Municipals saw yields rise across the curve, with the largest losses out long to end the week, while a higher-than-expected inflation report led to a massive U.S. Treasury selloff on the front of the curve and sent equities tumbling.
With Friday’s Consumer Price Index report, the “prospects for a quick slowdown in the rate of inflation have faded,” said Gary Pzegeo, head of fixed income at CIBC Private Wealth US.
He said the Fed will likely hike interest rates by 50 basis points and “provide forward guidance for a more rapid move toward and above neutral than previously expected.”
“Persistent inflation in the services sector could lead the Fed to anticipate a need for a higher endpoint in the policy rate,” Pzegeo said. “Markets have already moved to discount a 3% Fed Funds rate by the end of 2022 and the Fed will likely show a similar sentiment in their updated Dot Plot.”
USTs saw the two-year climb quarter point to close at 3.062%, the highest since 2008, and the CPI news moved the three-, five- and seven-year well above the 10- and the 30-year. Municipal secondary trading showed weaker prints with a heavy concentration of trading on the short end, but triple-A yields were cut four to 10 basis points two years and out with the larger moves higher out long.
Muni-to-UST ratios were at 63% in five years, 82% in 10 years and 96% in 30, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the five at 64%, the 10 at 81% and the 30 at 95% at a 4 p.m. read.
After Friday’s “surprisingly strong CPI print,” which saw inflation hit a 40-year high, investor focus will shift to next week’s FOMC meeting, according to Barclays PLC.
Coupled with last week’s robust payrolls, Barclays strategists Mikhail Foux, Clare Pickering and Mayur Patel said, “it is fair to assume that the Fed will remain quite aggressive on its tightening path as the labor market is cooling off a bit and inflation remains stubbornly high.”
On the muni-front, tax-exempts “have finally caught up to the UST selloff and their rally lost its steam, with profit-takers emerging in droves,” they noted.
“Muni ratios have been steadily moving up over the course of the week” and could go even higher, they said. While “recent wides in both ratio and yield terms are unlikely to be re-tested near-term,” they are cautious at this point.
Yield curves, Barclays strategists noted, “have been steepening, with the 20-30y part of the curve underperforming the most.”
“Aside from the COVID-19 selloff in 2020 and the subsequent market recovery,” they said, “the current slope of the 10s30s curve is at the steepest point since late 2014.”
By the end of the summer or early fall, they expect “the 10s30s curves should be much flatter than now.”
“Credit spreads have also continued moving wider, with single-As and triple-Bs underperforming higher-rated credits,” Barclays said.
High-yield names have also underperformed their high-grade counterparts, “with the stars of the rally,” such as Puerto Rico, tobacco and other liquid high-yield benchmarks, “fading and giving back some of their recent gains,” they said.
Investors will be greeted Monday with a drop in supply with the new-issue calendar estimated at $2.880 billion in $2.028 billion of negotiated deals and $852.6 million of competitive loans.
The lackluster supply stems from the upcoming Federal Open Market Committee meeting, though issuance continues to lag 2021’s pace. Bond Buyer 30-day visible supply sits at $10.57 billion.
The primary calendar for the week is led by $360 million of tax and revenue anticipation notes from Riverside County, California. Other notable deals include $301 million of revenue bonds from Salt Lake City, Utah (Aa1/AAA//) and $275 million of taxable revenue bonds from the Public Finance Authority, Wisconsin (Baa2///).
In the competitive market, $241 million of GOs from recently upgraded Nassau County, New York, (A2/AA-/A/) lead the calendar.
Minnesota 5s of 2023 at 1.51%-1.45%. Columbus, Ohio, 5s of 2023 at 1.31%-1.30%. Georgia 5s of 2024 at 1.87%.
Fairfax County, Virginia, 5s of 2025 at 1.99%. Minnesota 5s of 2025 at 1.94%. Utah 5s of 2025 at 1.92%.
Mecklenburg County, North Carolina, 5s of 2026 at 2.01%. Yale University 5s of 2027 at 2.06%-2.04%. Gilbert, Arizona, 5s of 2027 at 2.10%-2.09% versus 2.06%-2.04% Thursday. Florida PECO 5s of 2027 at 2.20%. New York City TFA 5s of 2027 at 2.25%-2.24%.
Baltimore County 5s of 2028 at 2.28%-2.26% versus 2.16% Monday. North Carolina 5s of 2032 at 2.78%.
Energy Northwest 5s of 2036 at 3%. New York City TFA 5s of 2051 at 3.95%-3.94% versus 3.55%-3.54% Tuesday.
Refinitiv MMD’s scale was cut four to 10 basis points outside of one year at the 3 p.m. read: the one-year at 1.41% (unch) and 1.75% (+4) in two years. The five-year at 2.05% (+4), the 10-year at 2.58% (+8) and the 30-year at 3.07% (+10).
The ICE municipal yield curve saw cuts of three to five basis points: 1.42% (+3) in 2023 and 1.77% (+4) in 2024. The five-year at 2.09% (+4), the 10-year was at 2.54% (+4) and the 30-year yield was at 3.06% (+5) at a 4 p.m. read.
The IHS Markit municipal curve saw cuts outside of one year: 1.43% (unch) in 2023 and 1.77% (+4) in 2024. The five-year at 2.04% (+4), the 10-year was at 2.60% (+8) and the 30-year yield was at 3.06% (+10) at 4 p.m.
Bloomberg BVAL saw four to eight basis point cuts: 1.48% (+4) in 2023 and 1.76% (+5) in 2024. The five-year at 2.08% (+6), the 10-year at 2.58% (+7) and the 30-year at 3.04% (+8) at a 4 p.m. read.
Treasuries sold off on the front end.
The two-year UST was yielding 3.062% (+25), the three-year was at 3.234% (+23), the five-year at 3.251% (+19), the seven-year 3.236% (+15), the 10-year yielding 3.156% (+11), the 20-year at 3.443% (+5) and the 30-year Treasury was yielding 3.196 (+3) at the close.
CPI has inflation at 40-year high
Tom Siomades, chief investment officer of AE Wealth Management, said Friday’s CPI figures means there’s plenty to be alarmed about.
“We are being told the economy is great, there’s tons of jobs and the inflation is only in food and gas (spoiler alert it is not) there appears to be a disconnect between what every day people are seeing and what is being put out officially,” he said. “Until the Fed gets more serious (and it will have to more aggressive, the longer this goes because it just keeps getting worse) and without effective policy measures from Washington as in a 180 degree change in energy policy this will just continue.”
“The numbers are catastrophically bad for Americans and the policymakers in Washington,” said Nancy Tengler, CEO and CIO at Laffer Tengler Investments. “So many expected the year-over-year CPI to decline instead we can in at 8.6% versus expectations of 8.3%,” she said.
“As we have been arguing this is sticky, persistent inflation that will take years to work out of the system,” she added.
And while food and energy play a large role in keeping CPI elevated here, Hugh Nickola, head of fixed income at GenTrust concurs that “inflation is proving more sticky than the market expected.”
However, he said this number doesn’t change his view that core inflation will drop meaningfully over the remainder of the year. He noted that the market is pricing in “a slightly more aggressive Fed based on this print, however, longer-term rates are moving slightly lower.”
“If the Fed had any doubt about the need for additional substantial rate hikes, they should be dispelled by this report,” said Ron Temple, head of U.S. equities at Lazard Asset Management.
“Accelerating shelter inflation, in particular, should raise a bright red flag. Housing is the single largest expense for consumers … and as home purchase prices have rocketed, renters have little choice other than to accept steep rent increases. Consumers know these cost increases will not reverse, fueling demands for higher wages to make ends meet,” he said.
“With labor markets the tightest in decades, employers have little choice other than to raise compensation, which in turn contributes to increasing services inflation,” Temple added. “The Fed faces a mighty challenge breaking this potential wage-price spiral.”
Despite this, Tengler believes “the consumer is still in decent shape though excess savings are being depleted.”
“People are working. Wages have risen though real DPI has declined close to the pandemic lows but still above 2019. The consumer cannot stay resilient forever obviously,” she said. ”But they were strong going into this debacle and we think will continue to surprise some with their resilience.”
Primary to come:
Riverside County, California, is set to price Tuesday $360 million of 2022 tax and revenue anticipation notes. J.P. Morgan Securities.
Salt Lake City, Utah, (Aa1/AAA//) is set to price Tuesday $301.06 million of public utilities revenue bonds, Series 2022, serials 2025-2042, terms 2047 and 2052. RBC Capital Markets.
The Public Finance Authority, Wisconsin, (Baa2///) is set to price Thursday $275 million of taxable federal lease revenue bonds, Series 2022. Mesirow Financial Inc.
The Aurora Highlands Community Authority Board, Colorado, is set to price Thursday $163 million of special tax revenue bonds, Series 2022. Jefferies LLC.
Nassau County, New York (A2/AA-/A/) is set to sell $240.655 million of general obligation general improvement bonds, 2022 Series A, at 10 a.m. eastern Tuesday.