Bonds

Municipals were mixed Wednesday as U.S. Treasuries rallied following the Federal Open Market Committee’s decision to hike rates a quarter point. Equities sold off.

The two-year muni-UST ratio was at 64%, the three-year at 65%, the five-year at 67%, the 10-year at 69% and the 30-year at 93%, according to Refinitiv MMD’s 3 p.m. ET read. ICE Data Services had the two at 60%, three at 60%, the five at 61%, the 10 at 67% and the 30 at 93% at 4 p.m.

The Federal Open Market Committee raised interest rates 25 basis points to a range of 4.75% to 5% but kept the Summary of Economic Projections expectations for the terminal rate at 5.1%, meaning one additional rate hike this year if the economy progresses as the Fed expects.

Federal Reserve Board Chairman Jerome Powell noted the decision was unanimous and based on the uncertainty fostered by the banking crisis.

“The committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time. In determining the extent of future increases in the target range,” according to the post-meeting statement.

This is a change from the previous statement when the Fed projected ongoing increases.

“In short, it appears that the end of the current tightening cycle is coming into view,” said Wells Fargo Securities Chief Economist Jay Bryson.

In response to a question, Powell said, “I would focus on the words may and some,” suggesting that a further hike is not certain, nor is the number set.

“This is not a dovish hike, said Fitch Chief Economist Brian Coulton. “The Fed has followed the ECB playbook and continues to focus its interest rate policy on inflation concerns, while using balance sheet tools to address financial stability risks.”

Powell noted the banking crisis should tighten conditions, which would do part of the Fed’s job, but the Fed will have to wait to see how much conditions are tightened.

While the dot plot shows the same terminal rate as the previous projections, Coulton noted, “the projections also now show rates coming down more slowly in 2024.”

“The Fed is still in an inflation-fighting mode and chose to use the window they have — a 25 bps would not be a big shock for markets — to ratchet up the rates at the slower pace compared to 2022,” said Jan Szilagyi, CEO and co-founder of Toggle.

“Staying the course also signaled to the market that there isn’t something ominous the Fed knows that markets may not be aware of,” he added.

But the Fed’s move “was not really a big decision,” said deVere Group CEO Nigel Green. “If they did more than 25 bps, it could trigger more instability and to do nothing could be seen as negligent.”

Ashish Shah, Goldman Sachs Public Investing Business chief investment officer, said, “we see considerable uncertainty in the path ahead and would downplay the significance of updated economic and dot plot projections in such a fast-moving environment.”

Future Fed decisions will depend on the economy and the banking sector, Shah added. ”It is difficult to pinpoint where and when further vulnerabilities may unfold, but we think areas that benefited the most from low rates and low inflation may be the most exposed.”

The “spastic trend in taxable rates has created more uncertainty for the muni market,” said Kim Olsan, senior vice president of municipal bond trading at FHN Financial.

During the 14 trading sessions in March, the 10-year UST has traded between 3.43% on March 17 and 4.05% on March 2 — “making the effort of deciphering fair relative value about as imprecise as it could be (10-year munis have been in a narrower 20-25 basis point range),” she said.

Secondary metrics “including dealer carry and trade volumes point to a market in transition,” she noted.

Inventory levels are below $10 billion, or around 20% “lower than recent year’s averages,” while secondary trade totals “dropped below $7 billion following the breakout of the banking crises after reaching more than $14 billion earlier in the month,” Olsan said.

Bid list makeups “still show a heavy focus on short-call bonds, forcing wider yield-to-call levels,” she said.

Price cuts in 4% coupons with “2024/2025 calls and maturities in the 7- to 10-year range have revisited a 3% handle,” Olsan said.

A dealer bought Dallas Independent School District, Texas, “4s of 2030 (callable 2025) at 3.20% and similar names are being turned around in the 3.05% area — for a concession of 50 basis points or more to 2025 spot levels,” she said.

In the 20-year range, she said, “high grade 4% coupons offer discounted yields — an intriguing offset to short-call 3% for a blended barbell approach.”

Las Vegas, limited tax GO 4s due 2045 “changed hands at 4.18%, offering a taxable equivalent yield of 5.29% (21% corporate bracket) and 6.63% (37% top individual bracket),” she said.

“Some of the inaction is feeding off low new issue levels, where reference points are largely missing,” Olsan said.

She noted the “final week of the quarter will bring several generic GO and utility credits with the market having the benefit of a few days’ time to process FOMC actions.”

“After several years of unprecedented pressures on the municipal bond market, including the pandemic and inflation, we’re hoping the worst is over for regional banks following the latest crisis and bout of volatility,” said Eric Kazatsky, head of municipal strategy at Bloomberg Intelligence. “An unintended consequence for munis has been dispelling the myth that every spot on the yield curve is the haven of choice for investors.”

He said at first glance, munis’ apparent outperformance of two-year USTs by “22 bps over the past week is reason for a smallish victory lap.”

However, he noted, “the goose egg that Treasuries put up for delta of change understates the volatility and drama experienced at the front end of the curve.”

The two-year UST fell 36 bps on March 15, “only to rise as much the next day, then dropped even further before rebounding once again,” he said.

“These sort of swings aren’t typically seen with U.S. government debt and are reserved for stocks like GameStop or AMC,” according to Kazatsky.

“Disruption within the U.S. regional-banking sector and attempts by the federal government and central banks to limit contagion,” have primarily driven the increased volatility in short rates, he said.

He said, “one unintended victim in muniland of the bank-drama fallout could be the tax-exempt variable-rate market.”

While not a direct cause and effect, he said, “investors’ general move toward short U.S. Treasury and taxable money-market funds has left banks reeling, while creating a pile-up of variable-rate inventories that need to be repriced competitively to move.”

The muni floater inventory is “at the highest level since March 2020,” he said. The previous peak for the year “was an inventory of over $9 billion that caused SIFMA to spike to just under 4% in mid-February.”

“With inventory exceeding the February disruption, it wouldn’t be surprising if SIFMA reset in excess of 4.5% this week to clear all of that paper,” he said.

Outflows continued, with the Investment Company Institute reporting investors pulled $684 million from mutual funds in the week ending March 15, after $734 million of outflows the previous week.

Exchange-traded funds saw outflows of $20 million after $158 million of inflows the week prior, per ICI data.

Secondary trading
NYC 5s of 2024 at 2.68%-2.67%. Connecticut Clean Water Fund 5s of 2025 at 2.49%. Georgia 5s of 2026 at 2.41%.

Baltimore County, Maryland, 5s of 2029 at 2.38% versus 2.60% original on 3/8. NYC TFA 5s of 2030 at 2.48% versus 2.49% Tuesday. Hanford County, Maryland, 5s of 2031 at 2.42%.

Ohio 5s of 2040 at 3.33%. Washington 5s of 2041 at 3.47%-3.46% versus 3.46% Tuesday and 3.53% on 3/14. DC 5s of 2043 at 3.57% versus 3.60%-3.58% on 3/13 and 3.77%-3.62% original on 3/10.

San Diego County Water Authority 5s if 2052 at 3.60% versus 3.65% Monday. Massachusetts 5s of 2052 at 3.84%-3.83% versus 3.77% on 3/13 and 4.01%-3.98% on 3/8.

AAA scales
Refinitiv MMD’s scale was cut five basis points at one-year. The one-year was at 2.58% (+5) and 2.51% (unch) in two years. The five-year was at 2.35% (unch), the 10-year at 2.38% (unch) and the 30-year at 3.42% (unch) at 3 p.m.

The ICE AAA yield curve was firmer two years and out: 2.58% (+1) in 2024 and 2.53% (-2) in 2025. The five-year was at 2.34% (-2), the 10-year was at 2.40% (-2) and the 30-year yield was at 3.48% (-2) at 4 p.m.

The IHS Markit municipal curve was cut five basis points at one-year: 2.58% (+5) in 2024 and 2.51% (unch) in 2025. The five-year was at 2.34% (unch), the 10-year was at 2.38% (unch) and the 30-year yield was at 3.40% (unch) at a 4 p.m. read.

Bloomberg BVAL was little changed: 2.55% (+1) in 2024 and 2.50% (+1) in 2025. The five-year at 2.33% (unch), the 10-year at 2.37% (unch) and the 30-year at 3.40% (-1).

Treasuries rallied.

The two-year UST was yielding 3.943% (-24), the three-year was at 3.731% (-25), the five-year at 3.522% (-22), the seven-year at 3.496% (-19), the 10-year at 3.443% (-16), the 20-year at 3.805% (-10) and the 30-year Treasury was yielding 3.652% (-7) at 4 p.m.

Primary on Tuesday
J.P. Morgan priced for the Louisiana Local Government Environmental Facilities and Community Development Authority (Aaa/AAA//) $1.491 billion of taxable system restoration bonds (Louisiana Utilities Restoration Corporation Project/ELL), Series 2023, with all bonds pricing at par: 5.081s of 6/2031, 5.048s of 12/2034 and 5.198s of 12/2039, noncall.

Wells Fargo Bank priced for the New York State Housing Finance Agency (Aa2///) $502.715 million of affordable housing revenue bonds. The first tranche, $111.200 million of climate bond certified/sustainability bonds, 2023 Series A-1, saw all bonds price at par: 2.8s of 11/2024, 3.1s of 5/2028, 3.15s of 11/2028, 3.75s of 5/2033, 3.8s of 11/2033, 4.25s of 11/2038, 4.7s of 11/2043, 4.85s of 11/2048, 4.9s of 11/2053, 4.95s of 11/2058 and 5s of 5/2063, callable 5/1/2032.

The second tranche, $230.915 million of climate bond certified/sustainability bonds, 2023 Series A-2, saw all bonds price at par: 4.6s of 11/2052, 3.65s of 2062 and 3.75s of 2062.

The third tranche, $34.875 million of sustainability bonds, 2023 Series B-1, saw all bonds price at par: 2.8s of 11/2024, 3.1s of 5/2028, 3.15s of 11/2028, 3.75s of 5/2033, 3.8s of 11/2033, 4.25s of 11/2038, 4.7s of 11/2043, 4.85s of 11/2048, 4.9s of 11/2053, 4.95s of 11/2058 and 5s of 5/2063, callable 5/1/2032.

The fourth tranche, $125.725 million of sustainability bonds, 2023 Series B-2, saw all bonds price at par: 3.6s of 11/2026 with a mandatory tender date of 5/1/2027, callable 6/1/2025.

Primary to come:
Energy Southeast, Alabama, will sell $846.880 million of energy supply revenue bonds in a two-pronged financing that is slated for pricing by Morgan Stanley & Co. Series 2023 A-1 fixed rate bonds totals $746.880 million, while Series 2023 A-2 Secured Overnight Financing Rate index bonds totals $100 million. Both series are rated A1 by Moody’s and A-plus by Fitch Ratings.

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