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Municipals were little changed as secondary trading eased on Thursday, but the short-end remained under pressure and flows returned to municipal bond mutual funds. US Treasuries ended the session mixed and stocks sold off strongly.
Muni-UST ratios were flat Thursday. The three-year muni-UST ratio is at 61%, the five-year at 67%, the 10-year at 72% and the 30-year at 98%, according to Refinitiv MMD’s 3pm reading. ICE data services had three at 62%, five at 67%, 10 at 74% and 30 at 97% readings at 4 hours.
Refinitiv Lipper reported outflows of $1.217 billion from municipal mutual funds in the week ending Wednesday, after inflows of $46.912 million.
Foreign exchange funds, led by high yield at $128.285 million after inflows of $552.127 million a week ago, inflowed an additional $757.860 million after inflows of $952.134 million last week.
In the primary market Thursday, Ramirez & Co. bought $400 million in consolidated bonds for the Port Authority of New York and New Jersey (AA3/AA-/AA-/). Two hundred thirty-sixth series $300 million of 1/2033 5s at 3.44%, 5s of 2037 at 4.01%, 5s of 20042 at 4.29%, 5s of 2047 at 4.2 of 4.5%, and 5s of 2.5s at 4.43% are callable. 1/15/2033.
The second tranche, from the two hundred and thirty-seventh series of $100 million, saw 5s of 1/2033 at 2.58%, 5s of 2037 at 3..29%, 5s of 20042 at 3.76%, 5s of 2047 at 3.93%. 2052 at 4.05%, callable 1/15/2033.
Short-end pressure
The fallout from the FOMC’s rate announcement is “good news/bad news – a small hike of 50 basis points but with a long tightening cycle to come,” said Kim Olson, senior vice president of municipal bond trading at FHN Financial.
“She largely ignores the pre-announcement noise outside of the short-term maturity,” says Munis. The SIFMA swap index jumped to 3.73% on Wednesday from 2.21% a week ago. In the year It reached its highest levels since March 2020, when it reached 5.20% on March 18 and 4.71% on March 25 of that year during the Covid-led muni short sale.
A one-year triple-A muni is higher than a two-year, five- and 10-year.
“Because there is a lot of interest in booking tax losses without current calls and correcting to a higher ratio compared to short USTs, the higher rate has created a penalty for sellers but a short-term opportunity for would-be buyers,” she said.
The one-year municipal yield is at 2.66% as of Thursday. It opened the year on January 3 with 0.17% in Refinitiv MMD. According to Refinitiv MMD, the one-year period rose 27 basis points in one week.
The one-year Refinitiv MMD score average from 2020 is “0.76%, up from 3.14% at the end of this year and the current 2.66% yield and 2.66%,” he said. The 1H10 MMD curve is inverted by 19 basis points) and between 2032 and 2042 (the 10H20 slope is 74 basis points).
The displacement of floating-rate production has “pushed 2023 maturities into broader regions – the University of Texas 5 due 2023 sold +29/MMD for a name that often trades in volatile markets less than AAA rating,” she said.
“The top 5s in the 15-year range yield 3% or better — dropping 5% or more for TEY’s long-term target for high-bracket buyers,” says Olsan.
“Without the benefit (or pressure?) of the new issue, secondary duty-free products can last until early January – which is certainly more attractive than the 1%-2% rate at the end of 2021,” she said. .
Municipal supply projections for 2023 have many variables.
In the last decade, the average annual amount is 405 billion dollars.
“In 2013, the 10-year yield was 21% higher than the 1.90% decade average, so the supply number fell 18% below that,” she said. “Following the enactment of new tax laws that eliminated early refunds and impacted the average 10-year MMD yield of 2.47%, the amount fell by 17% in 2018, to just $339 billion.”
In the year In 2020 and 2021, those years are “the two lowest production deliveries of the season, up 20% from the previous 10-year figure,” he said.
“Suppliers have booked long-term debt for the low-2% range — bonds that have been the majority of tax exchanges this year,” Olsan said.
November municipal bond issuance was at a 23-year low for the month, with total volume falling below $20 billion. Printing fell 47 percent year-over-year as suppliers grappled with continued market volatility and uncertain Federal Reserve policy.
Bond volume for the year through November totaled $360 billion, “12 percent below the 10-year annualized level, while the 10-year AAA spot traded at an average of 2.44%, 28 percent higher than the 1.90% average since 2013,” she said.
Forecasts for municipal bond issuance for 2023 are so far between $500 billion and $302 billion, and firms are divided on whether the supply will exceed 2022’s dismal total issuance.
According to the reported data, most of the organizations will be in 2023. They expect production in 2023 to be lower than the record levels in 2020 and 2021, but higher than in 2022.
In addition, Olsan said that the expected supply forecast is partly based on the overall production.
“A 60 basis point difference between the current range of the 10-year rate and the 1.90% ten-year average offers potential opportunity,” she said. “If the current estimated 2.50% level represents the starting point for 2023, any decline in yields will reflect a corresponding increase in overall supply as issuers benefit from lower interest costs amid new funding and repayment objectives.”
Secondary marketing
North Carolina 5s of 2023 at 2.67 percent. Texas 5s 2024 at 2.81%-2.67%.
Maryland 5s 2026 at 2.44% Charlotte, North Carolina, 2027 5s water at 2.44%-2.38%.
Massachusetts Green Water 5s 2029 at 2.44%-2.43%. Bulk green water 5s of 2031 at 2.46%-2.45%.
Mecklenburg County, North Carolina, 5s 2034 at 2.61%-2.60% from 2.67%-2.65% Monday. New York City TFA 5s 2037 at 3.38%-3.37% from 3.30% Monday.
California 5s of 2042 at 3.39%-3.32%. NYC TFA 5s of 2047 at 3.90%-3.85%. NYC TFA 5s of 2051 at 3.98%-3.93%.
AAA scales
The Refinitiv MMD index was unchanged: 2.66% in one year and 2.49% in two years. The five-year is 2.43%, the 10-year is 2.47% and the 30-year is 3.42%.
ICE AAA’s dividend yield was mixed: 2.65% (+1`) in 2023 and 2.52% (+1) in 2024. The five-year was at 2.46% (inch), the 10-year at 2.52% (-1). And the 30-year yield was at 3.43% (unch) at 4 pm
The IHS Markit municipal curve is unchanged: 2.64% in 2023 and 2.49% in 2024. The five-year yield was 2.45%, the 10-year yield was 2.49% and the 30-year yield was 3.41% at 4pm.
Bloomberg BVAL is little changed: 2.61% (inch) in 2023 and 2.50% (inch) in 2024. The five-year was at 2.44% (unch), the 10-year was at 2.51% (-1) and the 30-year was at 3.42% (unch) at 4 pm.
Treasurys have joined.
Two-year UST 4.236% (+3), three-year at 3.946% (+3), five-year at 3.620% (+1), seven-year at 3.559% (ounce), 10-year yield at 3.451% (-3), the 20-year yielded at 3.695% (-3) and the 30-year Treasury was yielding 3.502% (-4) closely.
FOMC redux
After the Federal Open Market Committee raised rates 50 basis points, Fed Chairman Jerome Powell’s hawkish comments sent traders weighing in on the Fed’s next moves.
Powell said at the post-FOMC news conference that policy is not yet tight enough. In three months, the summary of economic forecasts may increase, but it is not guaranteed because it is based on data.
“Inflation is heading towards the central bank’s 2% target,” said Andy Sparks, managing director of MSCI Research.
“Given the sharp improvement in inflation reported in October and November, this is serious talk,” he said. “Chairman Powell’s comments [Wednesday] It could open the Fed to more criticism from doves who argue that it has overreacted and that overly hawkish policies are pushing the economy into recession.
The Morgan Stanley report, led by US Chief Economist Ellen Zentner, said: “It was difficult for us to follow the logic of the changes in the SEP and the chairman’s comments, both of which seemed inconsistent.”
“Finally, financial conditions moved little despite a very tight supply, perhaps reflecting a recent bias towards lower shock core inflation,” the report said.
“The Fed doesn’t want the financial conditions to ease, but more and more investors are saying, ‘We hear what you’re saying and we know what you want, but we don’t believe you,'” said Christian Hoffmann, portfolio manager and managing director at Thornburg Investment Management.
“Paulus Octopus is less reliable than choosing the winner of the World Cup, so you can’t blame the uncertainty of the market.”
Joseph Kalish, chief global macro strategist at Ned Davis Research, said the key is timing for the Fed to tighten sufficiently.
Inflation in core private consumption spending is at 5.0% “and falling, and the new target of 4.25% to 4.50% is a sufficiently restrictive range for the Fed, the real consumption funds rate is not yet in positive territory,” he said. But with further increases due early next year, he said, the amount should be within the threshold range.
“Powell doesn’t accept a recession, but the higher terminal volume suggests more damage to the economy,” Kalish said.
“If this hawkish midpoint plot materializes, it puts the risk of a slowdown in the U.S. economy high next year,” said Scott Anderson, chief economist at Bank of the West. We now see the risk of at least a modest US recession of around 70% by 2023.
And while Craig Erlam, senior market analyst at ONDA, still doesn’t believe the Fed will “increase rates as the dot plot suggests,” he said, “The next hike could be another 50 basis points unless we see something.” More sustainable in terms of labor market and wage numbers.”
But given that the policy stance is now in a better position to tackle inflation, Berenberg US and Asia economist Mickey Levy expects the Fed to choose to move the rate hike to a 25 bp increase, from Jan. 31-Feb. 1 meeting.
Wells Fargo Securities Senior Economist Sarah House and Economist Michael Pugliese said “it seems more likely that we are closer to the end of this hiking cycle than the beginning.”
The Fed’s latest quarterly forecasts, Levy said, “revealed that the Fed has done a reality check and is very conservative in its policies to reduce inflation.”
“A clear pivot to easing monetary policy is a long way off and depends on how quickly inflation returns to 2% and how much economic pain is caused in the process,” House and Pugliese said. “The Fed’s soft projections for GDP growth and expectations for high unemployment suggest it will be a rough ride next year.”
Whether the Fed pursues this new policy course, Levy said, “depends heavily on economic and inflationary outcomes and whether the Fed is willing to pay short-term costs to reduce inflation to its 2% target.”
Markets have been ahead of the Fed several times this year, Erlam said, and “the central bank may simply be pushing back to prevent complacency in markets and weaken its own tightening efforts.”
But the issue is still that the road back to 2% from that to 9.1% can be much less smooth and sometimes frustrating, he said. Now we have to accept that.
Mutual fund details
Refinitiv Lipper reported outflows of $1.217 billion for the week ending Wednesday, following revenue of $46.912 million last week.
Exchange traded muni funds reported inflows of $757.860 million after inflows of $952.134 million last week. Prior to ETFs, muni funds saw outflows of $1.974 billion after last week’s outflow of $905.221 million.
Long-term muni bond funds drew $524.128 million after inflows of $448.245 million last week. Medium-term funds withdrew $524.741 million after last week’s withdrawal of $228.166 million.
It can be recalled that national funds withdrew $943.208 million after inflows of $226.343 million last week, while high-yield muni funds reported outflows of $128.285 million after inflows of $552.127 million the week before.
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