Bonds

Munis underperform UST rally

Municipals were stronger on the backs of a U.S. Treasury rally but underperformed the movements there, pushing ratios on the 10-year near 80% and the 30-year close to 90%.

Triple-A benchmark scales were bumped two to three basis points on bonds outside nine-years while the 10-year UST fell seven basis points and the 30-year fell 10 from a day prior.

Municipal-to-UST ratios showed the 5-year at 56%, the 10-year at 79% and the 30-year at 88%, according to Refinitiv MMD. ICE Data Services had the 5-year at 54%, 10-year at 79% and the 30 at 89%.

The Investment Company Institute reported $193 million of inflows into municipal bond mutual funds for the week ending Oct. 20, the lowest since the single week of outflows in March. It was the 33rd week in a row of inflows, but down from $385 million the week prior.

Exchange-traded funds saw $262 million of inflows, up from $124 million a week prior. Total inflows have hit $76.8 billion year-to-date.

The primary was more the focus Wednesday.

Citigroup Global Markets priced for Ohio (Aa1/AA+/AA+/) $329.195 million of general obligation bonds consisting of: $140.710 million of infrastructure improvement general obligation bonds, Series 2021A-II, with 5s of 3/2022 at 0.12%, 5s of 2026 at 0.64%, 5s of 2031 at 1.33%, 4s of 2036 at 1.67% and 5s of 2041 at 1.68%, callable March 1, 2032.

The second, $40.45 million of conservation projects general obligation bonds, Series 2021A-CP, saw 5s of 3/2022 at 0.12%, 5s of 2026 at 0.64%, 5s of 2031 at 1.33% and 5s of 2034 at 1.48%, callable March 1, 2032. The next, $47.905 million of infrastructure improvement general obligation refunding bonds, Series 2021B, saw 5s of 2/2025 at 0.45%, 5s of 2026 at 0.63%, 5s of 2031 at 1.33% and 5s of 2032 at 1.38%, noncall. The last, $100.13 million of common schools general obligation refunding bonds, Series 2021C, saw 5s of 3/2026 at 0.64%, 5s of 2031 at 1.33% and 5s of 2032 at 1.38%, noncall.

J.P. Morgan Securities priced for the Lancaster County Hospital Authority (A2/A+//) $288.84 million of Penn State Health revenue bonds. Bonds in 11/2037 with a 5% coupon yield 1.82%, 5s of 2041 at 1.96%, 5s of 2046 at 2.11% and 5s of 2051 at 2.18%, callable Nov. 1, 2029.

Morgan Stanley & Co. LLC priced for Austin, Texas, (A2/AA/AA-/) $217.715 million of water and wastewater system revenue refunding bonds, Series 2021. Bonds in 11/2024 with a 5% coupon yield 0.44%, 5s of 2026 at 0.74%, 5s of 2031 at 1.38%, 4s of 2036 at 1.72%, 4s of 2041 at 1.86%, 5s of 2046 at 1.88% and 4s of 2051 at 2.08%, callable Nov. 15, 2031.

Goldman Sachs & Co. priced for the Private Colleges & University Authority (A2//AA-/) $159 million of The Savannah College of Art & Design Projects revenue bonds with 5s of 4/2023 at 0.37%, 5s of 2026 at 0.84%, 5s of 2031 at 1.59%, 5s of 2036 at 1.86%, 4s of 2041 at 2.18% and 4s of 2044 at 2.27%.

In the competitive market, Minneapolis, Minnesota, (/AAA/AA+/) sold $125.515 million of general obligation unlimited tax bonds to BofA Securities. Bonds in 6/2022 with a 4% coupon yield 0.16%, 4s of 12/2022 at 0.18%, 5s of 2026 at 0.71%, 3s of 2031 at 1.55%, 2.125s of 2036 at 2.24% and 2.25s of 2040 at 2.33%, callable Dec. 1, 2029.

The issuer also sold $15.93 million of taxable general obligation bonds to Raymond James & Associates. Bonds in 12/2022 with a 1% coupon yield 0.26%, 1.3% par in 2026, 1.85% par in 2031, 2.3% par in 2036 and 2.6% par in 2040, callable Dec. 1, 2029.

Los Angeles (Aa2/AA/AAA/AA+) sold $211.94 million of taxable general obligation social bonds, Series 2021-A to Citigroup Global Markets Inc. Details were not available.

Secondary trading
Minnesota 5s of 2022 at 0.14%-0.13%. Maryland 5s of 2022 at 0.17%. Wisconsin 5s of 2022 at 0.14%. Gilbert, Arizona, 5s of 2022 at 0.15%.

Texas A&M 5s of 2023 at 0.26% versus 0.28% Tuesday. District of Columbia 5s of 2023 at 0.29%.

Michigan Trunkline 5s of 2024 at 0.43%-0.38%. Maryland 5s of 2024 at 0.37%. Virginia 5s of 2025 at 0.52%-0.52% versus 0.55% Monday.

Massachusetts water 5s of 2026 at 0.58% versus 0.59% Tuesday. New York City TFA 5s of 2026 at 0.73%.

Ogden City Utah SD 5s of 2027 at 0.85%. California 4s of 2027 at 0.85%.

Maryland 5s of 2030 at 1.21%-1.18%. Loudoun County, Virginia, 5s of 2030 at 1.19%.

Maryland 5s of 2031 at 1.30%-1.29%. Georgia 5s of 2031 at 1.18% versus 1.22% a week ago. Monmouth County, New Jersey, 5s of 2031 at 1.28% versus 1.31% Tuesday.

New York City 5s of 2033 at 1.62%. Texas water 5s of 2034 at 1.46%-1.45%.

Triborough Bridge and Tunnel 5s of 2037 at 1.74% versus 1.77% Tuesday.

Georgia road and tollway 5s of 2044 at 1.87%-1.86%. Washington 5s of 2045 at 1.80% versus 1.88% Friday. New York City TFA 5s of 2045 at 2.03%-2.02% versus 2.08% Friday.

Los Angeles Department of Water and Power 5s of 2049 at 1.75%. Massachusetts 5s of 2051 at 1.90% versus 1.98% Friday. New York Dorm NYU 5s of 2051 at 1.98%-1.97%.

Informa: Money market muni funds fall
Tax-exempt municipal money market fund assets fell by $922.3 million, bringing their total down to $87.59 billion for the week ending Oct. 26, according to the Money Fund Report, a publication of Informa Financial Intelligence.

The average seven-day simple yield for the 150 tax-free and municipal money-market funds sat at 0.01%, the same as the previous week.

Taxable money-fund assets gained $33.61 billion, bringing total net assets to $4.409 trillion. The average, seven-day simple yield for the 771 taxable reporting funds sat at 0.02%, same as the prior week.

AAA scales
According to Refinitiv MMD, the short end saw yields steady on the one-year at 0.15% in 2022 and at 0.25% in 2023. The yield on the 10-year was bumped three to 1.21% and the yield on the 30-year bumped three to 1.70%.

The ICE municipal yield curve showed bonds steady at 0.17% in 2022 and 0.25% in 2023. The 10-year maturity was down two to 1.20% and the 30-year yield fell three to 1.72%.

The IHS Markit municipal analytics curve showed short yields steady at 0.15% in 2022 and 0.23% in 2023. The 10-year yield fell two to 1.22% and the 30-year yield fell two to 1.71%.

The Bloomberg BVAL curve showed short yields steady at 0.17% in 2022 and steady at 0.21% in 2023. The 10-year yield fell two to 1.21% and the 30-year fell three to 1.73%.

In late trading, Treasuries were firmer on the 10- and 30-year and equities were mixed near the close.

The 5-year Treasury was yielding 1.143%, 10-year Treasury was yielding 1.539% and the 30-year Treasury was yielding 1.944%. The Dow Jones Industrial Average lost 274 points, or 0.69%, the S&P rose 0.07% while the Nasdaq gained 0.71%.

Taper, then what?
It’s clear the Federal Open Market Committee meeting next week will end with a taper announcement, but the story doesn’t end there.

“I think tapering will have minimal impact on inflation,” said Lon Erickson, portfolio manager at Thornburg Investment Management. “It will more likely have an impact on financial markets as the liquidity is extracted.”

And things should go smoothly, he said, unless the Fed deviates from what the market expects, the “both the yield curve and risk asset prices could be in trouble.”

While no taper tantrum is expected, volatility is possible, Erickson said. “The record amounts of liquidity helped push asset prices higher as it was being injected so I don’t think it’d be reasonable to expect no impact as its being withdrawn.”

“We believe the Fed has lost control of inflation,” said Jay Hatfield, founder and portfolio manager at Infrastructure Capital Advisors. “Fed tapering only means pouring less gasoline on an out-of-control fire.”

With inflation unchecked, the Fed will be forced to aggressively hike rates next year, he said, with a “50% chance of a recession in 2022.”

Hatfield estimates “true run-rate inflation is currently over 10%,” with “ultra-loose Fed policy” pushing up housing prices.

“The housing sector is the critical area of the economy that Federal Reserve policy impacts as 10 of 11 post WWII recessions were caused by tight Fed policy cratering the housing market,” he said. “The housing sector represents almost 20% of U.S. GDP.”

Thornburg’s Erickson said it’s too soon to determine if the Fed is behind the curve, “but risks are certainly tilted in that direction.”

The Fed never defined what they meant by transitory inflation, but it has continued longer than they expected. “And the problem with that,” Erickson said, “is, while inflation expectations remain anchored, the longer ‘transitory’ inflation (in addition to non-transitory pricing pressures such as wages and home prices) continues the less anchored those expectations will become and the Fed could then have a real mess on its hands with a vicious inflationary cycle.”

Another issue is market reaction, he said. “If the market loses confidence in the Fed’s ability to control inflation, and inflation expectations, then the markets will start barking back in a major way.”

“The Fed missed its window for monetary policy to have much impact and now needs to play catch up or at the very least appear to be more realistic regarding inflation,” said Bryce Doty, senior portfolio manager at Sit Investment Associates. “It’s disappointing and even comical to hear members of the Fed and even some economists claim that inflation pressures are more than anyone expected when many (us included) have been calling for shortages to continue to steadily worsen at least through the year-end holiday shopping season since last spring.”

He called it “ironic” that inflation caused by a worker shortage is addressed by “removing stimulus when they would typically be trying to enhance employment by stimulating the economy.”

But, Doty said, the Fed chooses “strategies that would reduce demand; not that it will make a difference given that there is so much pent-up demand and excess savings.”

Rate hikes, Thornburg’s Erickson said, will be needed to halt inflation. The market has begun pricing in rate hikes next year, he said, “perhaps losing confidence in the ‘transitory’ nature of inflation.”

Liftoff is expected late next year, but Wilmington Trust Chief Economist Luke Tilley said, Wilmington is “on the watch for earlier hikes if inflation surprises to the upside.”

Fed officials “are taking great pains to prevent markets from pricing in immediate rate hikes once the taper is complete, which is sincere and appropriate, but if inflation surprises to the upside they would certainly be willing to hike in mid-2022 in our view,” he said.

Supply chain issues continuing or firms raising wages to attract workers risk inflation growing, he said, but that’s not his base case. “We expect inflation to slow as purchases of goods are slowing and alleviating some of the price pressure.”

Wage pressures, he said, have crept into “mid-wage levels” lately, and it could continue to spread. But, increased productivity “mitigates some of that [wage] pressure.”

And ports in this country have “unloaded about 20% more containers year-to-date through August than in 2018 or 2019, even though jobs in associated industries” have dropped by 40,000 since before the pandemic,” Tilley said.

Jeffrey Cleveland, chief economist at Payden & Rygel, doesn’t expect liftoff until 2023. “If they only end their asset purchases by next summer, I don’t think there’s time” to fit in a rate hike before yearend, he said on a Bond Buyer podcast. “I think they’ll want to wait three to six months to see the impact of tapering on the economy.”

Count Grant Thornton Chief Economist Diane Swonk among those who see the Fed being aggressive. “We are betting that the Fed moves to dampen inflation sooner and more aggressively in 2022, to hedge against inflation becoming entrenched,” she said. “That would mark the first time that the Federal Reserve chased inflation since the 1980s. Since then, the Fed has been preoccupied with preempting a nonexistent surge in inflation. The pandemic continues to distort our world.”

In data released Wednesday, durable goods orders fell 0.4% in September, while excluding transportation, orders grew 0.4%. Economists polled by IFR Markets expected a 1.0% decline in the headline number and a 0.4% climb in ex-transportation.

“Investment is robust and provides a much-needed boost to productivity growth,” Swonk said. Those gains and a rebuilding of inventories will eventually help alleviate the upward pressure on overall inflation but not soon enough for the Federal Reserve.”

While growth was “solid” in core capital goods shipments, Wells Fargo Securities Senior Economist Tim Quinlan and Economist Shannon Seery noted, “unfilled orders continue to march higher as businesses are unable to get their hands on enough supply to meet demand.”

Primary market to come
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.

Dallas and Fort Worth, Texas, (A1//A+/AA/) is set to price Thursday $708.1 million of Dallas Fort Worth International Airport joint revenue refunding bonds, taxable Series 2021C, serials 2022-2036, term 2046. Barclays Capital.

Dallas and Fort Worth, Texas, (A1//A+/AA) is also set to price Thursday $300.6 million of Dallas Fort Worth International Airport joint revenue refunding bonds, Series 2021B (non-AMT), serials 2022-2030 and 2043-2045. RBC Capital Markets.

California Community Choice Financing Authority (A2///) is set to price $556.03 million of clean energy project green revenue bonds, Series 2021A (climate bond certified). Goldman Sachs & Co.

Westchester County Local Development Corp. (non-rated) is set to price $392.245 million of revenue bonds (Purchase Senior Learning Community Inc. Project), Series 2021, consisting of $213.805 million of Series A, $23.52 million of Series B, $58.73 million of Series C, $89.525 million of Series D and $6.665 million of Series Ser E. HJ Sims & Co.

The Health and Educational Facilities Board of the Metropolitan Government of Nashville and Davidson County, Tennessee, (A3/A///) is set to price Thursday $293.205 million of taxable revenue bonds (Vanderbilt University Medical Center), Series 2021A and 2021B. J.P. Morgan Securities.

The Industrial Development Authority of Phoenix, Arizona, (non-rated) is set to price Thursday $232.815 million of hotel revenue bonds (Provident Group — Falcon Properties LLC, Project), consisting of $143.585 million, Series A-1, terms 2041, 2051 and 2057; $7.785 million, Series A-2, term 2032 and $81.445 million, Series B, serial 2057. RBC Capital Markets.

The Indiana Finance Authority (Aaa/AAA/AAA/) is set to price $215.03 million of state revolving fund program bonds, Series 2021B (green bonds). Citigroup Global Markets.

Manor Independent School District is set to price Thursday $156.515 million of taxable unlimited tax refunding bonds, Series 2021B, serials 2022-2044. Jefferies LLC.

Successor Agency to the Redevelopment Agency of the City and County of San Francisco (/A//) is set to price $107.34 million of taxable third lien tax allocation bonds, 2021 Series A (affordable housing projects) (social bonds), serials 2023-2031. Citigroup Global Markets.

Clovis Unified School District (/AA-//) is set to price Thursday $100.815 million of federally taxable 2021 certificates of participation, serials 2022-2036, terms 2041, 2046 and 2051. Stifel, Nicolaus & Company.

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