Bonds

Munis ignore UST weakness after Fed meeting minutes

Municipals were slightly firmer in spots Wednesday, as U.S. Treasury yields rose and equities saw more losses after January’s Federal Open Market Committee meeting minutes showed the Fed was not in a hurry to cut rates.

Triple-A yield curves were firmer by a basis point or two while a larger new-issue calendar was the focus for investors.

“A large amount of cash remains on the sidelines to be reinvested, and supply is tepid,” said Anders S. Persson, Nuveen’s chief investment officer for global fixed income, and Daniel J. Close, Nuveen’s head of municipals.

As long as muni new issuance remains “light,” munis will remain rich relative to USTs, they noted. After Wednesday’s moves, muni to UST ratios fell slightly.

The two-year muni-to-Treasury ratio Tuesday was at 59%, the three-year at 58%, the five-year at 57%, the 10-year at 57% and the 30-year at 80%, according to Refinitiv Municipal Market Data’s 3 p.m. EST read. ICE Data Services had the two-year at 60%, the three-year at 59%, the five-year at 58%, the 10-year at 58% and the 30-year at 80% at 3:30 p.m.

The primary market, though, did pick up steam Wednesday, as several deals priced.

Goldman Sachs priced for the New Jersey Educational Facilities Authority (Aaa/AAA//) $658.640 million of Princeton University revenue bonds. The first tranche, $500 million of new-issue bonds, 2024 Series B, saw 4s of 3/2053 at 4.02% and 5.25s of 2054 at 3.66%, callable 3/1/2034.

The second tranche, $158.060 million of refunding bonds, 2024 Series C, saw 5s of 2/2025 at 2.92%, 5s of 2029 at 2.42 and 5s of 2044 at 3.26%, callable 3/1/2034.

Wells Fargo priced for the Board of Regents of the University of Texas System (Aaa/AAA/AAA/) $412.670 million of Permanent University Fund bonds, Series 2024A, with 5s of 7/2025 at 2.91%, 5s of 2029 at 2.53%, 5s of 2035 at 2.73%, 5s of 2039 at 3.05%, 4s of 2049 at 4.12% and 4s of 2053 at 4.17%, callable 7/1/2034.

In the competitive market, the East Central Independent School District, Texas, (Aaa///) sold $96.750 million of PSF-insured unlimited tax school building bonds, Series 2024, with 5s of 8/2025 at 2.87%, 5s of 2029 at 2.56%, 5s of 2034 at 2.63%, 5s of 2039 at 3.10%, 4s of 2044 at 3.87%, 4s of 2049 at 4.11% and 4s of 2054 at 4.15%, callable 8/15/2033.

AllianceBernstein strategists expect supply to pick up in March, with some larger deals already in the works through the end of next month.

New York City is set to bring $1.5 billion of tax-exempt fixed-rate general obligation bonds next week, the proceeds of which will be used to fund capital projects and convert some outstanding floating-rate bonds to fixed-rate.

Book-running lead manager BofA Securities is expected to price the GOs on Wednesday, after a one-day retail order period.

The Dormitory Authority of the State of New York (Aa1/AA+//) is set to price the week of March 11 $3.5 billion of state personal income tax revenue bonds.

The Texas Transportation Commission will bring $670 million of state highway improvement GO refunding bonds and $360 million of state highway find first tier revenue refunding bonds.

“The strong technical backdrop (light supply and cash still on the sidelines) has kept both credit and after-tax spreads (spreads) steady, but we do expect the technicals to soften heading into March, with supply ramping up,” AllianceBernstein strategists said.

The year-to-date push toward slightly higher yields and slightly wider spreads has continued, said Matt Fabian, a partner at Municipal Market Analytics.

However, he noted “rather than spread development via selling — which is the most reliable but also the most rare form of widening for tax-exempts — the 2024 dynamic reasonably references differing levels of buyer sponsorship across the curve and credit spectra,” he said.

Consistent separately managed account bidding “will be supporting the front end and higher grade levels; inconsistent mutual fund flows and still weak bank/insurance interest will be letting duration, structure, and credit slide wider with the taxable side,” Fabian said.

Performance this year could be another year of “riding what the SMAs are driving, with some upside for specific sectors (like prepaid gas), etc. that are growing in appeal to these accounts.”

The Investment Company Institute Wednesday reported inflows into municipal bond mutual funds for the week ending Feb. 14, with investors adding $964 million to funds following $1.555 billion the week prior.

This marks the sixth straight week of inflows and differs from LSEG Lipper, which reported $142.2 million of outflows for the week ending Feb. 14.

ICI reports exchange-traded funds saw outflows of $515 million following $463 million of outflows the week prior.

“The takeaway however is to trust all fund flow data a bit less right now, including that shown about modest inflows into high yield, noting here a counterpoint in the HYD ETF, which has shown minimal net creations or net redemptions all year; thus reported inflows could be specific to a portfolio not a sector strategy,” Fabian said.

Secondary trading
Ohio 5s of 2025 at 2.94%-2.91%. NYC 5s of 2025 at 2.93%. Maryland 5s of 2026 at 2.74%.

California 5s of 2028 at 2.46% versus 2.48% on 2/15. NYC 5s of 2029 at 2.54%. NY Dorm PIT 5s of 2030 at 2.49%-2.45%.

University of Texas System Permanent University Fund 5s of 2032 at 2.54%. California 5s of 2034 at 2.55% versus 2.39%-2.40% on 2/2. Washington 5s of 2036 at 2.78%-2.77%.

NYC TFA 5s of 2049 at 2.88%-2.87% versus 3.91%-3.89% Friday and 3.84%-3.85% on 2/15. Triborough Bridge and Tunnel Authority 5s of 2054 at 3.95%-3.97% versus 3.92%-3.98% on 2/13 and 3.95% on 2/9.

AAA scales
Refinitiv MMD’s scale was bumped up to two basis points five years and in: The one-year was at 2.96% (unch) and 2.74% (-2) in two years. The five-year was at 2.44% (-2), the 10-year at 2.46% (unch) and the 30-year at 3.59% (unch) at 3 p.m.

The ICE AAA yield curve was better by up one basis point: 2.97% (unch) in 2025 and 2.77% (-1) in 2026. The five-year was at 2.47% (-1), the 10-year was at 2.48% (-1) and the 30-year was at 3.55% (unch) at 3:30 p.m.

The S&P Global Market Intelligence municipal curve was bumped up to one basis point: The one-year was at 2.95% (-1) in 2025 and 2.75% (-1) in 2026. The five-year was at 2.45% (-1), the 10-year was at 2.47% (unch) and the 30-year yield was at 3.57% (unch), according to a 3 p.m. read.

Bloomberg BVAL was unchanged: 2.96% in 2025 and 2.81% in 2026. The five-year at 2.46%, the 10-year at 2.53% and the 30-year at 3.65% at 3:30 p.m.

Treasuries were weaker.

The two-year UST was yielding 4.654% (+5), the three-year was at 4.431% (+5), the five-year at 4.295% (+5), the 10-year at 4.320% (+5), the 20-year at 4.611% (+5) and the 30-year at 4.489% (+5) at 3:30 p.m.

FOMC meeting minutes
Policymakers appear to be concerned about the possibility of cutting interest rates too soon, according to minutes of the Federal Open Market Committee’s Jan. 30-31 meeting, released Wednesday.

Members noted “uncertainty” regarding how long policy would need to be restrictive. “Most participants noted the risks of moving too quickly to ease the stance of policy and emphasized the importance of carefully assessing incoming data in judging whether inflation is moving down sustainably to 2%,” according to the minutes.

A couple of members dissented, noting “downside risks to the economy associated with maintaining an overly restrictive stance for too long.”

“The fact that most officials noted the risks of cutting too quickly makes me scratch my head as to where the potential six rate narrative came from,” said Jay Woods, chief global strategist at Freedom Capital Markets. “It seems as if the higher for longer narrative is here to stay at least two more meetings as the data continues to trend the right way but not at any pace that has the Fed ready to cut.”

Participants, he said, seemed wary about a premature cut that would have to be reversed. “That’s one thing about the Fed that tends to be consistent, when they act, they tend to act too late,” Woods said. “They were late to raise rates and maybe this time they will be late to cut.”

The meeting minutes offered nothing new, according to Sam Stovall, chief investment strategist at CFRA Research. “Members regarded the policy rate to be likely at its peak, while inflation was declining and there were increasing signs of a balance between supply and demand,” he said. “Prices still remained elevated, however.”

“The committee is in no rush to cut rates given uncertainty around inflation,” said Jeffrey Cleveland, director and chief economist, Payden & Rygel. “Such was the view when the committee convened in late January, and we suspect there is more reason to tread cautiously based on data released in the interim.”

Specifically, he pointed to the core consumer and producer price indexes, which were hotter than expected and “suggest core personal consumption expenditures’ monthly reading for January (released next week) could register a similar rate of increase,” he said.

Although these readings “could be monthly noise,” Cleveland said, “based on the committee’s cautious approach, it will require a few months of ‘target-like’ monthly inflation readings to convince policymakers core inflation is indeed continuing to cool.”

The bottom line: “rate cuts before summertime seem highly unlikely to us, and with the strong GDP and payroll growth, we think it will be difficult to justify many cuts in 2024,” he added.

Three quarter-point cuts this year remains Cleveland’s base case, “contingent upon inflation making more progress toward 2%.”

“The market continues to underestimate the risk that growth and inflation have accelerated or that inflation remains sticky (in the 3-4% range), keeping the Fed on hold or even hiking again,” he said.

Negotiated calendar
The Maryland Transportation Authority (Aa2//AA/) is set to price Thursday $628.325 million of tax-exempt transportation facilities projects revenue refunding bonds, Series 2024A. BofA Securities.

The Michigan State Housing Development Authority (Aa2/AA+//) is set to price Thursday $424.675 million of social single-family mortgage revenue bonds, consisting of $248.350 million of non-AMT bonds, 2024 Series A, serials 2024-2036, terms 2039, 2044, 2049, 2053, 2054; $126.325 million of taxables, serials 2024-2034, terms 2039, 2044, 2050; and $50 million of taxable variable rate bonds, 2024 Series C, term 2054. Barclays Capital.

The California Infrastructure and Economic Development Bank (A2///) is set to price Thursday $281.450 million of California Academy of Sciences sustainability revenue bonds, consisting of $140.725 million of Series 2024A and $140.725 million of Series 2024B. Wells Fargo.

The Virginia Housing Development Authority (Aa1/AA+//) is set to price Thursday $177.070 million of non-AMT rental housing bonds, 2024 Series A, serials 2026-2036, terms 2039, 2044, 2049, 2054, 2059, 2065. BofA Securities.

The Creek County Educational Facilities Authority, Oklahoma, (/AA//) is set to price Thursday $153.840 million of BAM-insured Sapulpa Public Schools Project educational facilities lease revenue bonds, Series 2024. D.A. Davidson.

The State of New York Mortgage Agency (Aa1///) is set to price Thursday $139.120 million of social homeowner mortgage revenue bonds, consisting of $72.765 million of non-AMT bonds, Series 258, serial 2039, terms 2044, 2049, 2054; $72.765 million of AMT bonds, Series 259, serials 2024-2036, term 2039; and $39.120 million of taxables, Series 260, serials 2024-2036, terms 2039, 2043, 2054. BofA Securities.

The Virginia College Building Authority (Aa1/AA+//) is set to price Thursday $101.900 million of University of Richmond educational facilities revenue and refunding bonds, Series 2024, serials 2027-2034, 2036, 2038-2044, terms 2049, 2054. BofA Securities.

Competitive calendar
Nevada is set to sell $89.620 million of motor vehicle fuel tax highway improvement revenue bonds, Series 2024A, at 11:15 a.m. Thursday, and $45.080 million of indexed tax and subordinate motor vehicle fuel tax highway improvement revenue bonds, Series 2024B, at 11:45 a.m. Thursday.

Gary Siegel contributed to this story.

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