Municipals improved on Tuesday as the U.S. Treasury flight-to-safety bid continued and equities sold off on the escalating turmoil in the Ukraine.
Municipal yields fell three to six basis points across triple-A yield curves while five- and 10-year USTs saw yields fall 14 and 11 basis points, respectively.
Municipal to UST ratios rose as a result of the moves, putting five-year at 84% (up from 77% Monday), 89% in 10 (up from 86%) and 91% in 30 (unch), according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the five at 80% (up from 77%), the 10 at 93% (up from 90%) and the 30 at 92% (unch) at a 4 p.m. read.
The primary was active Tuesday with the New York City Municipal Water Finance Authority seeing bumps on the short end for an institutional pricing with cuts on bonds in 2039 from Monday’s retail offering.
Barclays Capital priced for institutions $774.375 million of water and sewer system second general resolution revenue bonds for the New York City Municipal Water Finance Authority (Aa1/AA+/AA+//). Bonds in 6/2028 with a 5% coupon yield 1.52% (-9), 5s of 2031 at 1.73% (-7), 4s of 2039 at 2.41% (+3), 5s of 2039 at 2.21% (+3), 3s of 2045 at par, 4s of 2045 at 2.56% (unch), 5s of 2045 at 2.24% (callable 2028) and 5s of 2045 at 2.36% (unch), callable 6/15/2032.
J.P. Morgan Securities priced for the Massachusetts Institute of Technology (Aaa/AAA//) $500 million of taxable corporate CUSIP bonds, Series H. Bonds priced at par in 4/2052 at 3.067%, callable 10/2051.
In the competitive market, the Omaha Metropolitan Utilities District, Nebraska, (Aa2//AA+/) sold $118.56 million of gas system revenue bonds, Series 2022, to Citigroup Global Markets. Bonds in 12/2022 with a 5% coupon yield 0.90%, 5s of 2027 at 1.45%, 5s of 2032 at 1.72%, 3s of 2037 at 2.35% and 3s of 2042 at 2.47%, callable 12/1/2031 at par.
Springdale Public Schools, Arkansas, (Aa2///) sold $171.345 million of refunding and construction bonds, Series B, to Citigroup Global Markets. Bonds in 6/2022 with a 5% coupon yield 0.70%, 5s of 2027 at 1.60%, 3s of 2032 at 2.30%, 3s of 2037 at 2.65%, 3s of 2043 at par, 3s of 2047 at 3.05% and 3s of 2051 at 3.10%, callable 6/1/2027.
Municipals should underperform Treasuries in March — and possibly April — as a result of high net supply and continued fund outflows, according to Peter Block, managing director of credit strategy at Ramirez & Co.
“Assuming the market settles down and new issue supply materializes as we expect at $70 billion over the next two months, reinvestment is fairly light at $56 billion, resulting in $14 billion positive net supply,” Block said in a weekly report Monday.
The Fed may feel driven to adopt less aggressive policies if global sanctions and/or the Russian reaction drive oil and gas prices considerably higher and harm growth, said Matt Fabian, partner at Municipal Market Analytics in a weekly Outlook report.
“Still, the flight-to-safety rally in municipals was a relief to sector participants who have been wrestling with January’s only half-completed municipal price correction,” Fabian said.
While shorter-maturity high grades weakened as accounts sought liquidity at the front of the curve, he said, selling did not extend to lower-rated high-yield paper, and high grades had not yet recovered to lower yields.
Furthermore, Fabian said mutual fund outflows have persisted, approaching $12 billion so far this year, depriving market makers of their go-to source for leading-edge demand and price discovery for the past five years.
All of this made credit and term spreads too tight to trade comfortably, further reducing dealer interest in risk-taking — inventories have fallen to levels last seen in the fourth quarter of 2021, he said.
“This is why a sustained push richer in muni triple-As would help liquify lower-rated paper and help unlock secondary liquidity,” he said. “Lower new-issue supply has also been a hindrance to liquidity by removing primary market price discovery, clouding the worth of evaluations and other marks.”
This is unlikely to change in the foreseeable future, especially if the economic disruption caused by the invasion forces issuers to reduce and/or postpone new-money borrowings, he said.
Overall, fund outflows remain an issue due to year-to-date negative returns, fear of higher rates, and likely further reinforced by tax season redemptions and sales driven by 2021 strong equity returns, according to Block.
Municipals see continued low risk for defaults and offer a window of opportunity for value, according to Jennifer Johnston, director of research for Franklin Templeton Fixed Income municipal bond team.
“If investors have been on the sidelines, this is a great time to get involved,” she said, noting that municipal credit is stable despite some fears over inflation and market volatility over the last month driven by rate concerns and potential Federal Reserve action.
“There is opportunity to find value across the credit spectrum,” especially among sectors that have responded differently to the volatility surrounding inflation, the roll off of federal aid, as well as labor market challenges when it comes to finding and maintaining workers and dealing with any ongoing COVID mandates.
From a credit standpoint, some municipalities are also facing operating pressures, credits pressures, and headline risk, according to Johnston.
Johnston said there could be potential value in credits that have not recovered at the speed of others and are priced incorrectly because of weakness due to the removal of federal aid after the pandemic.
“We like to capitalize on credits we believe can fundamentally recover well,” and offer a pricing differential, she said.
On the other hand, stronger credits exist in the market today that have gained structural balance on their own due to being weaned off federal aid in the post-COVID world.
Secondary trading
California 5s of 2024 at 1.20%-1.19%. Los Angeles DPW 5s of 2026 at 1.31%. New York City 5s of 2026 at 1.42%. Florida Board of Education 5s of 2028 at 1.42%.
NYC TFA 5s of 2031 at 1.86%-1.85%. New York City waters 5s of 2032 at 1.76% versus 1.78% Monday. Georgia 5s of 2033 at 1.59% versus 1.67%-1.64% Friday.
Ohio 5s of 2039 at 1.86% versus 1.92%-1.91% Monday. Washington 5s of 2039 at 1.92%. LA DPW 5s of 2040 at 2.02% versus 2.07% Monday.
AAA scales
Refinitiv MMD’s scale was bumped two to five basis points (with a two basis point cuts for the March roll on bonds out to 2025) at the 3 p.m. read: the one-year at 0.81% and 1.06% in two years. The five-year at 1.29% (-5), the 10-year at 1.53% (-5) and the 30-year at 1.93% (-5).
The ICE municipal yield curve was bumped: 0.80% (-3) in 2023 and 1.07% (-5) in 2024. The five-year at 1.28% (-6), the 10-year was at 1.58% (-6) and the 30-year yield was at 1.97 (-5) in a 4 p.m. read.
The IHS Markit municipal curve was bumped: 0.79% (-4) in 2023 and 1.06% (-3) in 2024. The five-year at 1.33% (-3), the 10-year at 1.56% (-3) and the 30-year at 1.93% (-3) at a 4 p.m. read.
Bloomberg BVAL saw bumps: 0.79% (-3) in 2023 and 1.01% (-3) in 2024. The five-year at 1.33% (-3), the 10-year at 1.55% (-4) and the 30-year at 1.92% (-5) at a 4 p.m. read.
Treasuries rallied while equities ended the day in the red.
The two-year UST was yielding 1.345% (-8 from Monday), the five-year was yielding 1.582% (-14), the 10-year yielding 1.720% (-11), and the 30-year Treasury was yielding 2.104% (-6) at the close. The Dow Jones Industrial Average lost 598 points or 1.77%, the S&P was down 1.57% while the Nasdaq lost 1.68% at the close.
Economy
The Russian invasion of Ukraine could slow interest rate hikes and has led the market to pull back on the chances of a 50-basis-point liftoff.
“The Russian invasion of Ukraine caused a rush to safer assets and a drop in Treasury yields,” said Bill Merz, head of fixed income at U.S. Bank Wealth Management. “Interest rate hike expectations fell slightly, but the market still anticipates more than five increases from the Fed this year.”
Peter Berezin, chief global strategist at BCA, agreed. “Central banks will temper their plans to raise rates in the near term,” he said. “Investors and speculators are net short duration at the moment, which could amplify any downward move in bond yields.”
But longer term, the Russian incursion “will lead to both higher inflation and interest rates,” Berezin said. “Larger budget deficits will sap global savings. The retreat from globalization will also put upward pressure on wages and prices.”
While oil prices have spiked, they will come down eventually, he said, as long as any Russian energy export reduction is short-term. Global economies should also fare well this year as the pandemic issues wane “and fiscal policy turns more expansionary,” Berezin said.
But markets rebound after geopolitical events, noted Steve Skancke, chief economic advisor at Keel Point.
“Apart from the horrific human tragedy of the Russian invasion of Ukraine and the disruption to world order, the likely impact on the U.S. economy and financial markets will be minimal,” he said.
Any increase in oil prices won’t be “material,” Skancke said, leading to a headline inflation gain of 0.2%, while cutting GDP 0.1 point.
“Consumer and business balance sheets are in good shape, with consumer spending and business investment expected to boost economic growth into the range of 4% in 2022,” he noted.
While the impacts of the invasion “will negatively drag on the markets as long as the conflict lasts and until a sense of normalcy returns,” said Matt Regan, president of Wealthcare, “there is an argument to be made that the market may have been looking for an excuse to sell off after a 12-year bull run that pushed valuations towards nosebleed levels.”
“One thing that we know is that the market hates uncertainty,” he continued. “Geopolitical turmoil is high on the list of items that provide that uncertainty, particularly in our globally connected world.”
But the sanctions imposed on Russia concern Wells Fargo Securities Chief Economist Jay Bryson and Economic Analyst Nicole Cervi. “Even if a full-blown financial crisis does not ensue,” they said, “the sanctions could lead to significant economic and financial weakness in Russia. Consequently, countries with meaningful amounts of economic and/or financial exposure to Russia could experience some negative repercussions as well.”
Expect this situation to linger. Tom Siomades, CIO of AE Wealth Management, said, “This mess is far from over and the repercussions will continue to hamper us going forward, so geopolitical risk is squarely on the table as a major potential market disruptor.”
Data released Tuesday suggested economic improvement, as the ISM manufacturing survey and Federal Reserve Bank of Dallas’s survey sector survey both posted gains in February, while construction spending grew faster than expected in January.
ISM saw employment slip from January’s levels, while price gains slowed. The Dallas survey saw employment rise, while wages and benefits fell from January, although prices grew.
The price dip in ISM “may prove to be short-lived with commodity prices — especially oil — surging after Russia invaded Ukraine,” said Scott Anderson, chief economist at Bank of the West. “Finally, manufacturing employment gains may be cooling down. The employment index dropped to its lowest level since October, pointing to a below consensus gain in manufacturing payrolls when the BLS employment report is released on Friday.”
Construction spending soared 1.3% in January following a revised 0.8% gain in December, first reported as a 0.2% increase.
“The construction sector will continue to face higher prices and worker shortages as more projects come on line. Russia’s invasion of Ukraine and the subsequent sanctions will drive up energy prices and add to supply chain bottlenecks and shipping times,” said Grant Thornton Economist Yelena Maleyev. “We still expect the Federal Reserve to begin raising interest rates at its March meeting, as it is now chasing inflationary pressures.”
This week’s primary to come:
Los Angeles Department of Water and Power (Aa2//AA/AA+) is set to price $300 million of water system revenue bonds, 2022 Series A, consisting of $100 million of Series A1, serial 2052; $100 million of Series A2, serial 2053; and $100 million of Series A3, serial 2054. Citigroup Global Markets.
Los Angeles Department of Water and Power (Aa2//AA/AA+) is also set to price $270 million of fixed-rate water system revenue bonds, 2022 Series B, serials 2023-2025 and 2035-2043. Wells Fargo Bank.
Arlington Higher Education Finance Corporation, Texas (/AAA//) is set to price $164.27 million of education revenue bonds, Series 2022, serials 2022-2052, insured by Permanent School Fund Guarantee Program. RBC Capital Markets.
The Arizona Sports and Tourism Authority (A1//A/) is set to price Tuesday $146.25 million of senior revenue and revenue refunding bonds, Series 2022, serials 2024-2036. RBC Capital Markets.
Competitive:
Baltimore County, Maryland is set to sell $100 million of certificates of participation, Series 2022, at 10:45 a.m. eastern Wednesday.
Baltimore County, Maryland is set to sell $225 million of general obligation bonds consolidate public improvement bonds – 2022 Series at 10:15 a.m. Wednesday.
The Virginia Transportation Board (Aa1/AA+/AA+/) is set to sell $263.985 million of transportation capital projects revenue and refunding bonds, Series 2022, at 10:30 a.m. Wednesday.
Baltimore County, Maryland is set to sell $150 million of general obligation bond anticipation notes Metropolitan District anticipation notes, 2022 Series, at 10:15 a.m. eastern Thursday.