The municipal primary was the focus Tuesday with large deals repricing to lower yields while the secondary market took a backseat with benchmark curves little changed even as U.S. Treasuries rallied and stocks sold off.
Triple-A benchmarks saw a basis point bump in spots while U.S. Treasury yields fell five basis points on the 10- and 30-year near the close.
Ratios rose as a result with the 30-year muni-to-Treasury ratio settling above 80%.
The 10-year was at 73% and the 30-year at 83%, according to Refinitiv MMD. The 10-year muni-to-Treasury ratio was at 78% while the 30-year was at 82%, according to ICE Data Services.
“Today and yesterday there was hardly anything to speak of in terms of customer selling,” aside from a couple of minor bid-wanted lists in the afternoon, a Florida trader said. “With all the new issues in the market this week for accounts to focus on, dealers are not allocating as much resources to the secondary market.”
California priced $2 billion of general obligation bonds for institutions with small bumps from its Monday retail scales. New York City Municipal Water Finance Authority and the Long Island Power Authority also repriced to lower yields while the competitive bidding on gilt-edged Frederick, Maryland, and highly rated Austin, Texas, saw compelling levels.
Atlanta’s (Aa3//AA-/) airport general revenue refunding non-AMT and AMT bonds priced tight to triple-A scales.
While municipal yields have barely moved so far in September, the market has been affected “by inconsistent flows in U.S. Treasuries, as driven by the nearing slow down in Fed UST buying, large amounts of corporate bond issuance, and supply-linked price inflation,” Matt Fabian, partner at Municipal Market Analytics, said.
However, “the most important issue for municipals … remains net supply challenges for tax-exempt holders,” he said. Between the beginning of the year to Sept. 30, scheduled tax-exempt maturities and calls were $200 billion, and mutual fund and exchange-traded inflows have been $86 billion year-to-date.
“Together these exceed the $259 billion in gross, YTD tax-exempt issuance, even before current refundings in such are excluded; the product is fewer and smaller reinvestors, likely to the detriment of sector price resilience should conditions turn more meaningfully negative,” Fabian said.
And while the market was focused on Tuesday on the primary, some other participants are still suggesting with this influx of paper, muni yields may face pressure heading into the second half of the month and into year-end.
“We believe municipals may sell off as we head into year end,” Nuveen said in a weekly note. This week’s new-issue calendar is outsized, and there is a good chance that this outsized supply will continue, the report said.
“Tax-exempt rates are not compelling at their current yields. Deals may have to be cheapened to pique investor interest,” John Miller, head of municipals at Nuveen said. “However, we would view any potential short-term increase in tax-exempt rates as a buying opportunity. A large amount of cash and ultra-short tax-exempt bonds continue to wait to be reinvested at cheaper yields.”
Not the case on Tuesday, though.
Primary details
Morgan Stanley priced for institutions $2.096 billion of California (Aa2/AA-/AA/) general obligation bonds with bumps to curves. The first, $1.044 billion, saw bumps of one to five basis points: 5s of 10/2022 at 0.06% (-4), 4s of 2025 at 0.32% (-2), 5s of 2030 at 0.98%, 4s of 2036 at 1.47% (-1), 4s of 2039 at 1.57% (-5), 2.375s of 2046 at 2.44% (-2) and 2.375s of 2051 at 2.48% (-2), callable April 1, 2031.
The second, $1.052 billion, saw bumps of one to three basis points: 4s of 10/2023 at 0.11% (-3), 4s of 2026 at 0.47%, 5s of 2031 at 1.05% (-1), 4s of 2036 at 1.47% (-1), 5s of 2041 at 1.66% (-3) and 5s of 2041 at 1.49%, callable April 1, 2031.
Large blocks of California paper traded near pricing levels. California 5s of 8/2026 at 0.45% and 5s of 4/2026 at 0.41%.
Raymond James & Associates priced for the New York City Municipal Water Finance Authority (Aa1/AA+/AA+/) $631.555 million of water and sewer system second general resolution revenue bonds. The first tranche, $543.355 million Series BB, saw bonds maturing in 6/2039 with a 4% coupon yields 1.68% (-4), 5s of 2044 at 1.74% (-3), 3s of 2044 at 2.17% (-2), 2.375s of 2044 at par and 4s of 2045 at 1.94% (-2).
The second, $88.2 million, Series BB-2, had bonds maturing in 6/2027, a 5% coupon to yield 0.46%, callable in 12/15/2025.
Wells Fargo Corporate & Investment Banking priced and repriced for the Long Island Power Authority (A2/A/A/) $536.765 million of electric system general revenue bonds with seven to 12 basis point bumps. The first tranche, $361.725 million of Series 21A, saw bonds maturing in 9/2022 with a 5% coupon yields 0.08% (-7), 5s of 2026 at 0.47% (-12), 5s of 2031 at 1.15% (-9), 5s of 2036 at 1.47% (-7), 4s of 2041 at 1.77% (-10) and 4s of 2042 at 1.83% (-7).
The second, $175 million of mandatory tender bonds, Series 21B, had bonds maturing in 9/2051 with a mandatory tender date of 9/1/2026, a 1.50% coupon to yield 0.68% (-10), callable March 1, 2026.
Loop Capital Markets priced for Atlanta (Aa3//AA-/) $132.455 million airport general revenue refunding bonds, Series 2021B (non-AMT): 5s of 7/2022 at 0.07%, 5s of 2026 at 0.49%, 5s of 2031 at 1.11%, 5 of 2036 at 1.42%, 4s of 2041 at 1.75% and 4s of 2042 at 1.78%. The $164.11 million, Series2021C AMT portion: 5s of 7/2022 at 0.14%, 5s of 2026 at 0.61%, 5s of 2031 at 1.31%, 5s of 2036 at 1.66%, 4s of 2041 at 1.91% and 4s of 2042 at 1.94%.
Morgan Stanley & Co. priced for Providence St. Joseph Health Obligated Group through Washington Health Care Facilities Authority (Aa3/AA-/AA-/) $177.535 million of taxable bonds, 4s of 10/2042 at 1.20%, mandatory put not yet available.
Morgan Stanley & Co. LLC priced for the Connecticut Housing Finance Authority (Aaa/AAA//) $158.775 million of housing mortgage finance program social bonds. Bonds in 11/2022 with a 5% coupon yield 0.12%, 5s of 5/2026 at 0.53%, 5s of 11/2026 at 0.58%, 1.65s of 5/2031 at par, 1.70s of 11/2026 at par, 2s of 11/2036 at par, 2.3s of 2041 at par, 3s of 2051 at 0.88%, PAC bonds.
Citigroup Global Markets Inc. priced for the Milpitas Unified School District, California (Aa1/AA//) $150 million of general obligation bonds with 4s of 2022 at 0.07%, 4s of 2026 at 0.32%, 4s of 2031 at 0.88%, 3s of 2036 at 1.61%, 2.125s of 2041 at 2.24% and 2.25s of 2046 at 2.39%, callable Aug. 1, 2031.
Goldman Sachs & Co. LLC priced for the Nebraska Public Power District (A1/A+/A+/) $107.95 million of general revenue bonds with 5s of 1/2023 at 0.14%, 5s of 2026 at 0.45%, 5s of 2031 at 1.14% and 5s of 2032 at 1.24%.
In the competitive market, Austin (Aa1/AAA/AA+/) sold $163.095 million of public improvement and refunding bonds to Morgan Stanley & Co. Bonds in 9/2022 with a 5% coupon yield 0.07%, 5s of 2026 at 0.48%, 5s of 2031 at 1.06%, 4s of 2036 at 1.36% and 4s of 2041 at 1.59%, callable 9/1/2031.
Hennepin County, Minnesota, (/AAA/AAA/) sold $100 million of general obligation bonds to HilltopSecurities. Bonds in 9/2022 with a 5% coupon yield 0.07%, 5s of 2026 at 0.48%, 5s of 2031 at 1.06%, 4s of 2036 at 1.36% and 4s of 2041 at 1.59%, callable Sept. 1, 2031.
The Massachusetts School Building Authority (Aa3/AA/AA+) sold $344.335 million of taxable subordinated dedicated sales tax refunding bonds to J.P. Morgan Securities LLC. Details not yet available.
Frederick County (Aaa/AAA/AAA) sold $150.5 million of general obligation public facilities refunding bonds to Morgan Stanley & Co. LLC. Bonds in 10/2022 with a 5% coupon yield 0.08%, 5s of 2026 at 0.42%, 5s of 2031 at 0.99%, 1.75s of 2036 at 1.79%, 2s of 2041 at par, 2s of 2046 at 2.19% and 2s of 2051 at 2.23%.
Rosebud Strategies Diffusion Index falls
The Rosebud Strategies Municipal Credit Diffusion Index, launched earlier this year, uses social media to gather commentary on the finances of state and local governments. The index measures the difference between negative and positive sentiment found in internet mentions regarding state and local government finances. The Index rises as the difference between negative and positive sentiment rises.
This week the Index fell to 0.80 after jumping up for one week to 0.90. The Index has remained below the 1.00 level since June 28. The Index has remained below the 13-week moving average for eight of the past nine weeks. The Index, which has fluctuated in the 0.80s recently, has been slowly converging toward its 13-week moving average, which has been declining since May 24.
The Diffusion Index also remains close to, but below, the 12-month trend. A week prior saw a decline from slightly above to once again below the moving average. The signal strength — the total number of mentions, positive and negative readings combined — continues to remain below the strength seen in June of over 20,000 daily mentions.
Secondary trading and scales
New York Dorm sales tax 5s of 2022 traded at 0.07%. Minnesota 5s of 2024 at 0.18%
Maryland 5s of 2025 traded at 0.26%-0.24%.
Minnesota 5s of 2025 at 0.25% versus 0.29% Monday. Minnesota 5s of 2027 at 0.57% versus 0.56% original. New York City 5s of 2029 at 0.92%.
Minnesota 5s of 2030 at 0.89% versus 0.93%-0.91% Thursday and 0.91% original.
Minnesota 5s of 2031 at 0.98%. Connecticut special tax 5s of 2031 at 1.13%.
Maryland 5s of 2034 at 1.15%-1.14% versus 1.16% Friday.
Texas water 3s of 2038 at 1.59%-1.52% versus 1.61%-1.52% on Monday. Iowa Finance Authority 5s of 2039 at 1.41%.
New York City TFA 4s of 2039 at 1.75%-1.73% versus 1.73% Wednesday.
Los Angeles MTA 5s of 2046 at 1.46%-1.44%.
New York City 5s of 2047 at 1.90%, the same as Monday and the original.
New York City TFA 4s of 2048 at 2.00%-1.99% versus 2.02%-2.00% Friday and 2.05% original.
Refinitiv MMD’s scale showed short yields steady at 0.08% in 2022 and 0.11% in 2023. The yield on the 10-year fell one basis point 0.93% while the yield on the 30-year sat at 1.53%.
The ICE municipal yield curve showed bonds steady in 2022 at 0.08% and at 0.12% in 2023. The 10-year maturity sat at 0.95% and the 30-year yield was down one to 1.52%.
The IHS Markit municipal analytics curve showed short yields steady at 0.09% and 0.11% in 2022 and 2023. The 10-year yield fell one to 0.93% and the 30-year yield fell one to 1.52%.
The Bloomberg BVAL curve showed short yields steady at 0.07% and 0.07% in 2022 and 2023. The 10-year yield sat at 0.93% and the 30-year yield fell one to 1.52%.
The 10-year Treasury was yielding 1.276% and the 30-year Treasury was yielding 1.844% in late trading. The Dow Jones Industrial Average lost 291 points or 0.83%, the S&P 500 fell 0.60% while the Nasdaq lost 0.50%.
Inflation
While Tuesday’s consumer price index showed some relief from price pressures and offered some support for the Federal Reserve’s position that it’s temporary, “the inflation story is not over,” according to one analyst.
Calling the numbers “a temporary flattening of inflation at a high level,” Berenberg chief economist for the U.S., Americas and Asia Mickey Levy, a member of the Shadow Open Market Committee said they offer “some relief to the Fed.”
Although, he cautioned one month does not guarantee anything. “The future trajectory of inflation depends on the pace of aggregate demand in the economy, how long supply constraints persist, and how higher inflationary expectations influence price and wage setting behavior,” Levy said. “We anticipate inflation will remain elevated.”
CPI grew 0.3% in August, after a 0.5% rise in July, while the core ticked up 0.1% following a 0.3% gain in July.
Economists polled by IFR Markets expected the headline number to increase 0.4% and the core to climb 0.3%.
The “soft” read “again gives the Fed more time to decide when to taper,” said John Farawell, head trader and EVP at Roosevelt & Cross. “It seems the Delta variant continues to challenge economies both here and globally.”
The slowing of inflationary increases, he said, “may give credence to the transitory inflation argument … the stronger UST 10-year at a 1.27 acknowledges this.” But economic data will determine the Fed’s actions, Farawell said. “With the Delta variant so paramount, it seems like this is all they can do.”
The increase in the headline number was “the smallest monthly gain in seven months, suggesting price pressures may be starting to ease,” said Scott Anderson, chief economist at Bank of the West
And while this is “welcome news, consumer inflation is expected to remain elevated through the first quarter of 2022 on a year ago basis, before easing further in the second half of 2022,” he said.
Although inflation cooled somewhat in the month, Stifel Chief Economist Lindsey Piegza said, “We’re still a ways away from achieving the Fed’s more benign inflation goal, particularly with some companies suggesting further price increases are coming down the pipeline as we head into the end of the year.”
She agreed, the “report is a small victory for dovish policymakers who have remained steadfast in their message of inflation-dismissal and hesitant to insist a rollback of emergency measures is needed.”
But, Ed Moya, senior market analyst for the Americas at OANDA, said, “It looks like the Fed may have gotten inflation right.”
Should this report be the beginning of a slowdown, it “could be what is needed to justify their taper delay and suggests they have a couple more months to see how the labor market recovery unfolds.”
Market expectations, he said, are drifting toward a December taper announcement.
“Used car and truck prices declined 1.5%, a positive sign that the global chip shortage might be easing a little bit,” Moya added. “This inflation round easily went to team transitory as indexes for airline fares, used cars and trucks, and motor vehicle insurance all declined over the month.”
The cooling appears to be partly related to the Delta variant, according to Grant Thornton Chief Economist Diane Swonk, “but the level of prices remains extremely elevated, especially for big-ticket items.”
Also of concern, she said, “the basics of food and energy costs are also elevated, which is crimping consumer budgets.” These numbers will be more comforting to the Fed “than most consumers,” she said.
Also released Tuesday, small business optimism rose in August, with half of the components of the NFIB optimism index higher in the month, although fewer respondents expect conditions to improve in the next half year.
“As the economy moves into the fourth quarter, small business owners are losing confidence in the strength of future business conditions,” according to NFIB Chief Economist Bill Dunkelberg. “The biggest problems facing small employers right now is finding enough labor to meet their demand and for many, managing supply chain disruptions.”
Primary to come
The Black Belt Energy Gas District (A2///) is set to price on Wednesday $805.325 million of gas project revenue bonds, 2021 Series B. Goldman Sachs & Co. LLC.
The North Texas Higher Education Authority, Inc. is set to price $478 million of taxable student loan asset-backed notes, Series 2021-1, consisting of $118 million Series A-1A (/AA+//), $350 million Series A-1B (/AA+//), and $10 million Series 21-1B (/AA//). BofA Securities.
Illinois (/BBB+/BBB+/AA+) is set to price on Wednesday $400 million of Build Illinois Bonds sales tax revenue bonds, junior obligation taxable Series B and junior obligation tax-exempt refunding Series C. Ramirez & Co., Inc.
The Texas Transportation Commission (Aaa/AAA/AAA/) is set to price on Thursday $250 million of State of Texas general obligation mobility fund put bonds, Series 2014-B. Wells Fargo Corporate & Investment Banking.
Texas (Aaa/AAA/AAA/) is set to price on Wednesday $209.285 million of general obligation bonds, consisting of $29.03 million of water financial assistance bonds, Series 2021A, serials 2022-2046; $164.435 million of water financial assistance refunding bonds, Series 2021B, serials 2022-2038; and $15.815 million of water financial assistance refunding bonds (Economically Distressed Areas Program), Series 2021, serials 2022-2029. Raymond James & Associates, Inc.
The Kentucky Public Transportation Infrastructure Authority (A2/AA//AA+) is set to price $191.81 million of taxable first tier toll revenue bonds (Downtown Crossing Project), Series 2021A, insured by Assured Guaranty Municipal Corp., serials 2021, 2025-2033, terms 2039, 2049, 2053. Citigroup Global Markets Inc.
The East Whittier City School District, Los Angeles County, California, (Aa2///) is set to price $180 million of election of 2016 general obligation bonds, Series D. RBC Capital Markets.
The Mt. Diablo Unified School District, California (Aa3///) is set to price on Thursday $170 million of refunding and forward deliver bonds. Stifel, Nicolaus & Company, Inc.
The City of Farmington, New Mexico (Baa2/BBB//) is set to price on Wednesday $146 million of pollution control revenue refunding bonds (Public Service Company of New Mexico San Juan and Four Corners Projects). U.S. Bancorp Investments Inc.
The California Municipal Finance Authority (//A-/) is set to price on Thursday $120 million of HumanGood senior living revenue bonds. Ziegler.
Christine Albano contributed to this report.