Bonds

Supply scarcity, UST rally propelling munis

Municipals saw healthy secondary trading on the short-end of the yield curve Wednesday, while U.S. Treasuries saw larger gains out long and equities improved after the Federal Open Market Committee minutes showed an expectation of slowing rate hikes.

The improved tone continued Wednesday, with triple-A muni yields falling up to nine basis points on the one-year, depending on the curve, while UST saw the largest gains out long, eight basis points lower.

Ratios rose slightly out long as a result. The three-year muni-UST ratio Tuesday was at 63%, the five-year at 76%, the 10-year at 77% and the 30-year at 96%, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the three at 63%, the five at 68%, the 10 at 77% and the 30 at 95% at a 3 p.m. read.

Markets took the news that it will soon be appropriate to increase the Fed funds target rate at a slower pace as good news. Most Federal Reserve officials believe rate hikes will soon slow, according to the minutes of the Nov. 1-2 FOMC meeting.

Some of the participants acknowledged the terminal rate needed to meet the Fed’s dual mandate will be “somewhat higher than they had previously expected.”

“A substantial majority of participants judged that a slowing in the pace of increase would likely soon be appropriate,” the minutes said. By slowing the hikes, many officials felt they’d have time to assess progress, given that monetary policy works with a lag.

“The uncertain lags and magnitudes associated with the effects of monetary policy actions on economic activity and inflation were among the reasons cited regarding why such an assessment was important,” according to the minutes.

In recent appearances, a number of Fed presidents and governors have said the next hike could be 50 basis points, which is what the markets have priced in.

A few officials wanted to see “more concrete signs that inflation pressures were receding significantly” before slowing the pace of hikes.

“Minutes from the Fed’s November meeting underscore the challenges facing the FOMC in properly calibrating monetary policy,” noted Morning Consult Chief Economist John Leer. “To put it bluntly, they don’t know if, how and when their interest rate increases will start to affect the labor market, inflation and overall economic activity. This type of uncertainty increases the likelihood of continuing to raise rates until there’s direct evidence of a slowdown in inflation and employment, which is likely to be too late to achieve a soft landing.”

The Fed is “nowhere near done, even as the committee members consider the possibility of recession, they’re still moving along with aggressive rate hikes and balance sheet reduction,” said Jose Torres, senior economist at Interactive Brokers. “Moving down to 50 basis points increases from 75 may seem like relief; however, 50 basis points is still a lot of tightening when considering what they’ve done already.”

Supply scarcity, UST rally propelling munis
Supply picks up in the week of Nov. 28, but not substantially so, and Connecticut and Massachusetts lead a $4.621 billion post-holiday calendar with $2.867 billion of negotiated deals and $1.754 billion of competitive loans.

Connecticut, tops the negotiated calendar with $900 million of general obligation bonds, $250 million of which are social bonds and $250 million are refundings. The state just saw its rating from S&P Global Ratings boosted to AA-minus from A-plus, with the agency citing improved financials and building of high reserve levels.

Massachusetts will sell GOs in two competitive deals Tuesday.

Bond Buyer 30-day visible supply sits at $10.76 billion while Bloomberg data shows $15.642 billion of net negative supply.

“Municipals are being propelled by limited supply conditions but also by a UST rally that is creating more favorable ratios,” said Kim Olsan, senior vice president at FHN Financial. She noted that upcoming December redemptions — expected to total $26 billion — are coming up against about $10 billion of forward 30-day issuance projections.  

“Current ratios are below the annual average but absolute yields remain high enough to entice steady flows,” she said.

“Buyers have been forced into narrower spreads — in many cases flat or through implied AAA spot yields on the shorter end of the curve,” she said. Olsan pointed to low AA-rated GOs due out to five years that would normally trade plus-10-15/AAA are trading with single-digit spreads “as demand exceeds available float.”    

Olsan noted that a 10-year 3% AA-rated muni “carries a near-5% taxable equivalent yield, while longer-term 4s have held value (despite posting an impressive rally themselves) at discounted yields, equating to TEYs that approach 7%.” 

“MSRB data indicate on a rolled up basis the recent rally is creating more net dealer-to-customer sells than dealer buys, albeit on reduced total volume,” she said. The first two weeks of November drew an average daily secondary total of $13 billion, a figure that has declined to $10 billion in the latest week. 

Bid tallies via Bloomberg bids wanteds have fallen by 6% in that same period — “a sign that perhaps redemption pressure is easing but also tax swapping that gained favor earlier in the year may be subsiding as well,” Olsan said. Bids wanteds totaled $3.326 billion on Monday and Tuesday. 

The rally this month which has taken yields lower by as much as 50 basis points has negated some of the losses booked through October. November returns for the Bloomberg Municipal Index are at positive 3.87% through Tuesday, moving total 2022 losses to 9.49%.   

Near-term outlooks “suggest a lower ratio/higher yield combination could sustain flows into early 2023,” she said.

Mutual fund and money market outflows
Outflows continued with the Investment Company Institute reporting investors pulled $1.084 billion from mutual funds in the week ending Nov. 16 after $3.188 billion of outflows the previous week.

Exchange-traded funds saw large inflows at $2.430 billion after $942 million of inflows the week prior, per ICI data.

Informa: Money market munis see outflows again
Tax-exempt municipal money market funds saw $946.3 million of outflows the week ending Monday, bringing the total assets to $111.79 billion, according to the Money Fund Report, a publication of Informa Financial Intelligence. The prior week they saw $315.4 million of outflows.

The average seven-day simple yield for all tax-free and municipal money-market funds fell to 1.63%,

Taxable money-fund assets saw inflows of $7.22 billion to end the reporting week at $4.46 trillion of total net assets after $7.23 billion of inflows the week prior. The average seven-day simple yield for all taxable reporting funds rose to 3.41%.

Secondary trading:
Anne Arundel County, Maryland, 5s of 2023 at 2.60%. California 5s of 2023 at 2.52%-2.47%. Maryland 5s of 2023 at 2.53%-2.51%. San Francisco City & County 5s of 2023 at 2.49%-2.43%. Delaware 5s of 2023 at 2.52%.

Washington 5s of 2024 at 2.64%. Los Angeles DWP 5s of 2025 at 2.67%-2.63%. Massachusetts 5s of 2028 at 2.72%.

California 5s of 2035 at 3.22%. Montgomery County, Maryland, 5s of 2036 at 3.22%-3.21% versus 3.35% a week ago.

New York Dorm PIT 5s of 2046 at 4.10% versus 4.15%-4.11% Tuesday. Los Angeles DWP 5s of 2047 at 3.82%. NYC waters 5s of 2047 at 4.11%-4.10% versus 4.15%-4.12% Tuesday. Texas waters 5s of 2057 at 3.90%.

AAA scales
Refinitiv MMD’s scale was bumped up to seven basis points: the one-year at 2.61% (-7) and 2.65% (-4) in two years. The five-year at 2.73% (-3), the 10-year at 2.86% (-2) and the 30-year at 3.59% (unch).

The ICE AAA yield curve was bumped up to nine basis points: 2.64% (-9) in 2023 and 2.68% (-5) in 2024. The five-year at 2.73% (-4), the 10-year was at 2.86% (-4) and the 30-year yield was at 3.66% (-3) at a 3 p.m. read.

Bloomberg BVAL was bumped up to five basis points: 2.64% (-5) in 2023 and 2.68% (-4) in 2024. The five-year at 2.73% (-2), the 10-year at 2.83% (-3) and the 30-year at 3.56% (-2) at 3 p.m.

Treasuries improved.

The two-year UST was yielding 4.486% (-3), the three-year was at 4.235% (-5), the five-year at 3.895% (-5), the seven-year 3.820% (-6), the 10-year yielding 3.708% (-5), the 20-year at 3.978% (-8) and the 30-year Treasury was yielding 3.745% (-8) at 3:20 p.m.

Negotiated calendar:
Connecticut (Aa3/AA-/AA-/AA) is set to price on Wednesday $900 million of general obligation bonds in three series: $400 million of GOs, $250 million of social GO bonds, and $250 million of GO refunding bonds. Citigroup Global Markets Inc. 

The San Jose Financing Authority (/AAA/AAA/AAA) is set to price on Thursday $275.575 million of wastewater revenue green bonds Climate Bond Certified, serials 2023-2042; terms 2047, 2052. Wells Fargo Bank, N.A. 

The Texas Department of Housing and Community Affairs (Aaa/AA+//) is set to price on Thursday $190 million of single-family mortgage revenue bonds (non-AMT), serials 2024-2034; terms 2037, 2042, 2047, 2052, 2053 (PAC bonds). Barclays Capital Inc.

School District Number 58, DuPage County, Illinois, (Downers Grove) (/AA//) is set to price Wednesday $130.92 million of general obligation school bonds, serials 2023-2041. Oppenheimer & Co.

The School Board of Sarasota County, Florida, (Aa2///) is set to price $123.465 million of certificates of participation on Tuesday. Raymond James & Associates, Inc.

The New Jersey Turnpike Authority (A1/AA-/A+/) is set to price on Tuesday $115.035 million of turnpike revenue refunding bonds, serials 2024-2030. RBC Capital Markets

The Aurora Highlands Community Authority Board, Aurora City, Adams County, Colorado, (NR/NR/NR/NR) is set to price on Wednesday $103.788 million of special tax revenue capital appreciation bonds. Piper Sandler & Co. 

Competitive: 
The commonwealth of Massachusetts (Aa1/AA/AA+/) is set to sell $200 million of general obligation bonds at 10:15 am. Eastern Tuesday. The issuer will also sell $500 million of GOs at 10:30 a.m. Tuesday. 

Alexandria, Virginia, (/AAA//) is set to sell $144.175 million of unlimited tax general obligation bonds at 10:30 a.m. Tuesday.

Westchester County, New York, is set to sell $142.375 million of tax-exempt GOs at 11 a.m. Thursday. The issuer will also sell $71.662 million of taxable general obligations bonds at 11:30 a.m. Thursday.

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