Municipal bonds were lightly traded and benchmark yields steady to end October while U.S. Treasuries bounced throughout the trading session, ending stronger near the close, and market participants are pointing to near-term volatility for both asset classes going into November.
In the near-term, the upcoming Federal Open Market Committee meeting should contain “an intense discussion of inflation,” and a clearer picture of the Fed’s views there. Most participants agree volatility in U.S. Treasuries will be a leading factor for municipal market performance.
Uncertainty in Washington also isn’t helping the asset class, with some analysts pointing to October’s 51% drop in issuance as part of the reason for it. And throwing another wrench into demand is a potential for a new corporate tax increase to pay for the latest iteration of Build Back Better legislation that will hit muni demand from banks and insurance companies.
As for the muni market outlook, “near-term trading will likely remain somewhat challenging, and the market feels a bit heavy, due to poor liquidity, rate volatility, heightened rate hike expectations (at the moment, two hikes next year are fully priced in) and much slower fund inflows,” Barclays strategists said in a Friday report. “Historically, muni performance in October and the first half of November is frequently somewhat challenging, and only in late November or December does the market start to perform.”
But as dealers “continue to position defensively, fund flows have slowed meaningfully and rate volatility and uncertainties on the policy front are keeping investors at bay,” they said, adding the muni market will “likely remain choppy near term, but we still expect it to end the year on a strong note.”
Triple-A benchmarks were little changed on Friday while ratios hovered near recent levels. Municipal-to-UST ratios saw the 5-year at 53%, the 10-year at 78% and the 30-year at 87%, according to Refinitiv MMD. ICE Data Services had the 5-year at 53%, 10-year at 77% and the 30 at 87%.
Muni market levels appear “stuck” absent clarity on muni provisions in the infrastructure/reconciliation bills, a Friday BofA Global Research report said. “Despite the large up-and-downs of the 10-year Treasury yield, 10-year AAA muni rates hovered around our yearly target of 1.20% for more than a week.”
Next week’s supply totals $4.991 billion with $3.973 billion of negotiated deals and $1.018 billion on the competitive calendar.
The largest slated deal is $830 million of Texas general obligation bonds. Several larger taxable healthcare deals will come and the largest competitive deal is a $169 million taxable refunding deal from the Miami-Dade County School District.
BofA noted principal redemptions for November total $29.7 billion and coupon payments are $10.3 billion, a total of $41 billion.
“This is roughly equal to expected monthly issuance. However, mutual funds flows have turned small, but still positive. So new supply and new demand should be roughly balanced next month,” the report said.
Fund flows are still being closely watched but many participants do not expect pressures to lead to outflows.
Much like February and March, mutual funds flows slowed considerably in September and October as muni rates rose, the BofA report said.
“If our constructive view of muni rates works out, these flows are less likely to turn negative consistently. However, if the 10-year AAA rate moves meaningfully higher from current levels, flows may turn negative,” the report said. “We established a few years ago that, historically, if the 10-year AAA rises 50+ bps and stays high, muni mutual funds would experience a sustained period of outflows.”
Secondary trading
There were several prints pointing to strength, but not enough to move benchmark yields. Maryland DOT 5s of 2022 at 0.17%. Texas 5s of 2022 at 0.16%. Forsyth County 5s of 2022 at 0.09%.
California 5s of 2023 at 0.29%. Georgia 5s of 2026 at 0.62% versus 0.67% Thursday. Denver City and County 5s of 2026 at 0.66%.
Arlington County 5s of 2027 at 0.77%. Washington 5s of 2028 at 0.94%-0.93%. Prince George’s County 5s of 2028 at 0.96%.
Washington Suburban Sanitation District 5s of 2030 at 1.17%-1.16%. Georgia 5s of 2032 at 1.23% versus 1.30% Monday. Maryland 5s of 2033 at 1.29% versus 1.31% Thursday.
Hawaii 5s of 2040 at 1.67%. New York City TFA 3s of 2041 at 2.30%-2.29%.
Texas water 3s of 2045 at 2.17%-2.16% versus 2.20%-2.20% on Oct. 18.
New York City 5s of 2047 at 2.01%. New York City water 5s of 2048 at 1.94%. Los Angeles DWP 5s of 2049 at 1.72%. Georgia road and tollway 3s of 2050 at 2.25% versus 2.30% Wednesday.
AAA scales
According to Refinitiv MMD, yields were unchanged across the curve. The one-year at 0.15% in 2022 and at 0.25% in 2023, the 10-year was steady at 1.21% and the yield on the 30-year sat at 1.69%.
The ICE municipal yield curve showed bonds steady at 0.17% in 2022 and at 0.25% in 2023. The 10-year maturity was steady at 1.18% and the 30-year yield fell one to 1.69%.
The IHS Markit municipal analytics curve showed short yields steady at 0.16% in 2022 and at 0.23% in 2023. The 10-year yield sat at 1.21% and the 30-year yield at 1.70%.
The Bloomberg BVAL curve showed short yields steady at 0.17% in 2022 and steady at 0.21% in 2023. The 10-year yield was steady at 1.21% and the 30-year sat at 1.72%.
In late trading, Treasuries were firmer and equities were down near the close.
The 5-year Treasury was yielding 1.173%, 10-year Treasury was yielding 1.546%, the 20-year at 1.981% and the 30-year Treasury was yielding 1.934%. The Dow Jones Industrial Average rose 89 points, or 0.25%, the S&P fell 0.10% while the Nasdaq lost 0.02%.
Inflation
Inflation remains at the forefront and the narrative has become that price pressures are mostly transitory but at a higher rate and for a longer duration than originally expected.
“This presents a ‘rates versus levels’ dilemma,” said Paul Gruenwald, global chief economist at S&P Global Ratings. “While the rate of inflation will come back to the policy target next year, the level of consumer prices will be permanently higher on the order of almost 4%.”
Unless wages rise, he said, purchasing power will decline, as will consumer confidence. “This will slow demand growth and help to bring inflation back to target.”
And the Federal Reserve will pay attention to inflation. “The Fed seems a lot more jumpy about inflation than just a few weeks ago,” said DWS Group U.S. Economist Christian Scherrmann. Fed Chair Jerome Powell “essentially acknowledged that global supply chain disruptions, and therefore price pressures, might last longer than initially expected — maybe some way into 2022.”
Tapering asset purchases, seen as a prerequisite to raising rates, must happen, he said, and if the Fed moves faster than a $15 billion a month reduction, it “would be sending a clear signal that it is now seriously worried about inflation,” Scherrmann said.
The upcoming Federal Open Market Committee meeting should contain “an intense discussion of inflation,” he said. While the Fed seems to be more concerned about inflation than it was several months ago, it is “not keen yet to fight it aggressively with rate hikes,” Scherrmann added. “The narrative has changed, and verbal intervention may be the Fed’s first weapon.”
The employment cost index, released Friday, showed compensation rose 1.3% in the third quarter, the biggest in the series’ 20-year history, suggesting inflationary pressures are broadening. Companies have raised pay to attract workers as many have stayed on the sidelines for reasons related to COVID-19.
“While we expect wage growth to slow over the second half of 2022, as more workers return to the jobs market, the near-term pressure on labor costs will keep inflation elevated over the next few quarters and make it difficult to settle back to the Fed’s 2% target anytime soon,” said Wells Fargo Securities Senior Economist Sarah House.
This increase “is arguably more alarming for businesses’ bottom lines” than the average hourly earning attached to the monthly employment report, she said. “ECI is broader than the average hourly earnings series, incorporating public sector workers in addition to benefit costs. What’s more, the index controls for compositional shifts in the workforce, which have been unusually large over the past year.
And while these gains may prove “sticky” and help push up inflation, House said, in the spring a pickup in the labor supply “should help allay pressures in the back half of 2022, and along with ongoing productivity gains, keep labor costs from driving an unrelenting rise in inflation.”
And these numbers “offered little relief to wage pressures as the probability of high wage growth for next year came in at 46%, which is the likelihood that growth in average hourly earnings (AHE) will exceed 2.9% in a year,” said Wells Fargo Securities Econometrician Azhar Iqbal and economic analysts Sara Cotsakis and Karl Vesely. “It looks like in the near term employers will still need to pay the big bucks if they aim to get the help they need, which may add to mounting inflation pressures seen elsewhere in the economy.”
Although it’s too soon to say if the economy is heading for a wage-price spiral, “the Employment Cost Index data reveals a discomforting amount of wage acceleration in the third quarter that definitely keeps that possibility open,” said Scott Anderson, chief economist at Bank of the West.
Meanwhile, consumer spending climbed 0.6% in September following an upwardly revised 1.0% jump in August, first reported as a 0.8% gain. Economists polled by IFR Markets expected a 0.5% rise.
Personal incomes dropped 1.0% in September more than the 0.1% dip expected by economists.
Personal consumption expenditures increased 0.3% in September and 4.4% year-on-year measures of the PCE to 4.4%, its largest gain since January 1991. Core PCE, the Fed’s preferred inflation gauge, grew 0.2% in the month and 3.6% year-over-year, a 30-year high.
Also released Friday, the University of Michigan consumer sentiment index rose to 71.7 in the final October read from 71.4 in the preliminary report, but down from 72.8 in the final September report, while current conditions slid to 77.7 from 77.9 mid-month and 80.1 in September, while expectations bounced to 67.9 from 67.2 earlier in the month, but lower than September’s 68.1.
Separately, the Chicago Business Barometer climbed to 68.4 in October from 64.7 in September. Economists expected a drop to 64.0.
Primary to come
The Texas Public Finance Authority (/AAA/AAA/) is set to price Tuesday $831.365 million of state of Texas general obligation and refunding bonds, consisting of $248.655 million, Series 2021A, serials 2022-2039 and $582.71 million, Series 2021B, serials 2022-2041. Raymond James & Associates.
Main Street Natural Gas (Aa2//AA-/) is on the day-to-day calendar with $750 million of gas supply revenue bonds, Series 2021A, serials 2023-2031, term 2052. RBC Capital Markets.
Beth Israel Lahey Health (A3/A//) is set to price Wednesday $500 million of taxable bonds, Series L (2021). Goldman Sachs & Co.
Allina Health System (Aa3/AA-/AA-//) is set to price Thursday $303.031 million of corporate CUSIP taxable bonds, Series 2021. J.P. Morgan Securities.
The Economic Development Authority of Lynchburg, Virginia, (Baa1/A-/A-/) is set to price Thursday $211.955 million of hospital revenue and refunding bonds (Centra Health Obligated Group), Series 2021, serials 2027-2047 and 2049-2055. Barclays Capital.
Idaho Health Facilities Authority (A3/A///) is set to price Tuesday $211.885 million of revenue bonds, Series 2021A (St. Luke’s Health System Project). J.P. Morgan Securities.
Minneapolis, Minnesota, (Aa3/AA-/AA-//) is set to price Thursday $172.135 million of health care system revenue bonds, Series 2021 (Allina Health System). J.P. Morgan Securities.
The North Dakota Housing Finance Agency (Aa1///) is set to price Tuesday $141.3 million of housing finance program bonds (Home Mortgage Finance Program), consisting of $125 million, Series 2021B (non-AMT) (social bonds), serials 2027-2033, terms 2036, 2041, 2043 and 2052 and $16.3 million, Series 2021C (AMT) (social bonds), serials 2022-2027. RBC Capital Markets.
The Fort Bend Grand Parkway Toll Road Authority, Texas, (Aa1//AA+/) is set to price Thursday $137.16 million of limited contract tax and subordinate lien toll road revenue refunding bonds, Series 2021A. Mesirow Financial.
The Regents of the University of Colorado (Aa1//AA+//) is set to price Tuesday $136 million of university enterprise refunding revenue bonds, consisting of $68 million, Series 2021C-3A (term rate bonds) (green bonds) and $68 million, Series 2021C-3B (term rate bonds) (green bonds). Loop Capital Markets.
Palm Beach County Health Facilities Authority, Florida, is set to price $128.815 million of revenue refunding bonds (Toby & Leon Cooperman Sinai Residences at Boca Raton), Series 2022 (forward delivery). HJ Sims & Co.
The Successor Agency to the Redevelopment Agency of the City and County of San Francisco (/AA///) is on the day-to-day calendar with $107.34 million of taxable third-lien tax allocation bonds, 2021 Series A (affordable housing projects) (social bonds), serials 2023-2031, insured by Assured Guaranty Municipal Corp. Citigroup Global Markets.
Spartanburg Regional Health Services District, South Carolina, (A3/A//) is set to price Wednesday $101.895 million of hospital revenue refunding bonds, Series 2022 (forward delivery). J.P. Morgan Securities.
Puerto Rico Industrial, Tourist, Educational, Medical and Environmental Control Facilities Financing Authority (/BBB+//) is set to price Tuesday $60.005 million of hospital revenue and refunding revenue bonds, Series 2021 (Hospital Auxilio Mutuo Obligated Group Project). J.P. Morgan Securities.
Competitive
Washington (Aaa/AA+/AA+) is set to sell $134.545 million of motor vehicle fuel tax general obligation refunding bonds, Series R-2022B at 11:30 a.m. eastern Tuesday.
Miami-Dade County School District (Aa3///) is set to sell $169.08 million of taxable general obligation school refunding bonds, Series 2021 at 10 a.m. eastern Wednesday.