The 30-year U.S. Treasury hit 2% overnight but settled at 1.97% near the close while equities rose for the sixth day on stimulus and vaccination hopes.
Municipals did more of the same — Triple-A benchmarks all reported no changes from Friday’s levels with no concessions in light secondary trading with an eye on the week’s primary.
Municipal to U.S. Treasury ratios stayed at 63% in 10 years and rose one basis point to 71% in 30 years, according to Refinitiv MMD. ICE Data Services showed ratios steady at 60% in 10 years and one basis point higher to 73% in 30.
What munis face is balancing more than $12 billion this year in fund flows against rising UST yields, which is challenging buyers’ tolerance for declining relative value.
Because of this, “it comes as no surprise that wider sectors stand out for more impressive moves as compared to generic GOs and essential service bonds — what is striking is the strength of spread compression,” according to Kim Olsan, senior vice president at FHN Financial.
A sale of Aa2/AA Rochester, Minnesota, Health/Mayo Clinic (Aa2/AA) 5s due 2034 (noncallable with a hefty $150 handle) traded at +12/AAA, nearly 10 basis points through its recent evaluated pricing and 30 basis points tighter than the implied AA Healthcare/AAA GO spread, she noted.
“Similar intermediate healthcare credits are trading along comparable spreads to essential service names, which has moved the year-to-date return to nearly 1.25%,” Olsan said. “In longer-dated bonds, the contraction is more at the coupon level — AA 3s due in 20 years are trading at indicative spreads of +15 to 4s, or nearly half their spread from mid-2020.”
The primary will get a taste of high-grade Washington Tuesday with nearly $900 million in four competitive sales, which should give an indication for benchmarks with the first state-level general obligation name since December. The New York Metropolitan Transportation Authority will sell three competitive deals, two of which are green bonds, totaling more than $700 million also on Tuesday, which will also give a sense of how investors are handling COVID-19-challenged credits.
New issues from last week traded up, including long New York City Transitional Finance Authority subordinate revenue bond 3s of 2051 at 2.17%-2.15% versus 2.22% original yield. Arlington, Texas, ISD 5s of 2035 at 1.03% versus 1.07% originals.
Secondary trading showed North Carolina GO 5s of 2022 at 0.08%. Washington GO 5s of 2022 at 0.21%. Washington GOs in 2023 at 0.23% Prince George’s County, Maryland, 5s of 2023 at 0.12%. Arlington County, Virginia, 5s of 2025 at 0.23%. Albuquerque, New Mexico, 5s of 2027 at 0.45%. Ohio GO 5s of 2027 at 0.58%-0.55%. Georgia GO 5s of 2028 at 0.48%-0.47%. Columbus, Ohio, 5s of 2029 at 0.60% versus 0.73% original.
New York Urban Development Corp. personal income tax bond 5s of 2032 traded at 1.10%.
NYC TFA subs 3s of 2037 at 1.74%. NYC TFA 4s of 2041 at 1.75%. Triborough Bridge and Tunnel Authority MTA bridges and tunnels 5s of 2054 at 1.82%. On Jan. 4, they opened the year at 1.86%-1.85%.
Inflation concerns?
Spending expectations rose to its highest level since June 2015, a 0.8-point gain to 4.2% in January, according to the Federal Reserve Bank of New York’s Survey of Consumer Expectations. Income is expected to grow 2.4%.
The probability of higher unemployment a year from now rose to 40.2% in January from 38.9% in December. The chance of losing your job fell in January, while the chance of finding a new job if you lost yours rose.
Inflation expectations held at 3.0% for both a one-year and three-year term.
And inflation has remained low, despite the money supply rising 22%, noted Scott Colbert, executive vice president and chief economist at Commerce Trust Co. The reason inflation hasn’t surged despite the substantial amount of money printed is that businesses remain cautious, he said. “And so this money isn’t really turning and pushing rates higher.”
And should inflation start to rise at some point, Colbert said, “just think how easy it is for the Fed to raise interest rates a little bit and slow some of this down.” In fact, he called inflation “a luxury good,” and the Fed would welcome some more inflation at this point.
Treasury Secretary Janet Yellen pushed for more stimulus in televised appearances this weekend. Stifel Chief Economist Lindsey Piegza agrees that “near-term inflationary concerns are likely unfounded,” but worries about “longer-term consequences from massive government spending,” which she says will have “unintended — and lasting — consequences.”
She added money supply growth “appears to be overpowered by restrained consumption both at home and globally. In other words, for now, weakness in the velocity of money appears to be trumping the implications of growth in the money supply in the near to medium-term.”
But without spending reductions or tax hikes, “unfettered government stimulus” will cause “unmanageable debt and deficits,” Piegza said, with “significant inflationary implications down the road.”
“On average in each recovery, inflation has been coming down and down and down,” Commerce’s Colbert added. “I don’t doubt in this recovery that it won’t be any lower than it was in the last recovery, because we’ve been so aggressive about stimulus, but inflation is not really our problem.”
A recovery has begun. “The average economic recovery lasts seven and a half years since 1960 in this country,” he said. “And they tend to get longer and longer than the last one, which was 10 and three quarter years.”
Bryce Doty, senior vice president and senior portfolio manager at Sit Fixed Income Associates, says the proposed Biden budget could cause a spike in inflation. The $4 billion plan “may be too much of a good thing.”
Demand for 30-year Treasury bonds generally declines with “almost any good news, especially if it could lead to higher inflation and erode the effective or real return of bonds,” he said. “And 2021 could be the strongest economic rebound in history.”
With stimulus, the Fed’s $120 billion a month of asset purchases, pent-up consumer demand, plus elevated savings levels, “bond investors have reason to be nervous and it is no surprise to see inflation expectations rising to over 2%.”
Sit expects the 30-year Treasury yield to gain “steadily in lock-step with rising inflation.”
Inflation may not thrive once pent-up savings are spent, he said. “Unfortunately, this will likely occur when the Fed is reducing the amount of money they are printing and $2.5 trillion of federal stimulus spending runs out. So while 2021 could be like a wild party, there could be a wicked hangover in 2022 and 2023.”
Separately, The Conference Board reported the employment trends index rose for the ninth month in a row, gaining in January to 99.27 from 98.55 in December, but remains 10.0% below year-ago levels.
“The employment trends index has been increasing in recent months, with the largest contributing component being the number of jobs in the temporary help industry,” said Gad Levanon, head of its Labor Markets Institute. “Over the next few months, expect some uncertainty around job growth, especially if some potentially adverse COVID-19 developments manifest – namely, the rapid spread of more aggressive virus strains. On the upside, however, by spring we expect strong job growth to resume and continue throughout the remainder of the year.”
With vaccines available, he said, businesses may start adding jobs “at an accelerated pace” by late in the spring, mostly “in in-person services, such as restaurants, hotels, recreation, passenger transportation, and childcare services,” pushing the unemployment rate near 5%.
Secondary market
High-grade municipals were steady, according to final readings on Refinitiv MMD’s AAA benchmark scale. Short yields were at 0.08% in 2022 and 0.09% in 2023. The 10-year stayed at 0.73% and the 30-year was flat at 1.38%.
The ICE AAA municipal yield curve showed short maturities steady at 0.09% in 2022 and 0.11% in 2023. The 10-year was at 0.70% while the 30-year yield sat at 1.40%.
The IHS Markit municipal analytics AAA curve showed yields at 0.09% in 2022 and 0.10% in 2023 while the 10-year remained at 0.68% and the 30-year at 1.37%.
The Bloomberg BVAL AAA curve showed yields at 0.08% in 2022 and 0.10% in 2023, while the 10-year was flat at 0.69%, and the 30-year yield steady at 1.42%.
The three-month Treasury note was yielding 0.09%, the 10-year Treasury was yielding 1.17% and the 30-year Treasury was yielding 1.97% near the close. Equities saw gains again with the Dow up 152 points, the S&P 500 rose 0.44% and the Nasdaq gained 0.60%.
Negotiated primary market
The Tennessee State School Bond Authority (Aa1/AA+/AA+/NR) is set to price $716 million of taxable higher education facilities second program bonds, serials 2021-2035; terms 2040, 2045. Jefferies LLC is bookrunner.
The Regional Transportation District, Colorado, is set to price $519.9 million of taxable sales tax revenue refunding bonds. Serials 2024-2037. Goldman Sachs & Co. is bookrunner.
The New York City Industrial Development Agency (A2/AA//) is set to price $507.8 million of Queens Baseball Stadium Project PILOT refunding bonds on Wednesday. Assured Guaranty insured. Goldman Sachs & Co. LLC is head underwriter.
The Lower Colorado River Authority, Texas, (/A//) is set to price $407.4 million of LCRA transmission services corporation project revenue bonds. BofA Securities is lead underwriter.
The City of Chula Vista, California, (/AA//) is set to price $398.4 million of taxable pension obligation bonds on Wednesday, serials 2022-2036; terms 2041, 2045. Stifel, Nicolaus & Company, Inc.
The University of Washington (Aaa/AA+//) is set to price $325 million of taxable and tax-exempt general revenue and refunding bonds on Wednesday. Goldman Sachs & Co. LLC is head underwriter.
The Tobacco Securitization Authority of Northern California is set to price $236.5 million of tobacco settlement asset-backed refunding bonds (Sacramento County Tobacco Securitization Corp.). $124.6 million Series 2021A, serials 2021-2040; term 2049. $33.1 million Series B1, terms 2030, 2049, $78.7 million Series B2, term, 2060. Jefferies LLC leads the deal.
The Maryland Department of Transportation (A1/NR/A/) is set to price $211.9 million of Baltimore/Washington International Thurgood Marshall Airport special transportation project taxable refunding revenue bonds on Wednesday. Serials 2023-2030. Citigroup Global Markets Inc. will run the books.
The California Statewide Communities Development Authority is set to price $198 million of essential housing revenue social bonds. Goldman Sachs & Co. leads the deal.
The Connecticut Housing Finance Authority (Aaa/AAA//) is set to price $193 million of housing mortgage finance program bonds, $111.3 million Series A-1, serials, 2021-2022, 2024-2032; term 2034, 2038, $17.25 million Series A-2, serials 2021-2024; $64.2 million Series A-3, serials 2021, 2025-2032, term 2034. Citigroup Global Markets Inc. is lead underwriter.
The San Francisco Municipal Transportation Agency (Aa2/AA-//) is set to price $175 million of taxable and tax-exempt refunding revenue bonds on Tuesday. Series A, $170.5 million of taxable, serials 2023-2036, term 2044; Series B, $4.5 million of exempts, serial 2031. RBC Capital Markets is head underwriter.
The City of Austin, Texas, (A3//A-/) is set to price $149.3 million of Travis, Williamson and Hays Counties rental car special facility revenue refunding bonds on Tuesday. Serials 2024-2036, term 2042. Wells Fargo Securities will run the books.
Wisconsin (Aa2//AA/) is set to price $118.5 million of taxable general fund annual appropriation refunding bonds on Thursday, serials 2022-2031. Barclays Capital Inc. is lead underwriter.
Shoreline School District No. 412 King County, Washington, (Aaa///) is set to price tax-exempt and taxable unlimited tax general obligation improvement and refunding bonds on Tuesday, Series A exempts, $59 million of refunding, serials 2021-2022, 2024-2029, 2039, and $55.9 million Series B, serials 2021-2022, 2024-2030. RBC Capital Markets is head underwriter.
The City of Downey, California (/AA//) is set to price $113.7 million of taxable pension obligation bonds on Tuesday. BofA Securities is bookrunner.
Bethel School District N. 52, Lane County, Oregon, (Aa1///) is set to price $107.5 million of general obligation bonds on Tuesday. Insured by Oregon School Bond Guaranty Act. Piper Sandler & Co. is lead underwriter.
Competitive market
On Tuesday, the New York Metropolitan Transportation Authority (A3//A-/) has three sales on tap: $205 million of transportation revenue bonds, 2041-2043, at 10:15 a.m.; $266 million of transportation revenue green bonds (CBI certified), 2044-2047, at 10:45 a.m.; $229 million of transportation revenue green bonds (CBI certified), 2048-2050, 11:15 a.m.
The State of Washington (Aaa/AA+/AA+/) will sell $257.9 million of various purpose general obligation bonds, 2022-2037, at 10:30 a.m.; $260 million of various purpose general obligation bonds, 2038-2046, at 11 a.m.; $109.6 million of motor vehicle fuel tax and vehicle-related fees GOs, 2022-2046, at 11:30 a.m.; $234.7 million of motor vehicle fuel tax and vehicle-related fees GOs, 2022-2046, at 11:45 a.m.
Richland County, South Carolina, (Aaa/AAA//) will sell $100 million of transportation sales and use tax general obligation bonds at 11 a.m.
On Wednesday, the Las Vegas Valley Water District, Nevada, is set to sell $154 million of general obligation limited tax water refunding bonds (additionally secured by SNWA pledged revenues) at 10:45 a.m. and $35 million of general obligation limited tax water refunding bonds (additionally secured by pledged revenues) at 11:15 a.m.
Cherry Creek SD #5, Colorado, is set to sell $150 million of general obligation bonds at 11 a.m.
On Thursday, the Maryland University System is set to sell $108 million of auxiliary facility and tuition taxable refunding revenue bonds at 10:45 a.m. and $230 million of auxiliary facility and tuition tax-exempt refunding revenue bonds at 10:30 a.m.