Tuesday, March 28, 2023
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New-issue calendar grows; Jobs report validates hawkish Fed

Municipals were little changed Friday as the market shifts its focus to next week’s midterm elections and a larger new-issue calendar.

U.S. Treasuries were weaker out long and equities ended up as markets digested a better-than-expected October jobs report that may validate the Fed’s more hawkish tone on rate hikes this week.

The day’s moves held muni to UST ratios fell slightly. The three-year muni-UST ratio was at 69%, the five-year at 74%, the 10-year at 81% and the 30-year at 96%, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the three at 69%, the five at 73%, the 10 at 83% and the 30 at 99% at a 4 p.m. read.

Friday’s trading session saw municipals remain steady amid the mixed performance along the Treasury curve, according to Jeff Lipton, managing director, head of municipal credit and market strategy and municipal capital markets at Oppenheimer & Co. Inc. 

“We suspect that some of this can be explained by the recent underperformance of munis relative to Treasuries as well as by emerging technicals that are likely to have a positive impact upon tax-exempt performance,” Lipton said Friday.

“We continue to believe that we are near the peak in bond rates,” Lipton said. “In our view, current Treasury trading ranges seem to be in the right zip code to account for the most likely restrictive policy scenario.”

Moving forward, Lipton believes that municipals will likely display more pronounced independence from the Treasury market as municipal technicals may soften the volatility brought on by monetary policy. 

BofA Global Research strategists noted that for the next few weeks or months, as the Treasury market is entertaining newer high yields, they “would view a muni rally this week as more tactical and thus should be quite limited for the days ahead. Investors should continue to exercise discipline in November and employ hedges if necessary as the selloff may resume soon,” they said.

“If the Fed terminal target rate does not exceed 5% materially, we see muni 1-5 year AAA rates to peak 10-15bps above current levels, and the 10+ year AAA rates to peak 20-30bps above current levels,” they wrote. “The possible loss of buying 1-5 year maturities now would be less than the cost of waiting if one buys them in March 2023. For the 10- and 30-year AAA, 3.60% and 4.30% areas, respectively, would be good entry points.”

“These targets should work well if there is no material change in the Fed’s terminal target rate stance,” the report noted.

Midterms in the near term
With the FOMC meeting over, “investor attention will shift to next week’s midterms,” according to Barclays PLC.

“If Republicans gain control of at least one of the congressional chambers, any major policy initiatives that would affect the muni asset class would be unlikely until at least 2024, and market reaction in this scenario would likely be muted, while investor focus would likely shift to the year-end omnibus bill,” said Barclays strategists Mikhail Foux, Clare Pickering and Mayur Patel.

Afterward, they said “investors will look for alleviation of some near-term concerns, and potentially rate stabilization that would help munis perform well for the remainder of the year, although some sectors and credits that greatly benefited from federal help in the past several years (i.e. public transit, healthcare) might actually start to lag.”

When triple-A yields were adjusting higher, underperforming USTs, they said, “it felt for a period of time that tax-exempts had good value relative to USTs.” However, this week “UST yields are moving up again, while munis are outperforming (more so in the front end), and MMD-UST ratios are declining,” Barclays strategists noted.

And although munis are not overly attractive compared to USTs, they said they would not be surprised by some muni outperformance going into 2023.

“Slow issuance is one of the main reasons making us more optimistic, as the visible supply pipeline looks quite subdued especially for taxable bonds, while a number of contested gubernatorial elections also historically put a damper on issuance after mid-terms,” they said.

But “with the election uncertainty out of the way next week, and the Fed seemingly approaching the end of the hiking cycle, some investors might start positioning for 2023,” Barclays strategists said.

They would not be surprised if it happens closer to the end of 2022 rather than sooner. Overall, their general outlook on munis “remains relatively sanguine in the near term.”

Calendar rebounds
Investors will be greeted Monday with a new-issue calendar estimated at $5.268 billion.

There are $4.002 billion of negotiated deals on tap and $1.266 billion on the competitive calendar.

The negotiated calendar is led by $617 million of taxable revenue bonds from the JobsOhio Beverage System. Other notable deals include $500 million from the South Carolina Public Service Authority, $500 million from the Los Angeles Unified School District and $500 million from the Tarrant County Cultural Education Facilities Finance Corporation, Texas.

The state of California leads the competitive calendar with $677 million of taxables in two deals.

Secondary trading
California 5s of 2023 at 2.88%-2.87%. South Carolina 5s of 2024 at 3.16%. Washington 5s of 2025 at 3.27%-3.25%.

New York City TFA 5s of 2030 at 3.45% versus 3.44% Thursday. University of California 5s of 2032 at 3.34%-3.33%.

New York Dorm PITs 5s of 2037 at 4.08%. California 5s of 2042 at 4.13%-4.09%.

Triborough Bridge & Tunnel 5s of 2047 at 4.72%-4.71%. NY MTA 5s of 2048 at 4.80%-4.63%.

AAA scales
Refinitiv MMD’s scale was unchanged: the one-year at 3.12% and 3.17% in two years. The five-year at 3.22%, the 10-year at 3.36% and the 30-year at 4.08%.

The ICE AAA yield curve was cut a basis point in spots: 3.12% (unch) in 2023 and 3.18% (+1) in 2024. The five-year at 3.22% (unch), the 10-year was at 3.42% (unch) and the 30-year yield was at 4.18% (unch) at a 4 p.m. read.

The IHS Markit municipal curve was unchanged: 3.12%) in 2023 and 3.18% in 2024. The five-year was at 3.23%, the 10-year was at 3.35% and the 30-year yield was at 4.07% at a 4 p.m. read.

Bloomberg BVAL was cut a basis point in spots: 3.16% (+1) in 2023 and 3.18% (unch) in 2024. The five-year at 3.21% (+1), the 10-year at 3.35% (unch) and the 30-year at 4.08% (unch) at 4 p.m.

Treasuries were weaker.

The two-year UST was yielding 4.663% (-6), the three-year was at 4.595% (-4), the five-year at 4.335% (-3), the seven-year 4.258% (-1), the 10-year yielding 4.170% (+2), the 20-year at 4.515% (+6) and the 30-year Treasury was yielding 4.267% (+9) at the close.

Jobs report beats expectations
“A decent jobs number of 261,000 beat the expected 193,000 jobs, which on the surface is bad for markets,” said Bryce Doty, senior vice president and portfolio Manager at Sit Fixed Income Advisors.

“Job growth is slowing down but not quickly enough to ease the labor market imbalances that are worrying the Fed,” said Brian Coulton, Fitch chief economist.

Doty said the figure may mean the Fed stays aggressive with rate hikes. 

“The Fed will take today’s number as very much a validation of their more hawkish stance that sent markets lower: It’s too soon to talk about a pause and the economy is not showing enough weakness to offset the still-very-elevated inflation prints,” said Jan Szilagyi, CEO of Toggle AI.

October’s mixed job report was “strong enough for the Fed to maintain its ‘hawkish’ policy bias” heading toward the Dec. 14 FOMC announcement, said Wells Fargo Investment Institute Global Strategist Gary Schlossberg.

Whether that translates to a fifth consecutive 75 basis point increase in the Fed funds target rate likely will depend on upcoming consumer price index and jobs reports, he said.

“Our sense is that the FOMC would prefer to hike by ‘only’ 50 bps in December, but hot economic data could force the Committee’s hand to once again go 75 bps,” said Wells Fargo Securities Senior Economist Sarah House and Economist Michael Pugliese

They doubt today’s data moved the needle much toward a 75 bps hike, and still expect a “50 bps rate hike remains our base case, with next Thursday’s CPI print the next pivotal piece of data.”

Matt Peron, director of research at Janus Henderson Investors, though, disagreed, saying the jobs report was “stronger” than he would like but “probably tame enough to keep the Fed on track to be able slow the pace of rate increases in the coming months.”

From an equity market perspective, he said “a relief rally could be in store as it could have been worse, but we think we are not out of the woods yet as the full impact of policy is yet to be felt, especially on corporate earnings.”

Despite jobs growth remaining robust in October, Morning Consult chief economist John Leer said “there’s been a clear downshift in hiring since early 2022.”

As the economy moved past the bounce-back phase of COVID-19 reopenings, jobs growth was bound to slow,” he said. “Rising interest rates and elevated macroeconomic uncertainty are likely to drag down employment growth later this year and into next,” Leer noted.

“The easing in wage growth might help reduce some inflationary pressure,” said Mortgage Bankers Association VP and Deputy Chief Economist Joel Kan. But he expects the Fed “to continue its current course of policy tightening until there is broader evidence of cooling inflation.”

“However, the Fed has succeeded in hurting wage growth” with the three-month wage growth declining to an annualized rate of just 3.9%,” Doty said. This, he noted, is “tough news for workers considering how much wage growth is lagging inflation.”

He said “Powell should also be pleased that the unemployment rate went up from 3.6% to 3.7%,” as all members of the Fed “want and are expecting unemployment to rise at least a full percentage point.”

“We have a more realistic view of the connection of labor shortages causing inflation. It’s particularly concerning that the labor force participation rate declined again to just 62.2%,” Doty said. “Makes it difficult to cure supply chain shortages with such a low labor force participation rate.”

Primary to come:
The JobsOhio Beverage System (Aa3/AA+//) is set to price Tuesday $617.245 million of taxable statewide senior lien liquor profits revenue bonds, Series 2022, terms 2032 and 2038. Citigroup Global Markets.

The South Carolina Public Service Authority (A3/A-/A-/) is set to price Tuesday $500 million of revenue obligations, consisting of $38 million of tax-exempt refunding bonds, Series C; $280 million of tax-exempt improvement bonds, Series E; $137 million of taxable refunding bonds, Series D; and $45 million of taxable improvement bonds, Series F.  J.P. Morgan Securities.

The Los Angeles Unified School District (Aa3//AAA/AAA/) is set to price Wednesday $500 million of sustainability dedicated unlimited ad valorem property tax general obligation bonds, Series QRR, consisting of $474.475 million of Series 1 and $25.525 million of Series 2. Morgan Stanley & Co.

The Tarrant County Cultural Education Facilities Finance Corporation, Texas, (Aa3/AA-//) is set to price Wednesday $500 million hospital revenue bonds (Baylor Scott & White Health Project), consisting of $250 million of fixed rate bonds, Series 2022D, terms 2047 and 2051, and $250 million of fixed rate hard put bonds, Series E, term 2052. Citigroup Global Markets.

The Philadelphia Authority for Industrial Development (/A-//) for is set to price Tuesday $200 million of university revenue bonds (Saint Joseph’s University Project), Series 2022. Morgan Stanley & Co.

The Antelope Valley Community College District, California, (Aa2/AA//) is set to price Wednesday $127.420 million of Election of 2016 general obligation bonds, Series C, consisting of $5 million of Series CIB, serial 2042, and $122.420 million of Series CABS, serials 2027-2047. Stifel, Nicolaus & Co.

Ohio (Aa2/AA//) is set to price Wednesday $112.240 million of major new state infrastructure project revenue bonds, Series 2022-1. Goldman Sachs & Co.

The Sterling Ranch Community Authority Board, Colorado, is set to price Tuesday $110.929 million of bonds, consisting of $98.365 million of Series 2022A, terms 2032, 2042 and 2053, and $12.564 million of Series 2022B, term 2053. Jefferies.

Pinal County, Arizona, (/AA/AA/) is set to price next $109.965 million of taxable pledged revenue obligations, Second Series 2022, serials 2023-2037, term 2042, insured by Assured Guaranty Municipal Corp. Stifel, Nicolaus & Co.

The Minnesota Housing Finance Agency (Aa1/AA+//) is set to price Wednesday $100 million of social residential housing finance bonds, consisting of $24.290 million of AMT bonds, Series 2022L, serials 2024-2032, term 2036, and $75.710 million on non-AMT bonds, Series 2022M, serials 2024, terms 2037, 2042, 2045 and 2053. RBC Capital Markets.

The Clovis Unified School District, California, (/AA//) is set to price Tuesday $100 million of Election of 2022 general obligation bonds, Series B, serials 2023-2024 and 2031-2042, term 2047. Stifel, Nicolaus & Co.

California is set to sell $127.060 of taxable various purpose general obligation bonds and refunding bonds (Bid Group A) at 11:15 a.m. eastern Wednesday.

The state also is set to sell $549.545 million of taxable general obligation bonds (Bid Group B) at noon Wednesday.

Christine Albano contributed to this report.

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