of Series A-2 and $39.25 million of Series B. Goldman Sachs & Co.
Bexar County, Texas, is set to price Wednesday $328.905 million of unlimited tax taxable refunding bonds, consisting of $7.975 million, Series S21A; $33.62 million, Series S21B and $287.31 million, Series S21C. HilltopSecurities.
The Aurora Highlands Community Authority Board in Aurora, Colorado, is set to price Wednesday $309.8 million of special tax revenue refunding and improvement bonds, Series 2021A. D.A. Davidson & Co.
Atlanta (Aa1//AA+/) is set to price Tuesday $193.485 million, consisting of $3.265 million of various purpose general obligation bonds, Series 2021B, serials 2022-2031 and $190.22 million of taxable general obligation refunding bonds, Series 2021C, serials 2022-2034. Siebert Williams Shank & Co.
The California Municipal Finance Authority Special Finance Agency XII is set to price Tuesday $178.035 million of essential housing revenue bonds, Series 2022A (Allure Apartments), consisting of $109.65 million of senior bonds, Series 2022A-1, term 2056 and $68.385 million of junior bonds, Series 2022A-2, term 2047. Jefferies.
Tunica County, Mississippi, is set to price Tuesday $155.685 million of urban renewal revenue bonds (Southern Celebration Boulevard Project), consisting of $148.8 million of Series A and $6.885 million of Series B. Ziegler.
Utah Inland Port Authority Crossroads Public Infrastructure District is set to price Tuesday $150 million of tax differential revenue bonds, Series 2021. Piper Sandler & Co.
Colorado Health Facilities Authority is set to price next week $138.995 of revenue bonds (Aberdeen Ridge), Series 2021, consisting of $88.245 million of Series A, $12 million of Series B-1, $16 million of Series B-2, $20.5 million of Series B-3 and $2.25 million of Series C. Ziegler.
Wisconsin Health and Educational Facilities Authority is set to price Wednesday $116.25 million of revenue bonds, Series 2021 (Oakwood Lutheran Senior Ministries). Ziegler.
The Arizona Industrial Development Authority is on the day-to-day calendar with $177.97 million (NewLife Forest Restoration Project), consisting of $110.045 million of senior federally taxable sustainability-linked revenue bonds, Series 2021A, term 2041 and $67.925 million of subordinate federally taxable sustainability-linked revenue bonds, Series 2021B, term 2046. Goldman Sachs & Co.