Bonds

Municipals sold off Wednesday in secondary trading, with the short end seeing the largest cuts, as several large deals priced in the primary. U.S. Treasuries were weaker and equities ended mixed after a strong retail sales report.

Triple-A benchmark yields were cut six to 16 basis points, depending on the scale, pushing the one-year muni above 2.75% and the two-year muni above 2.50%. UST yields rose up to seven basis points.

Muni-UST ratios rose. The three-year muni-UST ratio was at 54%, the five-year at 55%, the 10-year at 61% and the 30-year at 88%, according to Refinitiv MMD’s 3 p.m. ET read. ICE Data Services had the three at 56%, the five at 56%, the 10 at 62% and the 30 at 90% at 4 p.m.

“Conflicting signals abound in the muni market, with demand remaining steady enough despite volatility in other fixed income and challenging relative values,” said Kim Olsan, senior vice president of municipal bond trading at FHN Financial.

The relevance of “nearly every piece of forthcoming economic data and the [Federal Open Market Committee schedule] has created more volatility than is typical for the muni market,” she said.

A prolonged scenario of short rate pressure could shift allocations to a larger degree, she noted.

Once again, one-year yields “retreated in response to short-dated UST yields moving higher,” Olsan said.

Since June 2022, the monthly consumer price index report “has generated higher short-term muni rates in five out of nine months,” she said.

Quality paper trends closer to 3%, “a level that engages taxable equivalent yields near 5% — enticing for muni participants given the defensive option they offer despite ratios to USTs around the 60% range,” she said.

Until there is some stability in inflation readings, she noted, “it seems plausible to expect a continuation of upwardly trending short rates.”

Conversely, she said, “longer intermediates are enjoying a fairly steep slope and the optics of 3%-range yields.”

“The MMD 20s10s slope is currently 84 basis points, an annual high and well steeper than the 19 basis point flat slope from last May,” she said.

The belly of the curve, Olsan said, “has been entrenched in low-2% yields, giving little relief to several large buyer segments.” An offset to tight yields is optionality that has widened out in recent weeks.

“Along the coupon stack there is growing volume in seasoned calls (namely 2024-2026) that offer concessions to long-call bonds,” she said.

“Examples include NR/AA- Toms River, New Jersey, School District 3s due 2035 (call 2026) trading at 3.93%/+142 MMD, Aa1/AA+ King County, Washington, sewer 4s due 2034 (call 2026) selling at 3.04%/+70 MMD and NR/AA+ New York Dormitory personal income tax 5s due 2035 (call 2026) at 3.00%/+52 MMD. Comparable 4s and 5s with 2030+ call features are trading 10-20 basis points tighter,” she said.

With a tightening cycle in effect and not expected to end anytime soon, she said, credit quality has come into focus.

“In February 2022, Aaa/AAA Wake County, North Carolina, sold GO bonds with a 10-year yielding 1.73% for a spread of +8/BVAL (ratio of 85%),” she said.

“During the summer’s weaker period, a sale of Aaa/AAA Montgomery County, Maryland, GOs drew the 10-year yield at 2.49% at +12/BVAL (86% ratio),” Olsan noted.

While the market “endured further pressure into last fall,” she said, “recent activity has firmed demand for pure AAA credits.”

“Washington Suburban Sanitation District (county guaranteed) sold Aaa/AAA bonds with the 10-year (noncallable) maturity yielding 2.25% for a -7/BVAL spread but at a 60% relative value ratio,” she said.

Inflows continued with the Investment Company Institute reporting investors added $2.194 billion to mutual funds in the week ending Feb. 8, after $1.471 billion of inflows the previous week.

Exchange-traded funds saw outflows of $498 million after $456 million of outflows the week prior, per ICI data.

In the primary market Wednesday, Morgan Stanley & Co. priced for institutions $1.735 billion of tax-exempt general revenue bonds, 2023 Series BN, for the Regents of the University of California (Aa2/AA/AA/), with seven to 12 basis point cuts from Tuesday’s retail offering: 5s of 5/2023 of 2.84% (+12), 5s of 2028 at 2.28% (+9), 5s of 2033 at 2.46% (+9), 5s of 2038 at 3.17% (+7), 5s of 2043 at 3.43% (+7) and 5s of 2044 at 3.46% (+7), callable 5/15/2033.

J.P. Morgan Securities priced for the Salt River Project Agricultural Improvement and Power District, Arizona, (Aa1/AA+//) $500 million of Salt River Project electric system revenue bonds, 2023 Series A, with 5s of 1/2029 at 2.28%, 5s of 2032 at 2.39%, 5s of 2043 at 3.52%, 5s of 2047 at 3.69% and 5s of 2050 at 3.75%, callable 1/1/2033.

BofA Securities priced for the San Francisco City and County Airport Commission (A1//A+/) $238.665 million of second series revenue refunding bonds. The first tranche, $159.145 million of AMT bonds, Series 2023A, saw 5s of 5/2023 at 3.28%, 5s of 2028 at 3.26%, 5s of 2030 at 3.33% and 5s of 2038 at 3.95%, callable 5/1/2033.

The second tranche, $79.520 million of non-AMT/governmental purpose bonds, Series 2023B, saw 5s of 5/2043 at 3.67%, callable 5/1/2033.

In the competitive, the Bend-La Pine Administrative School District 1, Oregon, (Aa1///) sold $100 million of GOs, Series 2023, to Jefferies with 5s of 6/2024 at 2.90%, 6s of 2028 at 2.37%, 5s of 2033 at 2.50%, 5s of 2038 at 3.23%, 4s of 2043 at 4.08% and 4s of 2047 at 4.19%, callable 6/15/2033.

Secondary trading
Washington 5s of 2024 at 3.00% versus 2.45% on 2/3. Triborough Bridge and Tunnel Authority 5s of 2024 at 3.00%. New York State Urban Development Corp. 5s of 2025 at 2.73% versus 2.24% on 2/6 and 2.22%-2.20% on 2/3.

Indiana Finance Authority 5s of 2030 at 2.32% versus 2.33% Tuesday. NYC 5s of 2030 at 2.46%. California 5s of 2031 at 2.25%.

NYC Municipal Water Finance Authority 5s of 2034 at 2.54%. Maryland 5s of 2036 at 2.84% versus 2.62% on 2/2. Tuscaloosa, Alabama, 5s of 2038 at 3.29%-3.30%.

Dallas 5s of 2047 at 3.68%. Charleston water, South Carolina, 5s of 2052 at 3.53%-3.70% versus 3.54% Monday.

AAA scales
Refinitiv MMD’s scale was cut eight to 15 basis points. The one-year was at 2.86% (+15) and 2.54% (+12) in two years. The five-year was at 2.24% (+10), the 10-year at 2.34% (+8) and the 30-year at 3.38% (+8) at 3 p.m.

The ICE AAA yield curve was cut six to 16 basis points: 2.95% (+16) in 2024 and 2.62% (+9) in 2025. The five-year was at 2.28% (+7), the 10-year was at 2.32% (+7) and the 30-year yield was at 3.41% (+7) at 4 p.m.

The IHS Markit municipal curve was cut nine to 15 basis points: 2.85% (+15) in 2024 and 2.53% (+13) in 2025. The five-year was at 2.22% (+9), the 10-year was at 2.37% (+9) and the 30-year yield was at 3.39% (+9) at a 4 p.m. read.

Bloomberg BVAL was cut seven to 13 basis points: 2.82% (+13) in 2024 and 2.52% (+12) in 2025. The five-year at 2.29% (+10), the 10-year at 2.40% (+9) and the 30-year at 3.42% (+8).

Treasuries were weaker.

The two-year UST was yielding 4.622% (flat), the three-year was at 4.347% (+2), the five-year at 4.034% (+3), the seven-year at 3.932% (+4), the 10-year at 3.801% (+5), the 20-year at 3.990% (+7) and the 30-year Treasury was yielding 3.841% (+6) at 4 p.m.

Retail sales
A strong retail sales report will allow the Federal Reserve to continue on a hawkish path, but “recession doubts are getting some vindication,” according to Edward Moya, a senior market analyst at OANDA.

“The data-dependent Fed is seeing its case for more ongoing rate increases get bolstered after inflation accelerated and as retail sales rebound sharply in January,” he said. “Treasury yields continue to rise as the risks grow that the Fed will have to take rates even higher into restrictive territory.”

Retail sales surged 3.0% in January, nearly double the 1.6% gain projected by economists polled by IFR Markets, after falling 1.1% in December. Sales were boosted by a 5.9% climb in auto sales.

“While seasonal adjustments and unusually warm weather in January likely modestly overstate the strength of January’s retail sales report, it points to solid underlying momentum in consumer spending and is consistent with the strength of the labor market at the turn of the year,” said Mickey Levy, chief economist for Americas and Asia at Berenberg Capital Markets.

The economy is resilient, noted Matt Peron, director of research at Janus Henderson Investors.

“This notion is supporting the market’s current ‘goldilocks’ mood where the economy is strong, but inflation is receding, albeit still too high,” he said. “It’s the still too high part that keeps us concerned that rougher waters could be ahead.”

Janus doesn’t expect a deep recession but sees an economic slowdown, “which will be a continued headwind for corporate profits as the impact of higher rates flow through,” Peron said. ”This could limit further upside.”

The retail sales numbers and last week’s strong employment report provide “additional yards of runway for the Fed to continue constraining monetary policy,” said José Torres, senior economist at Interactive Brokers.

“Stronger consumption leads to higher inflation, and data released this month shows that the Fed’s efforts to dampen demand has proven deficient,” he said. “With Fed member Lael Brainard moving on to become the White House economic advisor, the central bank is down one big dovish voice, so January’s data releases will likely tilt the Fed increasingly hawkish, resulting in volatility for investors throughout 2023.”

Primary to come:
The Tarrant County Hospital District, Texas, (Aa1//AA/AAA) is set to price Thursday $412.160 million of limited tax bonds, Series 2023, serials 2024-2043, terms 2048 and 2053. Siebert Williams Shank & Co.

The California Pollution Control Financing Authority (Baa3//BBB/) is set to price Thursday $158.110 million of AMT water furnishing revenue bonds (Poseidon Resources (Channelside) LP Desalination Project), Series 2023. Morgan Stanley & Co.

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