Municipals largely ignored the rally in U.S. Treasuries and a massive selloff in equities as participants await another large new-issue week.
Without the primary in play and a mostly muted secondary, triple-A benchmark yield curves were little changed, coming nowhere near the moves in Treasuries as the 10- and 30-year UST fell five and six basis points from Friday, respectively, as negative headlines out of China, taper concerns and continued COVID uncertainty weighed heavily on stocks, which saw the largest losses in almost a year.
Ratios rose on Monday with the 10-year municipal to UST ratio at 72% and the 30-year at 83%, according to Refinitiv MMD. The 10-year ratio was at 75% while the 30-year was at 82%, according to ICE Data Services.
“Markets are clearly being driven by China at the moment with a risk-off tone prevailing,” said Shaun Burgess portfolio manager and fixed income analyst at Cumberland Advisors.
“Whether this bleeds into the municipal market remains to be seen,” he said. “There is a lot of overhang and potential for volatility, so we remain somewhat defensive here as we look for attractive relative value in the new-issue space.”
The preliminary pricing of upcoming deals looks to be in line with the pricing of deals last week, Burgess said, which “speaks to a healthy buy-side supporting the overall market.”
Many of the deals Cumberland participated in last week were multiple times oversubscribed, he said.
The market kicks off with several large new-issues on Tuesday from Massachusetts with nearly $1 billion of competitive loans, Ohio State University green bonds and the Triborough Bridge and Tunnel Authority with more than $800 million, among others. The 30-day visible supply figure sits at $13.26 billion.
A less-than-sunny tone was seen in Rosebud Strategies LLC’s municipal diffusion index, which rose in the latest week.
The index uses social media to gather commentary on the finances of state and local governments and measures the difference between negative and positive sentiment. The index rises as the difference between negative and positive sentiment rises.
“The index has risen above both its 13-week moving average and its 12-month trend,” said Christopher Mier, founder of Rosebud Strategies LLC. “This could possibly signal a breakout of the current range toward increased market discounting of credit risk. In other words, credit spreads could be widening.”
Nuveen said it expects muni demand to persist, as investors seek income in an environment where interest rates in general will probably remain lower for longer.
“However, we may see a selloff in tax-exempt yields as we approach year end, as the new-issue calendar will likely continue to be outsized. Deals will likely be priced to clear the market,” according to Nuveen. “However, flows continue into the asset class, and a tremendous amount of short-duration bonds are looking to be redeployed at higher yields further out on the yield curve.”
Muni CUSIP requests drop again
Monthly municipal CUSIP request volume decreased in August for the second consecutive month. The aggregate total of all municipal securities — which includes municipal bonds, long- and short-term notes and commercial paper — fell 1.7% versus July totals.
On an annualized basis, municipal CUSIP identifier request volumes were up 2.4% through August. For muni bonds specifically, there was an increase in request volumes of 5.3% month-over-month, and they are up 7.7% on a year-over-year basis.
“We’re seeing a second month in a row of declining CUSIP request volume, but it is also important to recognize that August is a historically slower month for issuers,” said Gerard Faulkner, CUSIP Global Services’ director of operations. “We will continue to monitor request volumes closely to get a clearer read on expected issuance activity as we head into the fourth quarter.”
CUSIP identifier requests for the broad category of U.S. and Canadian corporate equity and debt fell in August versus July totals. The monthly decrease was driven mainly by a drop in requests for domestic corporate equity and Canadian corporate identifiers. On a year-over-year basis, corporate CUSIP request volume was up 0.1%.
Secondary trading and scales
Trading was mixed. New York City TFA 5s of 2023 traded at 0.15%. Maryland 5s of 2023 at 0.13% versus 0.18% Friday.
New York City TFA 5s of 2024 at 0.21%. Wisconsin 5s of 2026 at 0.39%.
California 5s of 2027 at 0.60%. North Carolina 5s of 2028 at 0.64% versus 0.67% Friday. California 5s of 2029 at 0.81%. California 5s of 2029 at 0.91% and 5s of 2032 at 1.10%.
Maryland 5s of 2034 at 1.14%.
NYC TFA 4s of 2040 at 1.80%-1.78%.
NYC water 5s of 2044 at 1.68%. Washington 5s of 2045 at 1.61%.
Refinitiv MMD’s was unchanged with the one-year steady at 0.07% in 2022 and steady at 0.11% in 2023. The yield on the 10-year at 0.94% while the yield on the 30-year held at 1.54%.
The ICE municipal yield curve showed bonds steady in 2022 at 0.08% and at 0.12% in 2023. The 10-year maturity sat at 0.95% and the 30-year yield was down one to 1.52%.
The IHS Markit municipal analytics curve showed the one-year steady 0.08% and 0.11% in 2023. The 10-year at 0.94% and the 30-year also steady 1.53%.
The Bloomberg BVAL curve showed short yields steady at 0.07% and 0.07% in 2022 and 2023. The 10-year yield fell one to 0.93% and the 30-year yield held steady at 1.53%.
The 10-year Treasury was yielding 1.307% and the 30-year Treasury was yielding 1.844% in late trading. The Dow Jones Industrial Average fell 765 points or 2.21%, the S&P 500 lost 2.2% while the Nasdaq fell 2.76% near the close.
Slow path to taper
Most observers expect the Federal Reserve to continue taking baby steps toward taper, which could be announced in November, after perhaps some hints provided in this week’s post-meeting statement.
“We anticipate that the Fed will offer explicit tapering hints on Wednesday, followed by a formal announcement in November, and that the 2023 dots get revised down to one,” said John Hancock Investment Management’s Co-Chief Investment Strategist Emily Roland.
Morgan Stanley researchers expect the statement to offer confirmation that “if the economy evolves broadly as anticipated, it could be appropriate to start reducing the pace of asset purchases this year.” But they expect the announcement will come in December.
With questions about the employment situation, following a disappointing nonfarm payrolls number, the continuing Delta variant stresses, and the softer inflation reads, Christian Scherrmann, U.S. Economist at DWS Group, said, “We think that officials might want to wait and see if the promised surge in hiring on the back of expiring extended unemployment benefits in September actually is happening — which we will only know by the November FOMC meeting.”
As a result, DWS expects a taper announcement in November, with reductions in asset purchases beginning in December.
Noting the last Summary of Economic Projections was more hawkish than expected, John Hancock’s Roland, said, “Since then, growth has hit an air pocket.”
While the effects of the Delta variant shoulders part of the blame, and will be transitory, she said, “we believe that the end of direct transfer payments (stimulus checks) is tempering growth in a more persistent way. [Fed Chair Jerome] Powell is not going to want to risk tapering too soon/raising rates into a slowing growth environment and may be a bit more dovish than markets expect.”
But should the Fed message remain hawkish, Roland said, “the ‘September slump’ in equity markets could continue.”
With only one employment report to be released before the November meeting, Morgan Stanley Chief U.S. Economist Ellen Zentner said, “Unless we get an absolute blockbuster report, that likely sets the committee on the course to December,” with the reductions beginning in January.
As for the new dot plot, Morgan Stanley expects it to show rates holding in 2022, three 25 basis point hikes in 2023 and three more in 2024. “Powell will have ample opportunity to de-emphasize the importance of the dots as a policy signal,” they said.
“We expect the Fed to gently guide markets further toward more significant changes in the near future,” DWS’ Scherrmann said. “This could be expressed by an adjustment of the statement, most likely mirroring the Chair’s speech at Jackson Hole where Powell stated that ‘… if the economy evolved broadly as anticipated, it could be appropriate to start reducing the pace of asset purchases this year.’”
As for the SEP, he suggested Fed participants may lower their growth forecasts. “But the reality remains, despite some likely downward revisions to growth, that the U.S. economy is growing far above potential — one necessary condition for adjusting monetary policy.”
Inflation forecasts are likely to be revised higher.
“While the significance of the dot plot is routinely downplayed by the Fed chair,” Scherrmann said, “we think that market participants have already accepted that tapering is going to begin and are now zooming in on the expected rate path looking ahead.”
Currently, DWS expects two or three 25 basis point increases in 2023 and three more in 2024. “For 2022 we do not expect the dot plot to signal a rate hike,” he said, “but we imagine that a minority of individual dots might move up a bit. While this does not necessarily imply an earlier than expected lift-off, it could set a more hawkish tone for the overall meeting.”
Grant Thornton Chief Economist Diane Swonk said the Fed “will have to acknowledge a hard reality: Economic growth is coming in weaker than forecast, while inflation is coming in hotter.” And, while Powell has said if inflation doesn’t ease, “the Fed will do the heavy lifting necessary to bring down inflation,” that scenario “is becoming more likely.”
In data released Monday, homebuilder confidence ticked up rather than take an expected dip. The National Association of Home Builders Wells Fargo Housing Market Index climbed to 76 in September from 75 in August.
Economists polled by IFR Markets expected a 74 read.
“The single-family building market has moved off the unsustainably hot pace of construction of last fall and has reached a still hot but more stable level of activity, as reflected in the September HMI,” according to NAHB Chief Economist Robert Dietz. “While building material challenges persist, the rate of cost growth has eased for some products, but the job openings rate in construction is trending higher.”
Primary to come
Triborough Bridge and Tunnel Authority (/AA+/AA+/AA+/) is set to price on Tuesday $880.54 million of payroll mobility tax senior lien bonds, Series 2021C, consisting of $380.65 million, Series C-1, $184.115 million, Series C-2 and $315.775 million, Series C-3. Goldman Sachs & Co.
The Department of Airports of Los Angeles, California, (Aa3/A+/AA-//) is set to price $750.215 million of subordinate revenue bonds, 2021 Series D (private activity/AMT), serials 2026-2041, terms 2046 and 2051. Jefferies LLC.
The New Jersey Health Care Facilities Financing Authority (Aa3/AA-//) is set to price on Tuesday $746.27 million of revenue bonds, RWJ Barnabas Health Obligated Group Issue, Series 2021A, serials 2022-2041 and 2045, term 2051. Citigroup Global Markets Inc.
Orange County Transportation Authority (Aa3/AA//) is set to price on Tuesday $663.12 million of bond anticipation notes I-405 Improvement Project, Series 2021. BofA Securities.
Ohio State University (Aa1/AA/AA/) is set to price on Tuesday $600 million of general receipts bonds (Multiyear Debt Issuance Program II), Series 2021 A (Green Bonds), serials 2022-2041, terms 2046 and 2051. Barclays Capital Inc.
The California Housing Finance Agency (/AA+///) is set to price on Thursday $497.547 million of municipal certificates, Series 2021-2 Class A certificates (social certificates), evidencing beneficial interests in credit enhance custody receipts, serial 2035. Citigroup Global Markets Inc.
The California Housing Finance Agency (/AA+///) is set to price on Thursday $497.547 million of municipal certificates, Series 2021-2 Class X certificates (social certificates), evidencing beneficial interests in credit enhance custody receipts. Citigroup Global Markets Inc.
Southeast Alaska Regional Health Consortium (/A-/A-//) is set to price on Tuesday $300 million of taxable corporate CUSIP fixed rate bonds, Series 2021. BofA Securities.
The Maryland Health and Higher Education Facilities Authority (Ba3////) is set to price on Tuesday $213.36 million of revenue bonds, Adventist HealthCare Issue Series 2021B & C, consisting of $143.285 million, Series B and $70.075 million, Series C. Ziegler.
The Suffolk Tobacco Asset Securitization Corp. (non-rated) is set to price on Wednesday $179.125 million of tobacco settlement asset-backed bonds, Series 2021A-2 senior bonds and Series 2021B-1 subordinate bonds, consisting of $122.425 million, Series 21A2, serials 2024-2041, term 2050 and $56.7 million, Series 21B1, terms 2031 and 2050. Jefferies LLC.
The New York State Housing Finance Authority (Aa2////) is set to price on Tuesday $165.185 million of affordable housing revenue bonds, 2021 Series G (sustainability bonds) and 2021 Series H refunding bonds (social bonds), consisting of, $109.965 million; Series G; serials 2022-2033; terms 2036, 2041, 2047, 2051 and 2056 and $55.22 million; Series H, serials 2022-2033; terms 2036, 2041 and 2047. Wells Fargo Corporate & Investment Banking.
The Turnpike Authority of Kentucky (Aa3///AA-/) is set to price on Tuesday $157.285 million of economic development road revenue refunding bond (Revitalization Projects), 2021 Series A, 2021 Series B (federally taxable), 2022 Series A (forward delivery). J.P. Morgan Securities LLC.
The Residential Care Facilities for the Elderly Authority of Fulton County, Georgia, (non-rated) is set to price on Wednesday $131.775 million of Series 2021A & Series 2021B (Canterbury Court Project), consisting of $120.775 million, Series A and $11 million, Series B. Ziegler.
The Hospital Service District No. 1 of the Parish of Tangipahoa, Louisiana, (/A-/BBB+//) is set to price on Tuesday $129.795 million of hospital revenue refunding bonds (North Oaks Health System Project), Series 2021. BofA Securities.
The Department of Airports of Los Angeles (Aa3/A+/AA-//) is set to price $125.535 million of subordinate refunding revenue bonds, 2021 Series E (federally taxable), serials 2023-2036, terms 2041 and 2051. Jefferies LLC.
Palomar Community College District in San Diego County, California, (/AA//) is set to price on Tuesday $122.470 million of 2021 general obligation refunding bonds. Piper Sandler & Co., Minneapolis.
The Rampart Range Metropolitan District No. 5 in Douglas County, Colorado, (non-rated) is set to price on Thursday $117.700 million of limited tax supported and special revenue bonds, Series 2021, terms 2036, 2041 and 2051. Jefferies LLC.
The California Community Housing Agency (non-rated) is set to price on Thursday $117.505 million of essential housing revenue bonds, Series 2021A-1 senior bonds and Series 2021A-2 junior bonds (K Street Flats), consisting of $70 million, Series 21A1, term 2057 and $47.505 million, Series 21A2, term 2050. Jefferies LLC.
The Board of Regents of Higher Education at Montana State University (Aa3/A+//) is set to price on Tuesday $116.9 million of general revenue bonds, Series G 2021 and Series H 2021 (taxable), consisting of $45 million, Series G 21, serials 2022-2041, term 2046 and $71.9 million, Series H2, serials 2022-2036, terms 2041 and 2043. Wells Fargo Corporate & Investment Banking.
The Cypress-Fairbanks Independent School District (Aaa/AAA//) is set to price on Tuesday $91.96 million of unlimited tax refunding bonds, Taxable Series 2021B, insured by Permanent School Fund Guarantee Program. Morgan Stanley & Co. LLC.
The Suffolk Tobacco Asset Securitization Corp. (non-rated) is set to price on Wednesday $84.3 million of tobacco settlement asset-backed bonds, Series 2021B-2 subordinate bonds, term 2066. Jefferies LLC.
Competitive:
Massachusetts (Aa1/-/AA+) is set to sell $226.215 million of general obligation refunding bonds, 2021 Series A at 11 a.m. eastern on Tuesday.
Massachusetts is set to sell $350 million of general obligation bonds consolidated loan of 2021 Series D at 10:30 a.m. on Tuesday.
Massachusetts is set to sell $385 million of general obligation bonds consolidated loan of 2021 Series C at 10 a.m. on Tuesday.
Miami-Dade County School District is set to sell $450 million of tax anticipation notes, Series 2021 at 10 a.m. on Wednesday.
New York State Thruway Authority (A1/A/-) is set to sell $259.49 million of general revenue bonds Series O Bonds Maturity Group 1 at 10:15 a.m. on Thursday.
New York State Thruway Authority is set to sell $287.455 million of general revenue bonds Series O Bonds Maturity Group 2 at 10:45 a.m. on Thursday.
Christine Albano contributed to this report.