Municipals were weaker by a basis point or two Monday, while U.S. Treasuries saw larger losses across the curve and equities ended down following continued central bank assertions on raising rates.
“U.S. stocks were unable to hold onto gains as recession worries run wild and as global bond yields surge higher after former Fed’s Dudley pushed back on expectations that the Fed will blink once the unemployment rate starts to climb higher,” said Edward Moya, senior market analyst at OANDA. “Also supporting the move higher in yields was the surge with gilt yields as investors unload the holdings of UK debt ahead of the BOE’s January bond sales.”
Triple-A yields rose two to three basis points, depending on the curve, while USTs saw yields rise up to 10 on the 10-year. The three-year muni-UST ratio was at 61%, the five-year at 65%, the 10-year at 69% and the 30-year at 94%, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the three at 63%, the five at 67%, the 10 at 74% and the 30 at 97% at a 4 p.m. read.
“One of this year’s most ubiquitous debates has centered on whether recent interest-rate movements are short-term developments influenced predominantly by the current economic cycle … or if the transition represents what many have discussed throughout the last decade as ‘interest rate normalization,'” said Morgan Stanley strategists Matthew Gastall and Daryl Helsing in a Municipal Bond Monthly report.
Though this year’s transition was anticipated, they said, “questions remain over whether the current environment will change, or if we have emerged into a new normal where nominal interest rates will reside closer to modern averages and, thus, possibly trade within a range where entities can effectively borrow, but investors will earn better real returns.”
Nonetheless, they said, “the present environment represents a ‘whole new world’ for our market, particularly when contrasting the arena to the now 14 years that have followed the financial turmoil of 2008.”
Investors, Morgan Stanley strategists said, “are now earning notably more for lending their monies and, further, should remain mindful of how this new reality may also impact state and local government fiscal positions, market volatility, portfolio income profiles, and many other important dynamics.”
Interest rates, they noted, are possibly the most significant of recent developments. “Yield levels are now notably higher throughout many sectors of the yield curve by a number of percentage points,” they said.
“This comeback from both the pandemic and its many economic impacts was very much anticipated, and partially encouraged a low-to-neutral duration laddered strategy that helped investors to continuously earn yield, but still have assets in cash and coming due so consistent reinvestment could occur,” according to Morgan Stanley strategists.
More appealing yields “emerged throughout various segments in 2022, which then provided investors with opportunities to earn more while taking the same, or even less, credit and interest-rate risk,” they said.
Short-end yields rose “more aggressively than those offered in longer final maturities as fixed income markets anticipated future federal funds rate hikes,” they noted.
They said that “these dynamics helped participants to earn the majority of the fully offered municipal bond yield curve within a segment that potentially holds less short-term interest rate risk.”
Moving forward, it seems that “if this environment will continue in the short term; however, it is possible that yields may rise once again if inflation re-advances or municipals encounter a perfect storm of laggard fund outflows — even after other bond prices firm,” they said.
Higher yields “suggest that the interim trading prices for many outstanding bonds are now comparatively lower,” they said.
“When focusing on secondary supply, lower prices suggest that participants can buy more par value or earn larger amounts of income with lesser quantities at original investment,” they noted. “These concepts apply to primary issuance as well, while further suggesting that some new-issue securities may soon be structured to pay higher coupons.”
Overall, Morgan Stanley strategists said, “the developments indicate that the income profiles of many portfolios may also be higher moving forward.”
In the latest week, despite volatility in UST and equities, improved market technicals “have stoked demand for bonds with convexity and spread,” said CreditSights strategists Pat Luby and John Ceffalio.
Zero’s and 3-handle coupons have better month-to-date “returns than 4-, 5- or 6-handles and even though the State GO Bond Index is lagging the overall market, the New Jersey GO bonds in the index have continued to tighten and have outperformed the overall market and the other state GOs in the index,” they said.
For the week ended on Friday, they noted “3-handles earned 0.69% and the zeros returned 0.55%. 5%-coupons lagged the index, posting a composite total return of 0.19%, versus 0.29% for the index. 5-handles did a little better, earning 0.30%.”
Primary market net flows into muni exchange-traded funds was over $1 billion last week. “Average daily flows were down 15% from the prior week but 75% higher than the one-year average. Secondary market turnover was up 2% from the week before and 23% higher than the one-year average, they said.
Hospitals and airports were last week’s best-performing sectors.
“The market is (rightly) being discriminating among issuers, as non-AMT airport bonds, which benefit from scarcity, did better last week than AMT airport bonds,” according to CreditSights strategists.
Louisiana 5s of 2023 at 2.68%-2.65%. Connecticut 5s of 2023 at 2.76%. North Carolina 5s of 2023 at 2.71%-2.65%. Maryland 5s of 2024 at 2.65%.
California 5s of 2026 at 2.44%. Harvard 5s of 2028 at 2.49%-2.46%. Maryland 4s of 2028 at 2.52%-2.50%. Mecklenburg County, North Carolina, 5s of 2028 at 2.48%.
New York City TFA 5s of 2029 at 2.56%-2.55%. Florida BOE PECO 5s of 2030 at 2.53%-2.52%.
Washington 5s of 2036 at 3.16%-3.15%.
Wisconsin 5s of 2040 at 3.31%-3.30%. New York City TFA 5s of 2042 at 3.73%-3.72%.
Refinitiv MMD’s scale was unchanged: the one-year at 2.66% and 2.49% in two years. The five-year at 2.43%, the 10-year at 2.47% and the 30-year at 3.42%.
The ICE AAA yield curve was cut two to three basis points: 2.66% (+2) in 2023 and 2.54% (+2) in 2024. The five-year at 2.47% (+2), the 10-year was at 2.53% (+2) and the 30-year yield was at 3.46% (+3) at 4 p.m.
The IHS Markit municipal curve was unchanged: 2.64% in 2023 and 2.49% in 2024. The five-year was at 2.45%, the 10-year was at 2.49% and the 30-year yield was at 3.41% at a 4 p.m. read.
Bloomberg BVAL was cut a basis point in spots: 2.62% (unch) in 2023 and 2.51% (+1) in 2024. The five-year at 2.44% (unch), the 10-year at 2.52% (+1) and the 30-year at 3.43% (+1) at 4 p.m.
Treasuries were weaker.
The two-year UST was yielding 4.260% (+8), the three-year was at 4.001% (+9), the five-year at 3.715% (+9), the seven-year 3.681% (+9), the 10-year yielding 3.588% (+10), the 20-year at 3.830% (+9) and the 30-year Treasury was yielding 3.637% (+9) at the close.
Primary to come:
The Town of Hempstead Local Development Corporation, New York, (/BB//) is set to price Tuesday $71.820 million of Evergreen Charter School Project bonds, consisting of $71.535 million of Series 2022A< terms 2032, 2042, 2052 and 2057 and $285,000 of Series B, serial 2026. Baird
Rockwall, Texas, (Aa2/AA+//) is set to price Monday $71.665 million, consisting of $36.035 million of tax and limited revenue certificates of obligation, Series 2023, serials 2023-2042 and $35.630 million of general obligation refunding and improvement bonds, Series 2023, serials 2023-2042. Frost Bank.
The Albuquerque Metropolitan Arroyo Flood Control Authority, New Mexico, (Aaa///) is set to sell $12.500 million of general obligation bonds, Series 2023A, at 10:30 a.m. eastern Tuesday.