Municipals were weaker Friday ahead of next week’s heavier new-issue calendar. U.S. Treasury yields rose and equities were mixed.
Triple-A benchmark yields were cut up to five basis points, depending on the scale, while U.S. Treasury yields rose three to eight basis points, pushing the two-year UST above 4.50%.
The three-year muni-UST ratio was at 53%, the five-year at 54%, the 10-year at 60% and the 30-year at 86%, according to Refinitiv MMD’s 3 p.m. ET read. ICE Data Services had the three at 54%, the five at 56%, the 10 at 61% and the 30 at 89% at 4 p.m.
“The bond market moved to the Federal Reserve’s view: last week, the seemingly dovish post-Federal Open Market Committee conference call caused the fed funds futures market to insist on a 4.90% terminal target but, this week, following an outsized January employment report, the market quickly switched to a target of 5.15%, converging to the Fed’s Dec ’22 dot plot,” according to BofA strategists.
The disagreement “between the market and the Fed regarding the timing of the first rate cut should persist for many months,” they said.
This disagreement, and the evolution of it, they said, “will largely determine rate levels and yield curve dynamics for the foreseeable future.”
The BofA strategists noted Fed Chair Jerome Powell’s “apparent downplaying of the importance of the jobs report, and emphasis of inflation’s decline.”
UST rates have climbed some, but overall, they should continue to remain range-bound, they said.
Muni rates also “backtracked slightly, but as expected, credit spreads, especially in the BBB-rated index and high-yield muni index narrowed quite a bit,” they said.
“The sequentially strong jobs reports for the past few months enhanced the view that a recession likely will be postponed, if it happens at all,” the BofA strategists noted.
That may lead to some “further rise of AAA rates,” they said, “though inflation’s trajectory holds the key: any low print likely will lead to a rally for both rates and credit markets in the current environment.”
The long end of the UST curve “has not moved that much this week, but the front end has come under pressure, and the 2s5s and the 2s10s UST curves are inverted by a significant 65bp and 85bp, respectively,” said Barclays strategists Mikhail Foux, Clare Pickering and Mayur Patel.
Although the UST curve inverts at times, they said, the muni curve rarely has, “at least until now.”
“This peculiar shape of the muni yield curve has created a conundrum for investors, as all high-quality municipal bonds, with the possible exception of the long end, have become quite rich,” they said.
Even though the yield curve is “flattening over time, and the long end is starting to perform, it might also have some issues,” the Barclays strategists added.
If “the SIFMA index gets close to the yields of long-dated bonds for a prolonged time,” they said, “TOB funding mechanisms might not be able to function properly, and there might be some unwinds.”
Responding to ballooning VRDN inventories, “the SIFMA index has moved higher than the yields of 20y IG bonds this week, which might put some additional pressure on longer-dated bonds,” they noted.
The BofA strategists do not expect a meaningful repricing of muni rates unless the 10-year Treasury moves above 4%. They believe muni credit will improve by midyear, perhaps returning to mid-August 2022 levels.
“Credit spread widening from mid-August 2022 to the end of the year was based on extra 2% rate hikes during those months and the general belief that the U.S. economy was heading into a recession in 1Q23 that would last through much of the year,” they said.
“Now that the economy’s proven to be a lot more resilient, and the probability of a soft landing rises, taking back half of the entire widening should be in the cards,” the BofA strategists said.
Calendar stands at $7.2B
Investors will be greeted Monday with a new-issue calendar estimated at $7.226 billion.
There are $5.852 billion of negotiated deals on tap and $1.375 billion on the competitive calendar.
The negotiated calendar is led by $2.1 billion of tax-exempt general revenue bonds from the Regents of the University of California, followed by $500 million of electric system revenue bonds from the Salt River Project Agricultural Improvement and Power District, Arizona, and $456 million of revenue refunding bonds from the San Francisco City and County Airport Commission.
The Washington Suburban Sanitary District, Maryland, leads the competitive calendar with the sale of $340 million of consolidated public improvement bonds of 2023.
Secondary trading
Massachusetts 5s of 2024 at 2.62% versus 2.64% Wednesday. NYC TFA 5s of 2025 at 2.42% versus 2.51% Thursday. California 5s of 2026 at 2.28%.
Texas Water Development Board 5s of 2030 at 2.27%. Hennepin County, Minnesota, 5s of 2030 at 2.26%. California 5s of 2032 at 2.23%-2.20% versus 2.18% Tuesday.
Mecklenburg County, North Carolina, 5s of 2036 at 2.80%. NYC TFA 5.25s of 2037 at 3.11%.
Fort Worth ISD, Texas, 5s of 2048 at 4.10% versus 4.06% Wednesday and 3.98% original on 2/3. The Massachusetts Transportation Fund 5s of 2052 at 3.60% versus 3.44% on 2/2.
AAA scales
Refinitiv MMD’s scale was cut up to four basis points. The one-year was at 2.61% (+3) and 2.35% (unch) in two years. The five-year was at 2.12% (+3), the 10-year at 2.24% (+3) and the 30-year at 3.28% (+4) at 3 p.m.
The ICE AAA yield curve was cut three to five basis points: 2.70% (+5) in 2024 and 2.46% (+5) in 2025. The five-year was at 2.16% (+3), the 10-year was at 2.23% (+3) and the 30-year yield was at 3.31% (+3) at 4 p.m.
The IHS Markit municipal curve was cut two to four basis points: 2.60% (+2) in 2024 and 2.35% (+2) in 2025. The five-year was at 2.13% (+4), the 10-year was at 2.28% (+4) and the 30-year yield was at 3.28% (+4) at a 4 p.m. read.
Bloomberg BVAL was cut up three to five basis points: 2.65% (+4) in 2024 and 2.36% (+3) in 2025. The five-year at 2.17% (+3), the 10-year at 2.30% (+4) and the 30-year at 3.33% (+5).
Treasuries were weaker.
The two-year UST was yielding 4.525% (+3), the three-year was at 4.209% (+5), the five-year at 3.929% (+6), the seven-year at 3.855% (+6), the 10-year at 3.743% (+7), the 20-year at 3.957% (+6) and the 30-year Treasury was yielding 3.7823% (+8) at 4 p.m.
Primary to come:
The Regents of the University of California (Aa2/AA/AA/) is set to price Wednesday $2.128 billion of general revenue bonds, consisting of $1.732 billion of tax-exempt bonds, 2023 Series BN; $52.345 million of taxables, 2023 Series BO; and $344.380 million of variable rate demand notes, 2023 Series BP. Morgan Stanley & Co.
The Salt River Project Agricultural Improvement and Power District, Arizona, (Aa1/AA+//) is set to price Wednesday $500 million of Salt River Project electric system revenue bonds, 2023 Series A, serials 2029-2032 and 2043, terms 2047 and 2050. J.P. Morgan Securities.
The San Francisco City and County Airport Commission (A1//A+/) is set to price Wednesday for the San Francisco International Airport $456.185 million of second series revenue refunding bonds, consisting of $376.490 million of AMT bonds, Series 2023A, serials 2023-2030, 2033 and 2038, and $79.695 million of non-AMT/governmental purpose bonds, Series 2023B, serial 2043. BofA Securities.
The Lower Colorado River Authority (/A/A+/) is set to price Wednesday $433.415 million of transmission contract refunding revenue bonds (LCRA Transmission Services Corporation Project), Series 2023, serials 2024-2043, terms 2048 and 2053. RBC Capital Markets
The Tarrant County Hospital District, Texas, (Aa1//AA/AAA) is set to price Thursday $412.160 million of limited tax bonds, Series 2023, serials 2024-2043, terms 2048 and 2053. Siebert Williams Shank & Co.
Pasco County, Florida, (A1/A//) is set to price Tuesday $344.405 million of capital improvement cigarette tax allocation bonds (H. Lee Moffitt Cancer Center Project), Series 2023A, serials 2025-2054. BofA Securities.
The Prosper Independent School District, Texas, (Aaa//AAA/) is set to price Tuesday $250 million of PSF-insured unlimited tax school building bonds, Series 2023. Piper Sandler & Co.
The Houston Independent School District, Texas, (Aaa/AAA//) is set to price Wednesday $163.250 million of limited tax refunding bonds, consisting of $98.680 million of PSF-insured bonds, serials 2024-2038, and $64.570 million on non-PSF-insured bonds, serials 2027-2032. HilltopSecurities.
Dallas, Texas, (/AAA/AA/) is set to price Tuesday $160.235 million of waterworks and sewer system revenue refunding bonds, Series 2023A, serials 2024-2043, terms 2047 and 2052. Stifel, Nicolaus & Co.
The California Pollution Control Financing Authority (Baa3//BBB/) is set to price Thursday $158.110 million of AMT water furnishing revenue bonds (Poseidon Resources (Channelside) LP Desalination Project), Series 2023. Morgan Stanley & Co.
The Racine Unified School District, Wisconsin, (Aa3///) is set to price Tuesday $122.450 million, consisting of $94.540 million of refunding bonds, Series GORB, serials 2034-2043, and $27.910 million of bonds, Series GOPN, serials 2029-2033. Baird.
Competitive:
The Washington Suburban Sanitary District, Maryland, (Aaa/AAA/AAA/) is set to sell $340 million of consolidated public improvement bonds of 2023, at 10:15 a.m., Eastern, Tuesday.
The Bend-La Pine Administrative School District 1, Oregon, (Aa1///) is set to sell $100 million of GOs, Series 2023, at noon, Eastern, Wednesday.