Municipals finished out the last trading day of the year little changed in an abbreviated session that saw Treasury yields rise and equity prices fall.
“Bond investors bid a not-so-fond farewell to 2022 as they look forward to a much more attractive 2023,” said Bryce Doty, senior vice president at Sit Investment Associates.
The markets closed early ahead of the New Year celebration and are closed on Monday. Trading resumes Jan. 3, 2023.
The three-year muni-UST ratio was at 59%, the five-year at 63%, the 10-year at 68% and the 30-year at 90%, according to Refinitiv MMD’s final 1 p.m. ET read. ICE Data Services had the three at 61%, the five at 64%, the 10 at 70% and the 30 at 91% at a 1 p.m. read.
In contrast, on Jan. 4, the first trading day of the year, MMD had the five-year at 44%, 64% for the 10-year and 74% for the 30-year while ICE had the five at 43%, the 10 at 65% and the 30 at 73%.
In 2022, new issue volume fell 20.5% to $384.09 billion, down from the $483.23 billion sold in 2021.
The primary market begins to pick up steam as supply ticks up in the New Year holiday-shortened week after no issues were priced during the Christmas week.
For the week of Jan. 3, expected new issuance totals $1.28 billion. Negotiated deals total $1.16 billion while there will be $128 million of competitive sales.
The negotiated calendar is led by a $963 million deal from the Triborough Bridge and Tunnel Authority. The Owensboro-Daviess County Regional Water Resource Agency, Kentucky, leads the competitive calendar with a $74 million sale.
Doty said the market environment will become more attractive in the new year for fixed-income investors. “While stocks will struggle with slowing economic activity and the loss of inflated earnings from inflation, bonds are earning a decent income with the potential for price appreciation as yields come off their peak,” he said.
The Federal Reserve is nearly done raising rates as inflation slows, Doty noted,` while consumers are burning through what’s left of their stimulus-related savings.
“As workers run out of savings and go back to work, supply and demand will approach equilibrium around mid-2023, leaving investors to cope with all the myriad of normal uncertainties with a heavy dose of Russian war escalation,” he said.
“We expect no raise at the Fed’s May meeting,” he said, adding, “we expect core bond funds to have total returns between 4% and 8% in 2023 with most of that coming from interest income plus a modest amount of price appreciation as yields move moderately lower.”
The most important take of the year is that the era of easy money ended — and ended for good, said Ipek Ozkardeskaya, a senior analyst at Swissquote Bank.
“It means that the financial markets won’t look like anything we knew since the subprime crisis,” he said. “This is the beginning of a new era, when central banks will be playing a more subdued role in the markets, with less liquidity available to fix problems — a more than necessary move that came perhaps too late, and too painfully.”
And with plenty of cheap central bank liquidity waiting to be pulled back, the situation may not get better before it gets worse in early 2023, he said.
“Recession, inflation, stagflation will likely dominate headlines” in 2023, Ozkardeskaya said.
“The Fed’s desire to curtail demand by hiking interest rates seems to be doing its job, albeit slower than everyone hoped,” said Arthur Laffer Jr., president of Laffer Tengler Investments. “As such we still expect two more 25 basis point rate hikes in 2023 in the late January and March FOMC meetings.”
The new year will also bring a mixed bag of news, Laffer said.
“Inflation has peaked and we believe that it will continue to trend down over the course of the year but expect monthly volatility in the series both high and low,” he said. “With higher interest rates will come lower GDP growth going forward and a recession in 2023 in the first half of the year.”
One wildcard, he said, was the sudden re-opening of the Chinese/Hong Kong economies after three years of COVID-19 lockdowns.
“We expect that this will result in severe supply/demand imbalances in the short-run period (similar to what happened in the U.S.) as consumers and manufacturers adjust to non-COVID demand and workers returning to their jobs,” Laffer said. “Expect goods inflation first in the most severely impacted areas, which is the basic economic response of supply and demand imbalances.”
Secondary trading
Vermont 5s of 2023 at 2.86% versus 2.89% Thursday. Wisconsin Environmental Impact Fund 5s of 2024 at 2.69% versus 2.71% Thursday. Wake County, North Carolina, 5s of 2024 at 2.61% versus 2.63% Thursday.
Maryland 5s of 2025 at 2.63%. Georgia 5s of 2026 at 2.55%. New York City 5s of 2027 at 2.72%-2.68%.
Washington 5s of 2033 at 2.86%-2.85%. California 5s of 2035 at 3.08%-3.04% versus 2.83%-2.80% on 12/15.
NYC TFA 4s of 2051 at 4.55%-4.46% versus 4.39% on 12/20 and 4.27% on 12/15.
AAA scales
Refinitiv MMD’s scale was unchanged across the board: the one-year was at 2.86% (unch) and 2.60% (unch) in two years. The five-year was at 2.52% (unch), the 10-year at 2.63% (unch) and the 30-year at 3.58% (unch).
The ICE AAA yield curve was mixed: at 2.78% (+1) in 2023 and 2.61% (-1) in 2024. The five-year was at 2.55% (-2), the 10-year was at 2.65% (flat) and the 30-year yield was at 3.59% (flat) at 2 p.m.
Bloomberg BVAL was little changed: 2.80% (unch) in 2023 and 2.65% (-1) in 2024. The five-year at 2.53% (-1), the 10-year at 2.62% (unch) and the 30-year at 3.57% (+1).
Treasuries were weaker.
The two-year UST was yielding 4.429% (+6), the three-year was at 4.228% (+6), the five-year at 4.007% (+7), the seven-year at 3.974% (+6), the 10-year at 3.882% (+7), the 20-year at 4.146% (+7) and the 30-year Treasury was yielding 3.968% (+7) at 2 p.m.
Primary market ahead
The upcoming calendar is dominated by the only issue over $100 million — the New York Triborough Bridge and Tunnel Authority’s (/AA+/AA+/AA+) $963 million of Series 2023A climate bond certified payroll mobility tax senior lien refunding green bonds. The deal will be priced on Thursday by Goldman Sachs.
Other deals on the negotiated slate over $50 million include:
The Higley Unified School District No. 60, Maricopa County, Arizona’s (/A+//) $55 million of refunding certificates of participation. The deal will be priced on Thursday by Stifel.
The Public Finance Authority’s $54 million of unrated student housing revenue bonds
for NCCD-Taylorsville Properties LLC’s Salt Lake Community College project. The deal will be priced on Thursday by Citigroup.
The Hawley Independent School District No. 60, Minnesota’s (Aa1///) $53 million of school bonds insured by the Minnesota School District Enhancement Program. The deal will be priced on Thursday by Baird.
In the competitive arena, the Owensboro-Daviess County Regional Water Resource Agency, Kentucky, will sell $74 million of Series 2023A wastewater revenue bonds on Thursday. The financial advisor is First Kentucky Securities Corp.
Quincy, Massachusetts, will sell $51 million of general obligation bond anticipation notes on Thursday. The financial advisor is Hilltop Securities.
Jessica Lerner contributed to this story.