Munis take a breath; calendar grows to $7.7B

Municipals were steady to firmer in spots Friday with decent two-way flow in the secondary but a quieter session overall after weeks of major volatility led by geopolitical turmoil and central bank policy uncertainty.

Markets were generally calmer in a post-rate hike environment with clearer signals from the Fed for its plans going forward.

Short U.S. Treasuries rose while the five-year and out saw improvements.

Muni to UST ratios rose out longer as a result. The five-year was at 77%, 90% in 10-years and 96% in 30, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the five at 76%, the 10 at 93% and the 30 at 99% at a 4 p.m. read.

Municipal triple-A scales were little changed to a basis point or two better in spots while trading showed recent paper from New York issuers trading up ahead of a larger primary calendar led by New York City’s $891 million of GOs, triple-A competitive deals and several healthcare issuers.

Next week’s potential volume is slated to be $7.648 billion, $5.659 billion of which are negotiated deals and $1.989 billion of competitive loans. Along with New York City, other notable deals include $595 million of Northshore Edward Elmhurst Health revenue bonds from the Illinois Finance Authority, $534 million of corporate CUSIP taxable revenue bonds from Hoag Memorial Hospital Presbyterian, California and a $350 million deal from the Chicago Transit Authority.

Triple-A Palo Alto Unified School District with $240 million and Anne Arundel County, Maryland with $262.3 million in four deals lead the competitive calendar.

Bond Buyer 30-day visible supply sits at $15.18 billion.

“Market technicals are now weaker as the new-issue calendar begins to build, consistent with seasonal trends,” noted UBS Financial Services in Thursday report. “We also expect selling pressure to persist through April and thereby remain a headwind for the market.”

Wednesday’s Fed rate hike resulted in the flattening of the Treasury curve. The muni triple-A curve flattened as well, although at a slower rate, noted BofA Global Research strategists.

“With the Fed posture and Treasury curve status given above, the key for the rest of 2022 is a sustainable Treasury long bond rally, and demand/supply improvement in munis,” BofA said. “As the Treasury market turns more constructive, bearish action in munis should near its end as well.”

UBS expects geopolitical risk “to remain top of mind for investors and anticipate anxiety over inflation and monetary policy to sustain market volatility.”

“At the same time, the muni mutual fund outflow cycle now underway has prompted some pricing dislocations,” UBS said.

Mutual fund outflows have continued due to the weak return performance, putting downward pressure on prices.

BofA strategists said after the muni market overcomes mutual fund outflows, the muni curve should flatten further. Although the longer maturity indices have had a poor year-to-date performance, they have the most upside potential if the bond market turns around.

“Mutual fund flows are a lagging indicator; not a leading indicator,” BofA said. “However, the emergence of sporadic positive inflows would mark the early days of a market recovery if it is observed.”

Secondary trading
Washington 5s of 2022 at 1.03-1.07%. Massachusetts 5s of 2023 at 1.33-1.35% versus 1.30% on March 10 and 1.21% on March 11.

NYC Municipal Water Finance Authority 5s of 2026 at 1.74-1.75% versus 1.65-1.68% on March 11. Baltimore County, Maryland 5s of 2027 at 1.66-1.72%. New Mexico 5s of 2027 at 1.71-1.72% versus 1.61-1.62% on March 10.

Dorm PITs 5s of 2029 at 2.05% versus 2.08% Thursday and 2.23% original. Dorm PITs 5s of 2030 at 2.12% versus 2.15%-2.18% Thursday and 2.33% original. Dorm PITs 5s of 2031 at 2.18% versus 2.39% original. Dorm PITs 5s of 2032 at 2.25% versus 2.45% original.

Guilford County, North Carolina 5s of 2033 at 2.01% versus 2.08%-2.09% Thursday. Baltimore County, Maryland 5s of 2035 at 2.12% versus 2.19% Thursday.

AAA scales
Refinitiv MMD’s scale was unchanged at the 3 p.m. read: the one-year at 1.16% and 1.39% in two years. The five-year at 1.65%, the 10-year at 1.93% and the 30-year at 2.33%.

The ICE municipal yield curve was bumped up to two basis points: 1.12% (unch) in 2023 and 1.43% (-2) in 2024. The five-year at 1.65% (-2), the 10-year was at 1.98% (-2) and the 30-year yield was at 2.39% (-2) in a 4 p.m. read.

The IHS Markit municipal curve was unchanged: 1.16% in 2023 and 1.39% in 2024. The five-year at 1.66%, the 10-year at 1.93% and the 30-year at 2.33% at a 4 p.m. read.

Bloomberg BVAL saw one to two basis point bumps: 1.13% (-1) in 2023 and 1.38% (-1) in 2024. The five-year at 1.65% (-1), the 10-year at 1.94% (-1) and the 30-year at 2.32% (-2) at a 4 p.m. read.

Treasuries were mixed while equities rose.

The two-year UST was yielding 1.949%, the five-year was yielding 2.145%, the seven-year 2.176%, the 10-year yielding 2.149%, and the 30-year Treasury was yielding 2.411% at the close. The Dow Jones Industrial Average gained 274 points or 0.80%, the S&P was up 1.17% while the Nasdaq gained 2.05% at the close.

Explanations
Two Federal Open Market Committee voters explained their positions and thinking Friday, one who dissented and another who advocated for a 50-basis-point liftoff but deferred to colleagues’ decision for a quarter-point hike.

Federal Reserve Bank of St. Louis President James Bullard, in a blog post early Friday, saying a larger increase “would have been more appropriate.”

A strong economy — which he said was “resilient in the face of the pandemic” — and “unexpectedly high inflation” suggests monetary policy “is currently far too low to prudently manage the U.S. macroeconomic situation,” Bullard said.

And with inflation sharply higher and rates near zero, “monetary policy has been unwittingly easing further,” Bullard said. The Committee will have to move quickly to address this situation or risk losing credibility on its inflation target.”

As such, he felt a half-point increase was the better choice at this meeting.

Previously advocating for raising rates a full point by July 1, which would mean at least one 50-basis-point jump, Bullard now said he wants the fed funds rate target above 3% this year, which he said he put into the Summary of Economic Projections.

By surpassing 3%, he said, it “would quickly adjust the policy rate to a more appropriate level for the current circumstances.” He cited moves in 1994 and 1995, whose “results were excellent. The Committee achieved 2% inflation on average and the U.S. economy boomed during the second half of the 1990s.”

Also on Friday, Federal Reserve Gov. Christopher Waller, who had advocated for a 50-basis-point hike, explained geopolitical events required the FOMC to move cautiously, but he would advocate for a half-point rate increase based on data, if the geopolitical issues ease. He would like the fed funds rate above neutral by yearend

“I really favor front-loading our rate hikes, that we need to do more withdrawal of accommodation now if we want to have an impact on inflation later this year and next year,” Waller said in an appearance on CNBC-TV. “The way to front-load it is to pull some rate hikes forward, which would imply 50 basis points at one or multiple meetings in the near future.”

Also on Friday, Federal Reserve Bank of Richmond President Thomas Barkin said, “It’s time to begin to normalize rates.” The worst days of the pandemic are past and “we are learning to live with COVID-19.

As such, he said, inflation is the latest threat. With the neutral rate estimated to be between 2% and 3%, Barkin said, the move on Tuesday “still leaves us a good 9-10 rate increases away from” a rate level that would constrain economic growth. Therefore, he doesn’t expect a recession.

Addressing the talk of moving faster, he said the FOMC “certainly” could raise by 50 basis points at a meeting “if we start to believe that is necessary to prevent inflation expectations from unanchoring.”

Setting policy “is a balancing act,” Barkin noted and by overcorrecting, the Fed “can negatively impact employment.” Pointing to rates, he said, “The two-year Treasury yield has gone from 0.28% in September (as of Sept. 30 close) to 1.95% (as of March 16 close) today. The five-year has moved from 0.98% (as of Sept. 30 close) to 2.18% (as of March 16 close). So, while we could move faster, we are already having more impact than you might think.”

Meanwhile, Federal Reserve Bank of Minneapolis President Neel Kashkari, who’s not a voter this year, revealed his “dot” on the plot. He sees neutral as 2%. By yearend, Kashkari expects rates in a range between 1.75% and 2%, up from his December expectation of 0.50% to 0.75% in December and zero to 0.25% in September.

Two scenarios will determine the rate hike, he said. First, if inflation proves to be transitory but takes longer to resolve, “the FOMC will need to remove accommodation and get modestly above neutral while the inflationary dynamics unwind.”

But if the “economy is in a high-pressure, high-inflation equilibrium,” Kashkari said, “then the FOMC will need to act more aggressively and bring policy to a contractionary stance in order to move the economy back to an equilibrium consistent with our 2% inflation target.”

Primary to come:
New York City (Aa2/AA/AA-/AA+) is set to price Wednesday $890.910 million of tax-exempt general obligation bonds, consisting of $640.905 million, Fiscal 2022 Series B, Subseries B-1, serials 2023-2036 and $250.005 million, Fiscal 2022 Series C, serials 2022-2033. Citigroup Global Markets.

The Illinois Finance Authority (Aa3/AA-/) is set to price Tuesday $594.555 million of Northshore Edward Elmhurst Health revenue bonds, Series 2022A. J.P. Morgan Securities.

Hoag Memorial Hospital Presbyterian, California (/AA/AA/) is set to price Wednesday $538.700 million of corporate CUSIP taxable revenue bonds, Series 2022. J.P. Morgan Securities.

Brevard County Health Facilities Authority, Florida (A2/A/) is set to price Tuesday $445.250 million of hospital revenue bonds, Series 2022A and forward delivery hospital revenue bonds, Series 2023A. J.P. Morgan Securities.

New York City Housing Development Corporation is set to price Thursday $400.395 million of taxable sustainable development capital fund grant program revenue bonds, Series 2022A. J.P. Morgan Securities.

New York State Housing Finance Agency (Aa2///) is set to price Tuesday $235.790 million of affordable housing revenue bonds, consisting of $123.410 million of climate bond certified/sustainability bonds, 2022 Series A-2, serial 2060; $94.535 million of sustainability bonds, 2022 Series B-2, serial 2060 and $17.845 million of federally taxable climate bond certified/sustainability bonds, 2022 Series C, serial 2027. Ramirez & Co.

New York State Housing Finance Agency (Aa2///) is also set to price Wednesday $192.855 million of affordable housing revenue bonds, consisting of $85.065 million of climate bond certified/sustainability bonds, 2022 Series A-1, serials 2024-2034, terms 2037, 2040,2042, 2045, 2047, 2052, 2055 and 2060 and $107.790 million of social bonds, 2022 Series B-1, serials 2022-2034, terms 2037, 2040, 2042, 2045 and 2052. Jefferies.

Lamar Consolidated Independent School District, Texas (Aaa/AAA//) is set to price Thursday $393.035 million of unlimited tax schoolhouse bonds, Series 2022, serials 2024-2062, insured by Permanent School Fund Guarantee Program. RBC Capital Markets.

Chicago Transit Authority (/A+//AA-/) is set to price Wednesday $349.925 million of second lien sales tax receipts revenue bonds, Series 2022A, serials 2041-2042, terms 2047, 2052 and 2057. Cabrera Capital Markets.

School District 27J, Colorado (Aa2/AA//) is set to price Tuesday $264.505 million of general obligation bonds, Series 2022, serials 2022-2041, term 2046, insured by Colorado State Intercept Program. RBC Capital Markets.

The Industrial Development Authority of the City of Phoenix, Arizona is set to price Tuesday $198.355 million of economic development revenue bonds, Tax-Exempt Series 2022A and Taxable Series 2022B, consisting of $172.280 million of Series 1 and $26.075 million of Series 2. D.A. Davidson & Co.

Tennessee Housing Development Agency (Aa1/AA+//) is set to price Tuesday $175 million of non-alternative minimum tax social residential finance program bonds, Issue 2022-1, serials 2023-2034, terms 2037, 2042, 2045 and 2052. Raymond James & Associates.

California Public Finance Authority (/AA/AA/) is set to price Wednesday $168.540 million of fixed period revenue bonds, Series 2022A. J.P. Morgan Securities.

North Carolina Housing Finance Agency (Aa1/AA+//) is set to price Wednesday $150 million of non-alternative minimum tax social home ownership revenue bonds, Series 48, serials 2023-2034, terms 2037, 2042, 2045 and 2052. RBC Capital Markets.
Arlington Higher Education Finance Corporation (/AAA//) is set to price Tuesday $135.005 million of education revenue bonds, Series 2022, serials 2024-2057. PNC Capital Markets.

Competitive:
Palo Alto Unified School District, California (Aaa/AAA/) is set to sell $38 million of general obligation bonds (Election of 2008), Series 2022, at noon eastern Tuesday.

Palo Alto Unified School District, California (Aaa/AAA/) is set to sell $240 million of general obligation bonds (Election of 2018), Series 2022, at 1 p.m. Tuesday.

Beverly Hills Unified School District, California (Aa1/AA+/) is set to sell $110 million of taxable Election of 2018 general obligation bonds, Taxable Series B-1, at noon eastern Wednesday.

Beverly Hills Unified School District, California (Aa1/AA+/) is set to sell $115 million of Election of 2018 general obligation bonds, Taxable Series B, at 1 p.m. Wednesday.

Anne Arundel County, Maryland (Aaa/AAA/-) is set to sell $67.625 million of general obligation bonds, consisting of $44.780 million of consolidated general improvement series, 2022 Refunding Series and $22.845 million of consolidated water and sewer series, 2022 Refunding Series, at 10:45 a.m. Wednesday.

Anne Arundel County, Maryland (Aaa/AAA/-) is set to sell $194.690 million of general obligation bonds, consisting of $137.145 million of consolidated general improvement series, 2022 Series and $57.545 million of consolidated water and sewer series, 2022 Series, at 10:15 a.m. Wednesday.

Virginia Transportation Board (Aa1/AA+/AA+/) is set to sell $115.320 million of transportation revenue bonds, Series 2022 at 10:30 a.m. Wednesday.

Albuquerque, New Mexico is set to sell $104.315 million of general obligation bonds, consisting of: $76.395 million of general purpose bonds, Series 2022A; $4.305 million of storm sewer bonds, Series 2022B and $23.615 million of refunding bonds, Series 2022D, at 11 a.m. eastern Thursday.

Regents of the University of Michigan (Aaa/AAA//) is on the day-to-day calendar with $582.740 million of taxable general revenue bonds, Series 2022C. Goldman Sachs & Co.

Arizona Sports and Tourism Authority (/AA//) is on the day-to-day calendar with $144.835 million of senior revenue and revenue refunding bonds, Series 2022, serials 2024-2036, insured by Build America Mutual Assurance Co. RBC Capital Markets.