Bonds

Munis improve with USTs as data show inflation moderating

Municipals were firmer Tuesday as triple-A yields moved along with U.S. Treasuries to rally out long on a smaller-than-expected increase in producer prices. Equities closed the session in the black.

Triple-A yields fell five to eight basis points while UST saw yields fall up to eight, moving the 30-year UST below 4% for the first time since mid-October. The three-year muni-UST ratio on Tuesday was at 70%, the five-year at 75%, the 10-year at 81% and the 30-year at 95%, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the three at 69%, the five at 73%, the 10 at 81% and the 30 at 94% at a 4 p.m. read.

The U.S. Producer Price Index for final demand rose 0.2% month-over-month in October, lowering the year-over-year increase to 8%, “underpinned by relatively broad-based moderations of inflationary pressures within the goods sector and by margin compression,” said Scott Anderson, chief economist and executive vice president at Bank of the West Economics.

“The smaller-than-forecasted print, combined with last week’s encouraging consumer inflation report, provides more evidence that inflationary pressures are moderating in the United States,” said Mickey Levy and Mahmoud Abu Ghzalah of Berenberg Capital Markets.

The municipal market is alive and well, said Nuveen strategists Anders S. Persson and John V. Miller.

They noted that strong interest in tax-exempts continues at current high yields.

“However, we expect continued volatility in munis through the end of the year due to an outsized amount of tax-loss trading,” they said.

Ongoing outflows from the mutual funds are “leaving a base of smaller and more cautious buyers,” said Matt Fabian, a partner at Municipal Market Analytics.

Not all buyers have been cautious as municipal exchanged-traded funds have seen major inflows in the last few weeks, and seasonal expectations will turn very positive with December, he said.

A little caution is seen in the “SIFMA 7-day index’s reset to a lower yield, which itself represents just 58% of SOFR; this is likely a function of tight 2a7 supply conditions but suggests a material repricing risk at the front end nonetheless,” Fabian said.

In the primary market Tuesday, Citigroup Global Markets priced for the Duval County School Board, Florida, (/A+/A+/) $575.345 million of Florida Master Lease Program certificates of participation, Series 2022A, saw 5s of 7/2023 at 3.11%, 5s of 2027 at 3.32%, 5s of 2032 at 3.56% and 5s of 2035 at 3.83%, callable 7/1/2030.

Ramirez & Co. priced for San Antonio, Texas, (Aa3/A+/AA-/) $134.870 million of electric and gas systems variable rate junior lien revenue refunding bonds, Series 2018 (SIFMA Index), saw SIFMA +87bp of 2/2048 with a mandatory tender date of 12/1/2025 price at par, callable 6/1/2025.

In the competitive market, the Missouri Highways and Transportation Commission (Aa1/AA+/AAA/) sold $488.625 million of third lien state road bonds, Series A 2022, to Jefferies, with 5s of 5/2024 at 2.86%, 5s of 2027 at 2.92%, 5s of 2032 at 3.06% and 4s of 2033 at 3.09%, noncall.

The Mukilteo School District No. 6, Washington, (Aaa///) sold $108.350 million of Washington State School District Credit Enhancement Program unlimited tax general obligation bonds, Series 2022, to Morgan Stanley & Co., with 5s of 12/2024 at 2.90%, 5s of 2027 at 2.95%, 5s of 2032 at 3.05% and 5s of 2037 at 3.42%, callable 12/1/2032.

2023 will improve for fixed-income
Morgan Stanley strategists Mark T. Schmidt and Barbara A. Boakye said next year will be a good year for fixed-income across the board, including munis.

“Slowing inflation and a soft landing for growth could create a Goldilocks environment for fixed income,” they said.

For the first time in years, Morgan Stanley strategists said “households could net increase their exposure to bonds.”

They expect 8% total returns for the index as a whole, while out long, they see “double-digit total returns and 30bp of spread compression.”

Morgan Stanley strategists noted “the active share should rise next year as mutual funds play catch-up on distribution yields.”

“With a flat curve denting the benefits of leverage, for funds there may be few alternatives as attractive as adding credit,” possibly encouraging “more funds to add credit exposure for fear of missing out,” they said.

Muni CUSIP requests increase
Municipal request volume increased in October, following a decrease in September, according to CUSIP Global Services. For muni bonds specifically, there was an increase of 4.1% month-over-month but a 24.4% decrease year-over-year.

The aggregate total of identifier requests for new municipal securities, including municipal bonds, long-term and short-term notes, and commercial paper, rose 3.6% versus September totals. On a year-over-year basis, overall municipal volumes were down 21.0%.

Secondary trading
Maryland 5s of 2023 at 2.91%. Ohio 5s of 2024 at 2.95% versus 2.98% Monday. California 5s of 2025 at 2.92%.

New York City 5s of 2029 at 3.12%. California 5s of 2030 at 3.05%-3.02%.

Charlotte, North Carolina, waters 5s of 2039 at 3.56%. Los Angeles DWP 5s of 2040 at 3.77%-3.76% versus 3.86%. Washington 5s of 2041 at 4.89%-4.82%.

New York City TFA 5s of 2047 at 4.32%-4.30%. DC Income tax 5s of 2047 at 4.06% versus 4.10% Monday. Austin, Texas, waters 5s of 2052 at 4.16%-4.15%.

AAA scales
Refinitiv MMD’s scale was bumped five to eight basis points: the one-year at 2.91% (-5) and 2.92% (-5) in two years. The five-year at 2.96% (-6), the 10-year at 3.06% (-6) and the 30-year at 3.77% (-8).

The ICE AAA yield curve was bumped five to eight basis points: 2.89% (-6) in 2023 and 2.93% (-6) in 2024. The five-year at 2.96% (-5), the 10-year was at 3.11% (-6) and the 30-year yield was at 3.87% (-8) at a 4 p.m. read.

The IHS Markit municipal curve was bumped seven to eight basis points: 2.89% (-8) in 2023 and 2.91% (-8) in 2024. The five-year was at 2.95% (-7), the 10-year was at 3.06% (-7) and the 30-year yield was at 3.77% (-7) at a 3 p.m. read.

Bloomberg BVAL was bumped six to seven basis points: 2.91% (-6) in 2023 and 2.96% (-6) in 2024. The five-year at 2.97% (-7), the 10-year at 3.05% (-6) and the 30-year at 3.78% (-7) at 4 p.m.

Treasuries were better.

The two-year UST was yielding 4.355% (-3), the three-year was at 4.160% (-7), the five-year at 3.906% (-8), the seven-year 3.860% (-7), the 10-year yielding 3.784% (-8), the 20-year at 4.195% (-6) and the 30-year Treasury was yielding 3.946% (-9) at the close.

Producer price inflation moderates in October
Today’s PPI report “marks another positive development on the inflation front following the cooler October [Consumer Price Index report,” Bank of the West’s Anderson said. 

“The mix of easing intermediate and raw input prices, normalization in transportation and shipping costs, and slowing nominal compensation growth point to softer pipeline inflationary pressures in the month ahead,” he added.

“While the Fed may take solace in durable goods deflation, the uptick in short and long-run measures of consumer inflation expectations in the latest survey data provided by the University of Michigan and the Federal Reserve Bank of New York in response to increases in prices for ‘salient’ goods like food and gasoline suggest the Fed cannot be complacent,” he said.

“The Fed is still likely to raise rates by 50 basis points in the December meeting as the Fed has demonstrated that it has no ability whatsoever to forecast inflation,” said Jay Hatfield, CEO at Infrastructure Capital Advisors and portfolio manager of the InfraCap Equity Income ETF.

Levy and Ghzalah concurred, saying, “Fed funds futures are pricing in a 99.3% probability of a 50 basis point increase in December and a 100% probability of another 25 basis point hike in February with a 38% probability it could be another 50 basis point move.” 

Hatfield noted, “the Fed ignores forward-looking indicators of inflation including an unprecedented decline in the money supply and a decline in energy prices of almost 50%.”

He added, “The Fed is in the process of making yet another policy mistake by continuing to raise rates even when policy is extremely tight and inflation steadily declining, which is likely to cause a mild recession in the U.S. and a major recession in Europe.”

Primary to come:
The Louisiana Local Government Environmental Facilities and Community Development Authority (A1///AA-) is set to price Wednesday $458 million of Louisiana Insurance Guaranty Association Project insurance assessment revenue bonds, Series 2022B, serials 2025-2037. Wells Fargo Bank.

The New York City Municipal Water Finance Authority (Aa1/AA+/AA+/) is set to price $425.480 million of water and sewer system second general resolution revenue bonds, Fiscal 2023 Series AA, consisting of $343,910.00 million of AA-1, term 2052, and $81.570 million of Series AA-2, terms 2028, 2029 and 2032. Loop Capital Markets.

The Los Angeles Department of Water and Power (Aa2//AA-/AA/) is set to price $239.140 million of power system revenue bonds, 2022 Series E, serials 2023-2030. TD Securities.

The Washington Economic Development Finance Authority (Aaa///) is set to price Thursday $165 million of Mura Cascade ELP LLC Project environmental facilities revenue and refunding bonds, Series 2022. J.P. Morgan Securities.

The Illinois Housing Development Authority (Aaa///) is set to price Thursday $150 million of non-AMT social revenue bonds, 2022 Series G, serials 2023-2034, terms 2037, 2042, 2046 and 2052. RBC Capital Markets.

The Santa Clara Valley Water District, California, (Aa1//AA+/) is set to price $126.580 million, consisting of $79.370 million of Safe Clean Water Program refunding revenue bonds, Series 2022A, and $47.210 million of Safe Clean Water Program revenue certificates of participation, Series 2022B. J.P. Morgan Securities.

The Ohio Water Development Authority (Aaa/AAA//) is set to price Thursday $125 million of sustainability Drinking Water Assistance Fund revenue bonds, Series 2022A, serials 2025-2035, terms 2036, 2037, 2038, 2039, 2040, 2041 and 2042. Loop Capital Markets.

The Dormitory Authority of the State of New York (A1///) is set to price Thursday $114.975 million of Rochester Institute of Technology revenue bonds, Series 2022A, serials 2028-2042. RBC Capital Markets.

The Mississippi Business Finance Corporation is set to price Thursday $100 million of green Enviva Inc. Project exempt facilities revenue bonds, Series 2022. Citigroup Global Markets.

The State Center Community College District, California, (Aa1///) is set to price Thursday $100 million of Election of 2016 general obligation bonds, Series 2022C. Morgan Stanley & Co.

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