Munis rally, outflows lessen; Fed minutes suggest no rate cuts in ’23


Munis rallied Wednesday as outflows lessened and U.S. Treasury yields fell in lockstep even as minutes from the Federal Open Market Committee meeting showed participants agreeing rate cuts are not expected in 2023. Equities ended up.

Triple-A benchmark yields were bumped four to 15 basis points, depending on the curve, while U.S. Treasury yields fell seven to nine basis points three years and out.

The three-year muni-UST ratio was at 59%, the five-year at 63%, the 10-year at 70% and the 30-year at 92%, according to Refinitiv MMD’s final 3 p.m. ET read. ICE Data Services had the three at 59%, the five at 62%, the 10 at 68% and the 30 at 89% at a 4 p.m. read.

“The effect of January’s redemption cycle and limited calendar was felt in the opening session of the year,” said Kim Olsan, senior vice president of municipal bond trading at FHN Financial.

While bid list volume was well below recent figures at “$543 million, posted via Bloomberg’s bid system, or less than one-third December’s average,” she said, “trade prints showed bidders’ confidence that current levels can hold.”

Generic high-grades, like Florida general obligation bonds and local AAAs due 2025-2026 from later bid-wanteds, “resulted in sales through implied spot levels — all the more impressive considering the 10-15 basis point inversion against 2023 trades,” she said.

“An ultra-flat curve between 2025 and 2033 is forcing a deeper (and somewhat unusual) analysis as to the direction of rates in the coming year,” according to Olsan.

While generic curves sit with a slope of less than 20 basis points between two and 10 years, she said, bond structures are taking on more relevancy.

“Much of 2022 saw short-call options trade out of favor as yields spiked 200 basis points, but a growing recession theme (witness a 50 basis point rally in the 10-year UST since late October) could reengage buyer interest,” she noted.

“Issues that priced as new money bonds with call dates of 2024-2027 that would be eligible for current refunding could offer some cushion against an otherwise flat curve,” she said.

Meanwhile, Olsan said, “longer maturities are showing modest improvement in spreads, as volumes past 12 years comprise a larger share (over 50%) of the total than where December trading was occurring.”

“Of course, any sizable rally in the long bond would encourage commitments on relative value moving higher for quality munis in this range,” she said.

Demand got a boost Tuesday as investors received $24 billion of Jan. 1 principal and interest payments, said CreditSights strategists Pat Luby and John Ceffalio.

Payments for the rest of the month will total $8.4 billion — $6.8 billion principal and $1.6 billion of interest.

“Notwithstanding the weakness in the market in the last two weeks of December, we do expect a return of investor demand that, compounded with the very light new issue supply, will give the market a positive bias to start the month,” they said.

However, they noted, “with tax-exempt yields mostly far away from offering value to corporate investors subject to the 21% federal corporate income tax, the market will be almost totally dependent on direct and indirect demand from individual investors, and we expect that demand to be focused in the front part of the curve.”

When new issue supply picks up or secondary market selling surges, CreditSights strategists said, “long-duration bond prices and spreads would be subject to greater volatility, which should present an opportunity for investors with the flexibility to extend beyond the 10-year horizon favored by many retail investors.”

“Seasonality could enhance the probability of positive municipal returns, especially during stable-to-improving market environments,” said Jeff Timlin, Sage Advisory’s head of munis.

The January effect, he said, “will provide a supportive technical backdrop as investors look to rebalance asset allocations, including their municipal holdings.”

January is “known to have some of the largest maturity and coupon payments that come due, and the reinvestment of those proceeds adds to the demand for municipal bonds, ultimately driving up pricing and lowering yields,” he said.

Additionally, he noted, the “lack of meaningful supply during this time enhances technical strength.”

“A less common but equally important factor is that February will have higher redemptions than January, which should help maintain a well-supported technical environment for some time,” Timlin said.

“Lastly, the $125.9 billion in total redemptions during the first half of the year will be a positive factor for municipal returns, especially since forward new issue supply is expected to remain below recent annual issuance,” he said.

Outflows lessened with the Investment Company Institute reporting investors pulled $3.402 billion from mutual funds in the week ending Dec. 28, after $4.129 billion of outflows the previous week.

Exchange-traded funds saw inflows of $679 million after $531 million of outflows the week prior, per ICI data.

Secondary trading
New York State Dormitory PIT 5s of 2024 at 2.81%-2.78%. Wake County, North Carolina, 5s of 2024 at 2.52% versus 2.61% on 12/30/22 and 2.63% on 12/29/22. California 5s of 2025 at 2.42%. Georgia 5s of 2026 at 2.42%-2.43% versus 2.55% original on 12/30/22.

Austin water, Texas, 5s of 2031 at 2.69%-2.68%. Triborough Bridge and Tunnel Authority 5s of 2032 at 2.64%. University of California 5s of 2033 at 2.71% versus 2.74% Tuesday.

Tuscaloosa, Alabama, 5s of 2040 at 3.57%. Fort Lauderdale, Florida, 5s of 2043 at 3.65% versus 3.73%-3.72% Tuesday.

New York City TFA 5s of 2047 at 4.00%-3.99% versus 4.03% Tuesday and 4.05% on 12/21/22. Massachusetts 5s of 2049 at 3.80%. Virginia 5s of 2052 at 3.55%-3.57%. Illinois Finance Authority 5s of 2052 at 4.54%-4.50% versus 4.57% on 12/22/22 and 4.47%-4.49% on 12/16/22.

AAA scales
Refinitiv MMD’s scale was bumped six to eight basis points: the one-year at 2.62% (-8) and 2.49% (-6) in two years. The five-year was at 2.46% (-6), the 10-year at 2.58% (-6) and the 30-year at 3.50% (-7).

The ICE AAA yield curve was bumped four to seven basis points: at 2.70% (-4) in 2024 and 2.50% (-4) in 2025. The five-year was at 2.47% (-6), the 10-year was at 2.56% (-6) and the 30-year yield was at 3.47% (-7) at 4 p.m.

The IHS Markit municipal curve was also bumped: 2.69% (-15) in 2023 and 2.50% (-10) in 2024. The five-year was at 2.48% (-6), the 10-year was at 2.57% (-6) and the 30-year yield was at 3.50% (-6) at a 4 p.m. read.

Bloomberg BVAL was bumped five to 10 basis points: 2.70% (-10) in 2024 and 2.55% (-10) in 2025. The five-year at 2.47% (-6), the 10-year at 2.57% (-5) and the 30-year at 3.50% (-6).

Treasuries were better.

The two-year UST was yielding 4.364% (-3), the three-year was at 4.123% (-7), the five-year at 3.855% (-8), the seven-year at 3.786% (-9), the 10-year at 3.693% (-9), the 20-year at 3.967% (-8) and the 30-year Treasury was yielding 3.800% (-7) at 4 p.m.

FOMC doubles down on inflation fight
Inflation remained the Federal Reserve’s focus, but panelists were concerned about its intentions being misread, and none expect rate cuts in 2023, according to minutes of the latest Federal Open Market Committee meeting.

“Participants noted that, because monetary policy worked importantly through financial markets, an unwarranted easing in financial conditions, especially if driven by a misperception by the public of the Committee’s reaction function, would complicate the Committee’s effort to restore price stability,” the minutes of the Dec. 13-14 meeting showed.

But the Summary of Economic Projections’ rate expectations “tracked notably above market-based measures of policy rate expectations, underscore[ing] the Committee’s strong commitment to returning inflation to its 2 percent goal.”

While participants acknowledged “significant progress” moving monetary policy to restrictive levels, inflation remains “well above” the 2% level.

With inflation and the economic outlook quite uncertain, the members said, “flexibility and optionality” would be key “when moving policy to a more restrictive stance.”

Some participants felt it “important to clearly communicate” that slower rate increases were not a sign the FOMC was weakening its “resolve” to achieve price stability.

The minutes note participants agreed they needed to be data dependent and make decisions on a meeting-by-meeting basis.

“It appears that officials remain hawkish and are especially concerned about the tight labor market,” said deVere Group CEO Nigel Green. “We expect that the latest minutes will give the central bank further support to maintain interest rates higher for longer than had been previously priced-in by the markets.”

The hawkish tone from the minutes shows “the Fed is not yet ready to pivot,” which dashes hopes of a soft landing and raises the odds of a “deeper and longer” recession, he said.

Primary to come
The New York Triborough Bridge and Tunnel Authority’s (/AA+/AA+/AA+) is set to price Thursday $963 million of climate bond certified payroll mobility tax senior lien refunding green bonds, Series 2023A. Goldman Sachs & Co.

The Owensboro-Daviess County Regional Water Resource Agency, Kentucky, is set to sell $74 million of wastewater revenue bonds on Thursday, Series 2023A, at 11 a.m. eastern Thursday.

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