Municipals were steady to weaker in spots Wednesday, while U.S. Treasury yields rose several basis points in conjunction with the release of the Federal Open Market Committee minutes that showed members split on whether interest rates will be raised further. Stocks sold off.
After cuts up to 10 basis points Tuesday, triple-A yields were cut up to another four basis points, depending on the scale and UST yields rose two to five basis points.
Ratios rose slightly. The two-year muni-Treasury ratio Wednesday was at 73%, the three-year at 75%, the five-year at 74%, the 10-year at 73% and the 30-year at 92%, according to Refinitiv MMD’s 3 p.m. ET read. ICE Data Services had the two-year at 73%, the three-year at 76%, the five-year at 73%, the 10-year at 74% and the 30-year at 93% at 4 p.m.
“We have seen cuts along the curve so far this week, reflecting some catch-up to recent Treasury moves and overall market weakness,” Shaun Burgess, portfolio manager and analyst at Cumberland Advisors said Wednesday.
“The market is oddly mixed, with weakness on the new-issue side contrasted with good bids on the Silicon Valley Bank and Signature Bank lists being put out,” he said.
More outflows from mutual funds were reported Wednesday by the Investment Company Institute, showing investors pulled another $137 million out of municipal bond mutual funds in the week ending May 17, after $290 million of outflows the previous week. Exchange-traded funds saw outflows to the tune of $158 million after $258 million of inflows the week prior.
In the primary market Wednesday, Barclays Capital priced for the Metropolitan Washington Airports Authority (Aa3/AA-/AA-/) $437.455 million of AMT airport system revenue and refunding bonds, Series 2023A, with 5s of 10/2024 at 3.88%, 5s of 2028 at 3.75%, 5s of 2033 at 3.81%, 5s of 2038 at 4.25%. 5.25s of 2043 at 4.37%, 5.25s of 2048 at 4.45%, 5.25s of 2053 at 4.50% and 4.5s of 2053 at 4.75%, callable 10/1/2032.
Jefferies priced for the Pennsylvania Housing Finance Agency (Aa1/AA+//) is set to price $389.065 million of non-AMT single-family mortgage revenue social bonds, Series 2023 -142A, with all bonds pricing at par – 3.4s of 10/2028, 4s of 4/2033, 4.05s of 10/2033, 4.85s of 10/2043 and 4.9s of 10/2050 – except 4.5s of 10/2038 at 4.60%, 5s of 10/2043 at 4.85% and 5.5s of 10/2053 at 4.25%.
Barclays Capital priced for San Antonio, Texas, (Aa3/A+/AA-/) $100 million of electric and gas systems variable rate junior lien revenue and refunding bonds, Series 2023, with 3.65s of 2/2053 with a mandatory put date of 12/1/2026 at par, callable 9/1/2026.
Rate hikes less certain
The FOMC minutes showed the need for further interest rate hikes is “less certain,” members “generally” believe, as the banking crisis and the lagging impact of previous rate increases work their way through the economy.
“Participants agreed that it would be important to closely monitor incoming information and assess the implications for monetary policy,” the minutes state.
Many members wanted to “retain optionality” on policy, the minutes say. Some expect inflation will be “unacceptably slow” in dropping to 2%, and thus more tightening will be needed “at future meetings.”
Still “several participants” said if the economy follows “their current outlooks, then further policy firming after this meeting may not be necessary.”
The factors that will help members determine policy include “the degree and timing with which cumulative policy tightening restrained economic activity.” Some members saw evidence prior “tightening was beginning to have its intended effect.
The panel is “very uncertain” about the impact of the banking crisis on tightening credit and cutting inflation, which will weigh on their decisions.
The minutes show the FOMC sees inflation as “substantially elevated,” with tight labor markets and modest economic expansion.
A few members saw upside risk to growth, but most saw downside risk.
Munis see some positive factors
There are several positive factors for munis in the coming months, said Nick Vendetti, municipal bond fund portfolio manager with Allspring Global Investments.
There are no indications that the technical factors coming to fruition in the summer will slow down now, he said. June 1 and July 1 will be “big maturity and coupon payment dates,” where “a lot of money needs to be reinvested,” he said.
“The summer tends to be a great time to own bonds [but] a little bit more difficult time to buy bonds,” he said. “Now is a great entry point for investors to ride that summer wave” due to those strong technical factors.
Vendetti said there will be “continued flows into municipal bond products and fixed-income products in general.”
An “infinite amount has flown into money market funds, and at some point, that money is going to have to go somewhere else,” he said, noting the “first step for a lot of that money is going to be into fixed income.”
For high-income taxpayers, he said much of that money will be in tax-exempt portfolios.
“That’s going to be largely supportive of the market through the next three months from a demand perspective, and that’s going to be met with continued very low supply,” he said.
Vendetti added that issuers have “certainly benefited from the fact that we wrote a gigantic stimulus check.”
“A lot of that money showed up on their balance sheets, and that’s allowed them to delay debt borrowings for a little while, and they’re going to be able to continue to delay on that list for the next three months largely,” he said.
Vendetti said issuers are also still coming to terms with “what it means to issue debt in a significantly higher rate environment. How are they going to structure it? What are their debt carrying costs going to look like so on and so forth?”
Maryland 5s of 2024 at 3.31%. North Carolina 5s of 2024 at 3.40%-3.34%. Connecticut 5s of 2025 at 3.36% versus 2.93% on 5/16.
Georgia 5s of 2028 at 2.81% versus 2.78% Tuesday and 2.34% on 5/11. Triborough Bridge and Tunnel Authority 5s of 2029 at 2.89%-2.82%. California 5s of 2030 at 2.76%-2.77% versus 2.40% on 5/2.
Triborough Bridge and Tunnel Authority 5s of 2032 at 2.71%-2.69%. Wisconsin 5s of 2034 at 2.85% versus 2.80%-2.81% Tuesday and 2.46% on 5/15. NYC TFA 5s of 2034 at 3.04%-3.00% versus 2.57% on 5/9 and 2/55%-2.56% on 5/3.
NYC TFA 5s of 2045 at 3.97%-3.98% versus 3.63% on 5/11. LA DWP 5s of 2052 at 3.91% versus 3.64% on 5/9.
Refinitiv MMD’s scale was cut: The one-year was at 3.31% (unch) and 3.15% (unch) in two years. The five-year was at 2.80% (+3), the 10-year at 2.70% (+3) and the 30-year at 3.62% (unch) at 3 p.m.
The ICE AAA yield curve was changed up to two basis points: 3.35% (-2) in 2024 and 3.19% (flat) in 2025. The five-year was at 2.80% (-1), the 10-year was at 2.72% (+1) and the 30-year was at 3.68% (-2) at 4 p.m.
The IHS Markit municipal curve was cut up to four basis points: 3.30% (unch) in 2024 and 3.15% (unch) in 2025. The five-year was at 2.80% (+3), the 10-year was at 2.69% (+3) and the 30-year yield was at 3.62% (unch), according to a 4 p.m. read.
Bloomberg BVAL was cut up to two basis points: 3.15% (unch) in 2024 and 3.04% (unch) in 2025. The five-year at 2.72% (+2), the 10-year at 2.64% (+1) and the 30-year at 3.65% (unch) at 4 p.m.
Treasuries were weaker.
The two-year UST was yielding 4.357% (+2), the three-year was at 4.046% (+5), the five-year at 3.801% (+4), the 10-year at 3.733% (+3), the 20-year at 4.116% (+3) and the 30-year Treasury was yielding 3.971% (+2) at 4 p.m.
FOMC minutes redux
Since the May FOMC meeting, Morgan Stanley Research strategists said “communication from policymakers has shown a clear division on the path forward for rates.”
The FOMC meeting minutes “show a committee that is split on whether there will be need to raise interest rates further,” according to James Knightley, chief international economist at ING.
Some members, he said, “felt that based on the news flow to date, getting inflation back to target ‘could continue to be unacceptably slow,’ which would mean ‘additional policy firming would likely be warranted at future meetings.'”
However, Knightley noted that “several participants noted that if the economy evolved along the lines of their current outlooks, then further policy firming after this meeting may not be necessary.”
He said “several” probably exceeds “some” but noted the key takeaway is that “many participants focused on the need to retain optionality after this meeting- i.e. data dependency.”
Morgan Stanley Research strategists concurred, saying “What was agreed upon [from the FOMC] is the need to retain flexibility and be data dependent.”
They believe “it won’t be difficult to get consensus on a June pause if it is coupled with the promise that further hikes could be needed if the data do not cooperate.”
In terms of the economic backdrop, Knightley said “inflation remained ‘unacceptably high’; although participants judged that risks to the outlook for economic activity were weighted to the downside.”
Federal Reserve staff, he said, “continue to forecast that ‘the effects of the expected further tightening in bank credit conditions, amid already tight financial conditions, would lead to a mild recession starting later this year, followed by a moderately paced recovery.'”
“A substantial portion of the minutes were once again dedicated to monitoring the impact of tighter lending standards on economic activity, but there seemed to be less concern of banking instability than in the prior minutes,” according to Morgan Stanley Research strategists.
The minutes showed that “overall, the credit quality of most businesses and households remained solid but deteriorated somewhat for businesses with lower credit ratings and for households with lower credit scores,” they said.
“Further, some participants noted that ‘developments in the banking sector appeared to have had only a modest effect so far on credit availability for firms,'” they said.
Several participants do not think “tighter credit availability will necessarily lead to lower inflation, given that both supply and demand for credit are moderating,” Morgan Stanley Research strategists said.
Participants, they said, “gauged risks to inflation to the upside, though less so compared with March.”
The Fed acknowledged that “a ‘timely’ increase in the U.S. debt ceiling is essential [to] “‘avoid the risk of severely adverse dislocations in the financial system and the broader economy,” according to Knightly.
Their concerns will be higher now, he said.
The tone of the minutes, Knightley said “reflects the balance of the Fed comments we have subsequently heard.”
Fed Chair Jerome Powell seems to be leaning toward a pause, but “the hawks are still pushing for more action.”
Others, he noted, “are more open to the idea of a pause given the 500bp of hikes enacted since March last year has been the most aggressive and rapid period of monetary policy tightening for 40 years.”
With “monetary policy operating with long lags before it really has an impact on the economy there are several FOMC members making the case, similarly to Jerome Powell, that they considering skipping the June meeting and reconsider the situation in July,” according to Knightley.
The market, he said, “has significantly repriced the outlook for Fed policy.”
Just two weeks ago, market participants were “looking at rates having peaked and a first 25bp rate cut coming in September with nearly 100bp of cuts by the January 2024 FOMC meeting,” he said.
Now, Knightley said “there is a 30% chance of a 25bp hike and a 65% chance by the July FOMC meeting.”
He added cuts are still priced before the end of 2023, but nowhere near to the same extent.
What happens next “will come down to the data and events, such as inflation, jobs, the debt ceiling showdown and what is happening with the state of the banking sector and the impact on the flow of credit,” he said.
The June decision for many FOMC participants, Morgan Stanley Research strategists noted, may come down to the May consumer price index data.
Morgan Stanley strategists forecast the May core CPI to increase 0.30% for the month, slowing from the pace in April, they said.
They think the May CPI print will “show a slowdown in core services, which includes our expectation that the downward trend in housing resumes.”
Policymakers in particular, they noted, “will be focused on non-housing services inflation so as usual, the devil will be in the details.”
Primary on Tuesday:
Wells Fargo Bank priced for the Department of Water and Power for the city of Los Angeles (Aa2/AA+/AA/) $495.530 million of water system revenue bonds, 2023 Series A, with 5s of 7/2023 at 3.30%, 5s of 2028 at 2.68%, 5s of 2033 at 2.74%, 5s of 2038 at 3.33%, 5s of 2043 at 3.66%, 5s of 2049 at 3.94% and 5.25s of 2053 at 3.93%, callable 7/1/2033.
Primary to come:
The New Jersey Transportation Trust Fund Authority (A2/A-/A/A/) will price $674 million of Series AA transportation program bonds on Thursday. Jefferies.
The authority (A2/A-/A/) is also set to price $262.780 million of Series A transportation system bonds on Thursday. Jefferies.
Christine Albano contributed to this story.