Bonds

Muni, UST yields fall after Fed signals rate cuts not imminent

Municipals saw the largest one-day improvements since November Wednesday, as U.S. Treasury yields fell and equities sold off after the Federal Reserve Open Market Committee kept rates unchanged and signaled the Fed may not be rushing to cut rates until inflation is further tamed.

In his press conference, Fed Chair Jerome Powell said cuts are likely this year but are not guaranteed. He added that the Fed is looking for more signs that inflation is moderating. “We are prepared to maintain the current target range for the federal funds rate for longer if appropriate.”

“We’re not declaring victory,” Powell said, “we still have a ways to go.”

Triple-A yields fell five to 10 basis points while USTs fell as much a 11 on the short end as of 3:30 p.m.

The two-year muni-to-Treasury ratio Wednesday was at 63%, the three-year at 63%, the five-year at 61%, 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 61%, the three-year at 61%, the five-year at 60%, the 10-year at 60% and the 30-year at 82% at 3:30 p.m.

In the primary market Wednesday, Goldman Sachs held a one-day retail order for the $800 million of TBTA Capital Lockbox – City Sales Tax sales tax revenue bonds, Series 2024A, from the Triborough Bridge and Tunnel Authority (/AA+/AAA/). The first tranche, $642.980 million of Series 2024A-1, saw 5s of 5/2027 at 2.63%, 5s of 2029 at 2.51%, 5s of 2034 at 2.65%, 5s of 2039 at 3.19%, 5s of 2044 at 3.57%, 5s of 2049 at 3.86%, 5s of 2054 at 3.97%, 5.25s of 2059 at 4.01%, 4.25s of 2064 at 4.40% and 5.25s of 2064 at 4.11%, callable 5/15/2034.

The second tranche, $102.850 million of Series 2024A-2, saw 5.25s of 5/2059 at 4.01% and 5.25s of 2064 at 4.11%, callable 5/15/2033.

Morgan Stanley priced for the Rhode Island Health and Educational Building Corp. (/BBB+/BBB+/) $300 million of Lifespan Obligated Group Issue hospital financing revenue bonds, Series 2024, with 5s of 5/2034 at 3.20%, 5s of 2039 at 3.84%, 5s of 2044 at 4.12%, 5.25s of 2040 at 4.21% and 5.25s of 2054 at 4.29%, callable 5/15/2034.

The primary market has done well, said Jennifer Johnston, director of Municipal Bonds Research at Franklin Templeton.

“Part of that could be where bonds are being priced at the time they’re being released,” but the “good success” of the primary market when new deal prices could continue in the coming months.

Supply in January increased year-over-year. Issuance rose 16.1% to $27.9 billion.

With lower rates than previous years, Johnston said that could be an “impetus” for issuers to come to market “now that it’s a bit more affordable for them.”

Previously, many issuers have taken advantage of their strong financial positions, resulting from increased taxes, among other things.

Additionally, issuers, flushed with federal stimulus, spent cash on capital projects instead of issuers long-term debt, she said. From a budget perspective, this was a “positive” as it allowed the issuers to avoid challenges posed by the high rate environment, Johnston noted.

However, now the market is seeing a reversal of that as lower rates allow issuers to access the market at a better price point.

Additionally, as revenues from state and local governments have started to slow from inflation and federal stimulus has dried up, issuers are returning to the muni market for capital financing, she said.

The Investment Company Institute Wednesday reported more inflows into municipal bond mutual funds for the week ending Jan. 24, with investors adding $178 million to funds following $1.506 billion the week prior.

Exchange-traded funds, meanwhile, saw outflows of $299 million following $293 million of inflows the week prior.

January has seen three straight weeks of inflows, which is a positive after significant outflows of $145 billion in 2022, followed by another year of negative flows of $21 billion, according to ICI.

Meanwhile, tax-exempt municipal money market funds saw a second consecutive week of outflows as $812.3 million was pulled the week ending Jan.uary 30, bringing the total assets to $116.81 billion, according to the Money Fund Report, a weekly publication of EPFR.

The average seven-day simple yield for all tax-free and municipal money-market funds rose 3.59%.

Taxable money-fund assets saw $372.3 million added to end the reporting week.

The average seven-day simple yield for all taxable reporting funds remained at 5.03%.

Demand from retail investor participation will be a “key driver” for munis this year, said Steve Shutz, portfolio manager and director of Tax-Exempt Fixed Income at Brown Advisory.

Corporate buyers, however, such as insurance companies, will remain on the sidelines as lower corporate income tax rates have made them less interested in tax-exempt munis, he said.

Interest from separately managed accounts, which have been one of the most consistent buyers in the muni market over the past year, has remained strong, he said.

“Mutual funds and ETFs are going to be vital for the performance of the overall market,” he said.

AAA scales
Refinitiv MMD’s scale was bumped five to seven basis points: The one-year was at 2.92% (-5) and 2.64% (-5) in two years. The five-year was at 2.36% (-5), the 10-year at 2.38% (-6) and the 30-year at 3.52% (-7) at 3 p.m.

The ICE AAA yield curve was bumped five to 10 basis points: 2.86% (-8) in 2025 and 2.68% (-10) in 2026. The five-year was at 2.41% (-5), the 10-year was at 2.39% (-5) and the 30-year was at 3.48% (-5) at 3:30 p.m.

The S&P Global Market Intelligence municipal curve was bumped six to seven basis points: The one-year was at 2.92% (-6) in 2025 and 2.70% (-6) in 2026. The five-year was at 2.38% (-6), the 10-year was at 2.39% (-6) and the 30-year yield was at 3.51% (-7), according to a 3 p.m. read.

Bloomberg BVAL was bumped five to 10 basis points: 2.86% (-9) in 2025 and 2.71% (-10) in 2026. The five-year at 2.37% (-9), the 10-year at 2.44% (-7) and the 30-year at 3.56% (-5) at 3:30 p.m.

Treasuries were stronger.

The two-year UST was yielding 4.257% (-11), the three-year was at 4.046% (-11), the five-year at 3.900% (-10), the 10-year at 3.974% (-9), the 20-year at 4.324% (-7) and the 30-year Treasury was yielding 4.218% (-6) at 3:30 p.m.

FOMC
Leaving the fed funds rate target at a range between 5.25% and 5.50%, the post-meeting statement of the Federal Open Market Committee said the risks of meeting its dual mandate “are moving into better balance,” but it “does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%.”

The decision was unanimous. The statement dropped the reference to further rate hikes.

The passage about rate cuts “shows the Fed is thinking along its tradition: rates are not cut into an expansion until there’s a clear move south in growth and inflation,” said Giuseppe Sette, co-founder and president of Toggle AI. “Until the slowdown, rates are ok to remain well above inflation.”

“The market’s expectation of a 50% probability of a rate cut by March seems reasonable, given the recent positive signals from the Fed’s preferred measures of inflation and wage growth,” according to Whitney Watson, global co-head and co-chief investment officer of Fixed Income and Liquidity Solutions within Goldman Sachs Asset Management.

“There is clearly some pushback here against growing market expectations of imminent rate cuts,” said Fitch Ratings Chief Economist Brian Coulton. “The Fed sounds quite cautious about prematurely reaching the conclusion that inflation is moving back to 2% on a sustainable basis and wants more time to assess the evidence. With scant evidence of a slowdown in growth, a still tight labor market and elevated wage and services inflation, we don’t see rate cuts until June or July.”

The changes to the statement were “fairly significant,” said Mortgage Bankers Association SVP and Chief Economist Mike Fratantoni. “While financial markets were expecting rapid cuts in the federal funds target this year, the statement pushes back on that expectation.”

MBA expects three cuts starting in May.

Morgan Stanley expects the first of four rate cuts in June followed by another 200 bp of cuts in 2025.

Powell said the Fed would “move carefully” and he doesn’t expect a rate cut in March, but all decisions will be data-dependent. Balance sheet run off has gone well and the FOMC discussed balance sheet issues, he said, but the conversation is just starting.

“Data suggests that while the economy has cooled, it remains healthy and resilient,” said Jeff Klingelhofer, co-head of investments at Thornburg Investment Management. “The two risks we’re watching continue to be the stickiness of inflation or a notable tumble below the 2% target.”

Primary to come
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.

Gary Siegel contributed to this story.

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