Municipals were a touch weaker Tuesday, but the focus was on a large new-issue day with airport revenue bonds from Minneapolis-St. Paul and transportation revenue bonds from Delaware leading the calendar.
Treasuries saw smaller losses out longer with the 10-year closing above 3% again while equities ended in the red as economic data disappointed.
Triple-A yield curves saw one to two basis point cuts, playing catch up after outperforming the larger losses in UST on Monday.
Muni-UST ratios were hovering around recent levels, with the two- and three-year ratios around 66% to 67%. The five-year was at 70%, the 10-year at 82% and the 30-year at 96%, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the five at 70%, the 10 at 84% and the 30 at 93% at a 4 p.m. read.
While short ratios are still lagging behind historical highs, real yields are compelling. The one-year fixed rate maturity is above 2%, a level last seen in March 2020, but before that, 2008, noted Matt Fabian, partner at Municipal Market Analytics, in the firm’s weekly Outlook report.
Last week’s short-end selloff has left the market with attractive yields there, both from a nominal basis — a one-year 2% yield is a rarity in recent decades — and relative to longer bonds: the three-year yield is once again providing 65% of the 30-year yield, Fabian said.
“After last week’s losses, the front of the municipal yield curve — the 1-6-year segment — is reading fairly cheap/oversold at present,” he said. “Despite the likelihood of the Fed raising rates again, buyers should be considering the very short opportunities being presented.”
Fabian said buyers should also be looking at the very long end (16 years-plus) “where valuation has entirely flopped into oversold as well.”
“Sellers and issuers should focus on the seven-year to the 12-year segment, which looks overbought but is also losing such momentum quickly,” he said.
The intermediate portion of the yield curve offers the most attractive relative yields, said Cooper Howard, fixed income strategist at Charles Schwab. “We believe the bulk of the move up in yields is behind us for this cycle and investors should take advantage of more attractive opportunities by locking in yields now,” he said.
The primary market was busy Tuesday.
In the negotiated space, Wells Fargo Bank priced for the Minneapolis-St. Paul Metropolitan Airports Commission, Minnesota, (/A+/A+/) $372.735 million of subordinate airport revenue bonds, with of $145.945 million of governmental/non-AMT bonds: 5s of 1/2023 at 2.27%, 5s of 2027 at 2.43%, 5s of 2031 at 2.75%, 4.125s of 2047 at 4.25%, 5s of 2052 at 3.97% and 4.25s of 2052 at 4.31%, callable 1/1/2032; and, $226.790 million of private activity/AMT bonds: 5s of 1/2023 at 2.70%, 5s of 2027 at 3.10%, 5s of 2032 at 3.55%, 5s of 2037 at 4.00%, 4.25s of 2042 at 4.39%, 5s of 2047 at 4.27%, and 5.25s of 2047 at 4.22%, callable 1/1/2032.
Citigroup Global Markets priced for the South Carolina State Housing Finance and Development Authority (Aaa///) $160 million of non-AMT mortgage revenue bonds. Bonds in 1/2024 and 7/2024 at 2.4% par, 2.80% par in 1/2027 and 7/2027, 3.50% par in 1/2032, 3.55% par in 7/2032, 4.00% par in 7/2037, 4.20% par in 7/2042, 4.35% par in 7/2047, 4.40% par in 7/2052, and 5s of 1/2052 at 3.56%, PAC bonds, callable 7/1/2031.
J.P. Morgan Securities priced for the Economic Development Authority of Loudoun County, Virginia, (Aaa/AAA//) $160 million of Howard Hughes Medical Institute Issue revenue bonds: 4s of 10/2052 at 4.11%, callable 10/1/2032.
In the competitive market, the Delaware Transportation Authority sold $228.910 million of transportation system senior revenue bonds to J.P. Morgan Securities LLC. Bonds in 7/2023 with a 5% coupon yield 2.20%, 5s of 2027 at 2.30%, 5s of 2032 at 2.62%, 4s of 2037 at 3.50%, 3.75s of 2042 at 3.82%, callable 7/1/2032.
Suffolk County, New York, sold $143.100 million of public improvement serial bonds to Mesirow Financial. Bonds in 9/2023 with a 5% coupon yield 2.30%, 5s of 2027 at 2.37%, 5s of 2032 at 2.73%, and 4s of 2036 at 3.55%, callable 9/1/2030.
The Triborough Bridge & Tunnel Authority sold $955 million of MTA payroll mobility tax bond anticipation notes: $430 million to BofA Securities, mature in 8/2024 with a 5% coupon to yield 2.35%; $300 million of BANs to J.P. Morgan Securities, mature in 8/2024 with a 5% coupon at 2.37%, $175 million to Wells Fargo Bank, mature in 8/2024 with a 5% coupon to yield 2.36%; $50 million to Goldman Sachs & Co., 5% coupon to yield 2.38%.
Montgomery County, Maryland, 5s of 2023 at 2.20% versus 2.05% Thursday. Minnesota 5s of 2023 at 2.19%. Texas 5s of 2023 at 2.21%-2.20%. Mecklenburg County, North Carolina, 5s of 2023 at 2.12%-2.02% versus 1.90% original.
Connecticut 5s of 2025 at 2.44%. Mecklenburg County 5 of 2025 at 2.24% (original 1.85%). Mecklenburg County 5s of 2026 at 2.24% (original 1.85%). Minnesota 5s of 2026 at 2.28% (original on 8/9 1.80%).
California 5s of 2027 at 2.26%-2.25%. California 5s of 2030 at 2.41%. Mecklenburg County 5s of 2031 at 2.52% versus 2.27% a week ago.
Minnesota 5s of 2035 at 2.88%. New York Dorm PITs 5s of 2036 at 3.47%-2.45%. University of North Carolina Chapel Hill 5s of 2037 at 2.99%-2.92%.
Los Angeles DWP 5s of 2042 at 3.40%-3.39%. Washington 5s of 2046 at 3.48%-3.47% versus 3.43% Thursday.
Refinitiv MMD’s scale was cut two basis points at a 3 p.m. read: the one-year at 2.17% (+2) and 2.18% (+2) in two years. The five-year at 2.22% (+2), the 10-year at 2.50% (+2) and the 30-year at 3.13% (+2).
The ICE AAA yield curve was cut a basis point in spots: 2.18% (unch) in 2023 and 2.21% (+1) in 2024. The five-year at 2.24% (+1), the 10-year was at 2.54% (unch) and the 30-year yield was at 3.08% (unch) at a 4 p.m. read.
The IHS Markit municipal curve was cut two basis points: 2.15% (+2) in 2023 and 2.18% (+2) in 2024. The five-year was at 2.21% (+2), the 10-year was at 2.49% (+2) and the 30-year yield was at 3.14% (+2) at a 3 p.m. read.
Bloomberg BVAL was cut one to two basis points: 2.21% (+2) in 2023 and 2.20% (+2) in 2024. The five-year at 2.19% (+2), the 10-year at 2.48% (+2) and the 30-year at 3.16% (+2) at 4 p.m.
Treasuries were weaker out longer.
The two-year UST was yielding 3.298% (-1), the three-year was at 3.346% (unch), the five-year at 3.171% (+8), the seven-year 3.120% (+7), the 10-year yielding 3.028% (+5), the 20-year at 3.483% (+4) and the 30-year Treasury was yielding 3.232% (+1) at the close.
Jackson Hole preview
Don’t expect much new information to come from the Jackson Hole symposium this year analysts say, as the data-dependent Federal Open Market Committee will rely on incoming economic numbers in September to decide the proper size rate hike.
Currently, some FOMC members favor a 75-basis-point increase, while others want a 50-basis-point raise in September, noted Berenberg chief economist for Americas and Asia Mickey Levy, and economist Mahmoud Abu Ghzalah. Powell “is likely to reaffirm the Fed’s inflation-fighting resolve but offer little in the way of fresh insights into the Fed’s deliberations,” they said. “Given the Fed’s recent emphasis on data dependence, August’s inflation and employment data released in early September will likely be the deciding factors in determining the size of September’s rate hike.”
Expect Federal Reserve Chair Jerome Powell to restate “his commitment to taming inflation,” said Ed Moya, senior market analyst at Oanda. Powell “may try to push back on market expectations for a dovish pivot in September,” and “send a clear message that even if they have a slower pace of rate hikes that won’t signal a lower peak rate or that they will be quick to cut rates.”
The market watches the symposium, but it’s “rarely been the catalyst for major market moves,” said Blake Gwinn, head of U.S. rates strategy at RBC Capital Markets. But this year’s meeting could cause more volatility than usual, he said. “Sensitivity to both the chair’s speech (and any other Fed comments that come out of sideline interviews) may be heightened in the midst of a hiking cycle, multi-decade high inflation, and a market struggling to get a handle on the Fed’s reaction function.”
For those reasons, as well, Powell’s speech could “be a bit more inclined to address the near-term economic and policy outlook than he has at prior Jackson Hole appearances,” Gwinn said.
Rather than at Jackson Hole, he added, “Powell is likely to hold back on any major shift in tone until the September FOMC,” since between the two “a string of potentially crucial data points” get released.
Inflation remains the key, especially hitting the 2% target.
“I haven’t seen any commentary from anyone on the Fed or data to suggest that inflation has moved lower enough to give them comfort that it’s moving back toward 2% beyond a reasonable doubt,” said Gene Tannuzzo, global head of fixed income at Columbia Threadneedle Investments. “Remember, it was last year’s Jackson Hole when Powell first acknowledge that inflation had made enough upward progress for them to start tapering asset purchases.”
He said he’d be surprised “if they sounded comfortable enough in thinking inflation has evidenced a downward trend, and that they can decelerate rate hikes in the near-term. That was initially the market’s reaction to July’s CPI print, but I don’t think the Fed is going to be on the same page as that.”
Megan Horneman, chief investment officer at Verdence Capital Advisors, said she doesn’t expect any signals on the September rate decision. “Like many other investors, we believe more data is necessary before the next FOMC meeting (September 20-21) for a clearer picture of what may be expected.”
Since the meeting is “closely watched by investors,” there is a chance it will be a market mover, she said.
But Wilmington Trust Chief Economist Luke Tilley said he expects Powell to explain what conditions must be met to slow rate hikes. “A couple months ago it was ‘a series’ of lower inflation readings,” he said. “Then after July he went more general in saying ‘convincing evidence.’ That change gives them more latitude, especially with all of the nuance about lags for shelter in the CPI, the differences between CPI and PCE, and a host of other things.”
While Powell said in the Spring that it wasn’t the time for nuance in inflation talks, Tilley said, “As we hit the second half of the year, nuance is back.”
And they will rely on data, Tilley said. “If inflation slows as we expect, most of the hiking is behind us. They’ll slow sharply and likely end the year with the top of their target range at just 3.25%,” he said. “If inflation remains high, they’ll keep hiking.”
Expect Powell to stress inflation is still too high and the Fed is determined to hit its inflation target “even at the risk of economic weakness,” said David Kelly, chief global strategist, at JPMorgan Asset Management.
Other themes will be data dependency and no preset hiking agenda. “However, his speech, echoing many of his colleagues in recent days, may well express confidence that the economy can handle higher rates and that, even with recently falling gasoline prices, it is far too early to declare victory in the war on inflation,” he said.
But, he noted, “a balanced assessment of today’s economic environment suggests the danger of recession exceeds the risk of inflation staying at a level that could inflict long-term economic damage.”
If the Fed determines this to be the case, it “will moderate the pace of monetary tightening, potentially giving a further boost to U.S. bond and stock markets,” Kelly said. “If they do not, then interest rates could be higher in the short run but probably lower next year.”
No matter what the Fed does, he said, the result will likely be “a slow-growing economy with moderate inflation and interest rates.” If the Fed is overly aggressive, it would cause a “more volatile economic and market cycle.”
Investors, Kelly said, should watch the data as well as Jackson Hole. “It still looks likely that the data will be weak enough on both growth and inflation to allow the Fed to raise rates by 50 rather than 75 basis points” in September. “However, if they back up their recent tough talk with tough actions next month, it may be wise to adopt a more diversified and defensive position in portfolios for the months ahead.”
Primary to come:
The New York City Transitional Finance Authority (Aa1/AAA/AAA/) is set to price Wednesday $987.250 million of tax-exempt future tax secured subordinate bonds, consisting of $980.340 million of Fiscal 2023 Series B, Subseries B-1 serials 2023-2038 and $6.910 million, Fiscal 2023 Series C, Subseries C-1, serial 2022. Ramirez & Co.
Charlotte, North Carolina, (Aaa/AAA/AAA/) is set to price Wednesday $467.030 million of water and sewer system revenue bonds, consisting of 451.075 million of exempts, Series 2022A, serials 2023-2042, terms 2047 and 2052 and $15.995 million of taxable, Series 2022B, serials 2023-2025. Wells Fargo Bank.
The Del Valle Independent School District, Texas, (/AAA//) is set to price Wednesday $280 million of PSF-guaranteed unlimited tax school building bonds, Series 2022, serials 2024-2042, term 2047. Siebert Williams Shank & Co.
The Alamo Community College District, Texas, (Aaa/AAA//) is set to price Thursday $244.170 million of maintenance tax notes, Series 2022, serials 2023-2030. Siebert Williams Shank & Co.
The Pennsylvania Housing Finance Agency (Aa1/AA+//) is set to price Wednesday (retail order on Tuesday) $201.945 million of single-family mortgage revenue bonds, consisting of $178.675 million of non-AMT social bonds, Series 2022-140A, terms 2042, 2047, 2050 and 2052 and $23.270 million of taxable, Series 2022-140B, term 2042. Barclays Capital.
Richmond, Virginia, (/AA-//) is set to price Thursday $156.285 million of taxable pension refunding bonds, Series 2022, serials 2026-2037, term 2044. Loop Capital Markets.
The County of Sacramento Metro Air Park Community Facilities District No. 2000-1, California, is set to price Wednesday $121.210 million of Special Tax Bonds, Series 2022, serials 2023-2037, terms 2042 and 2047. Stifel, Nicolaus & Co.
The Dormitory Authority of the State of New York (Aa3//AA-/) is set to price Thursday $111.795 million of school district revenue bond financing program revenue bonds, Series 2022C, serials 2023-2041. RBC Capital Markets.
The Indiana Finance Authority (Aaa/AAA/AAA/) is set to $250 million of green state revolving fund program bonds, Series 2022B, at 11:15 a.m. eastern Wednesday.