Bonds

Primary deals scooped up while a firmer tone sets in pre-FOMC

Municipals were slightly firmer Tuesday as new-issues from the New York Thruway Authority and the Massachusetts Development Finance Agency’s Children’s Hospital were well-received. U.S. Treasuries were mixed as were equities ahead of the Fed rates decision Wednesday.

Triple-A yields were bumped one to four basis points, depending on the curve, while UST saw yields fall rise on the short end and fall 10-years and longer.

The two-year muni-to-Treasury ratio Tuesday was at 62%, the three-year at 62%, the five-year at 60%, the 10-year at 60% and the 30-year at 84%, according to Refinitiv Municipal Market Data’s 3 p.m. EST read. ICE Data Services had the two-year at 64%, the three-year at 63%, the five-year at 62%, the 10-year at 60% and the 30-year at 82% at 3:30 p.m.

Few participants expect any big surprises after Wednesday’s Federal Open Market Committee meeting, but all eyes and ears will pivot to Federal Reserve Chair Jerome Powell’s press conference following it.

“This week’s Fed meeting should be relatively tame,” said Cooper Howard, a fixed-income strategist at Charles Schwab. There’s virtually no chance of a rate hike this week but what will be important to watch are the signals about when rate cuts will start and what the plan with the balance sheet is.”

Howard said he “would not be surprised if there are mentions or hints of tapering which will likely be a signal that rate cuts may occur soon,” Howard said, noting he believes there will be three to four cuts this year, the first of which will happen in May.

“The expectation is that rates are going to be cut,” said Scott Diamond, co-head of the municipal fixed income team at Goldman Sachs. “So anytime you have a backup in yields, you probably want to lean into that market to try to take advantage of that because by the end of the year yield should be lower.”

The backdrop for the municipal asset class is a positive one, he said.

“Yields are attractive, and there’s going to be a lot of demand and there’s not going to be a lot of bonds,” he said.

In 2022, it was “pretty much a given” that yields would move higher as the Fed was raising rates. In 2023, “everybody was so focused on when the Fed was going to stop and then cut rates and that created tremendous volatility,” as seen in Q3 and Q4 of that year, Diamond said.

For this year, there’s the question of when the Fed will start cutting rates.

Preliminary numbers for January volume are showing an increase over 2023. For 2024, most muni firms expect issuance to rise year-over-year, with totals ranging from a low of $375 billion from Ramirez & Co. to a high of $425 billion and $450 billion from MMA.

HilltopSecurities, which initially predicted issuance would be at $330 billion of 2024, has since revised its forecast upward to $420 billion following improved macroeconomic conditions.

Anything more than a “modest rebound” is unlikely, thouhg, said Matt Fabian, a partner at Municipal Market Analytics.

Sylvia Yeh, co-head of the municipal fixed income team at Goldman Sachs, concurred, saying supply will grow “marginally.”

With the upcoming election, issuance will be more front-loaded than back-loaded, with several big deals already coming to market so far this year, she said.

In the primary market Tuesday, J.P. Morgan priced and repriced for institutions $1.027 billion of Series P general revenue bonds from the New York State Thruway Authority (A1/A+//), with yields bumped up to 13 basis points from Monday’s retail offering: 5s of 1/2025 at 3.07% (-2), 5s of 2029 at 2.59% (-4), 5s of 2034 at 2.72% (-6), 5s of 2039 at 3.23% (-13), 5s of 2044 at 3.64% (-7), 5s of 2049 at 3.92% (-8) and 5.25s of 2054 at 3.95% (-13), callable 1/1/2034.

J.P. Morgan priced and repriced for the Massachusetts Development Finance Agency (Aa2/AA//) $436.565 million of Children’s Hospital Issue revenue bonds, Series 2024 T, with yields bumped 25 basis points out long from Tuesday’s preliminary pricing: 5s of 3/2034 at 2.71% (-5), 4s of 2054 at 4.16% (-25) and 5.25s of 2054 at 3.86% (-25), callable 3/1/2034.

Meanwhile, demand will be “fierce, as investors deal with ‘FOMO’ and decide to start putting money to work, so they don’t feel as if they have missed out,” Yeh said.

This could translate into further growth in separately managed accounts and exchange-traded funds and further inflows into mutual funds, she noted.

Inflows into muni mutual funds “have lately been better but still remain just barely positive,” at only $300 million last week for funds, a similar estimate for exchange-traded fund receipts, Fabian said.

Primary dealer inventories, “depleted perhaps by the Citi winddown,” fell to their lowest non-VRDO total at $7.5 billion on Jan. 10,  which is “the least dealer capital invested since last March,” he said.

Unsurprisingly, the ratio curve has flattened out once more: “a compelling signal of investor indecision,” according to Fabian.

“Still, overall trading flows have been steadily improving all year; last week, for the first time, led by more institutionally sized trading blocks, the average customer bid size jumping above [$400,000] for the first time since last summer,” he said.

Secondary trading
New Hampshire 5s of 2025 at 2.79%. NY State Urban Development Corp. 5s of 2026 at 2.80%-2.75% versus 2.73% on 1/12. University of California 5s of 2026 at 2.65% versus 2.83%-2.76% original on Thursday.

Minnesota 5s of 2028 at 2.52%-2.50% versus 2.57%-2.54% Wednesday. California 5s of 2029 at 2.47%-2.46% versus 2.39% on 1/17. DC 5s of 2030 at 2.56%.

California 5s of 2033 at 2.50%-2.49% versus 2.57% on 1/23. University of California 5s of 2034 at 2.40% versus 2.42$-2.40% Monday and 2.52% original on Thursday. NYC TFA 5s of 2035 at 2.67%.

Washington 5s of 2049 at 3.76% versus 2.96% original on Wednesday. Massachusetts 5s of 2053 at 3.90% versus 3.95% Monday and 4.01% Wednesday.

AAA scales
Refinitiv MMD’s scale was bumped two basis points: The one-year was at 2.97% (-2) and 2.69% (-2) in two years. The five-year was at 2.41% (-2), the 10-year at 2.44% (-2) and the 30-year at 3.59% (-2) at 3 p.m.

The ICE AAA yield curve was bumped two to four basis points: 2.94% (-2) in 2025 and 2.78% (-2) in 2026. The five-year was at 2.46% (-2), the 10-year was at 2.45% (-2) and the 30-year was at 3.53% (-4) at 3:30 p.m.

The S&P Global Market Intelligence municipal curve was bumped one to two basis points: The one-year was at 2.98% (-1) in 2025 and 2.76% (-1) in 2026. The five-year was at 2.44% (-1), the 10-year was at 2.45% (-2) and the 30-year yield was at 3.58% (-2), according to a 3 p.m. read.

Bloomberg BVAL was bumped one to two basis points: 2.95% (-1) in 2025 and 2.81% (-1) in 2026. The five-year at 2.46% (-2), the 10-year at 2.51% (-2) and the 30-year at 3.61% (-2) at 3 p.m.

Treasuries were mixed.

The two-year UST was yielding 4.362% (+5), the three-year was at 4.151% (+5), the five-year at 4.004% (+3), the 10-year at 4.061% (-1), the 20-year at 4.395% (-2) and the 30-year Treasury was yielding 4.279% (-3) at 3:45 p.m.

Primary to come
The Triborough Bridge and Tunnel Authority (/AA+/AAA/) is set to price Thursday $800 million of TBTA Capital Lockbox – City Sales Tax sales tax revenue bonds, Series 2024A. Goldman Sachs.

The Rhode Island Health and Educational Building Corp. (/BBB+/BBB+/) is set to price Thursday $300 million of Lifespan Obligated Group Issue hospital financing revenue bonds, Series 2024. Morgan Stanley.

The Nassau County Interim Finance Authority, New York, (/AAA//) is set to price $127.830 million of sales tax secured bonds, Series 2024A, serials 2024-2030. BofA Securities.

The Alvin Independent School District, Texas, is set to price Thursday $102.455 million of unlimited tax schoolhouse and refunding bonds, Series 2024. Piper Sandler.

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