Triple-A benchmark yields fell two to five basis points in a U.S. Treasury-led rally Wednesday, following a general market sentiment that the economic strength of late has plateaued. The Federal Open Market Committee meeting minutes did little to quench Treasury momentum.
While municipals typically lag major movements in U.S. Treasuries, that is not the case this week, as secondary trading of large blocks of high-grades again moved yields lower across the curve, though not to the same scale as their taxable counterpart. Still, munis were already quite rich to UST to begin with, so the moves lower are notable.
The 10-year UST dipped below 1.30% in overnight trading and came in at 1.32% in late trading while the 30-year fell to 1.93%. The 10-year has moved 11 basis points lower since Friday and the 30 also fell 11.
The 10-year AAA muni fell below 0.90% to 0.88% on Refinitiv MMD’s scale, Bloomberg BVAL dipped to 0.89% while other benchmarks hovered at or just above the threshold. Muni yields are down about six basis points in 10 years since Friday and the 30-year also has fallen eight basis points since then. But since July 1, municipals have been ticking lower on the month’s strong performance.
Analysts and traders say last August’s lows, when the 10-year muni was at 0.54% and the 30-year at 1.28%, are not that far out of reach (about 12 basis points away on the 30-year). July is looking to be strongly in issuers’ favor, all else being equal. The supply coming in — 30-day visible per The Bond Buyer is $11.49 billion and net negative supply at -$14.4 billion per Bloomberg — will contribute to the strong position.
The continued fund inflows — another round came in at $1.98 billion, according to the Investment Company Institute — are an additional layer of support. ICI reported $1.981 billion of inflows into municipal bond mutual funds for the week ending June 30, down slightly from the $2.039 billion a week prior, but still substantial and the 17th consecutive week of inflows and $50.2 billion year-to-date.
Exchange-traded funds brought in $294 million, down from the $598 million a week prior, but still holding their own for the year.
Municipal-to-UST ratios are in line with movements in both markets. They were at 67% in 10 years and 72% in 30 on Wednesday, according to Refinitiv MMD. ICE Data Services had the 10-year muni-to-Treasury ratio at 68% and the 30-year at 72%.
The Bloomberg Barclays Municipal bond index has returned 1.25% year-to-date, with the best performance out long, while the high-performing high-yield index is now up to 6.45% YTD and taxables are up to 0.99% YTD.
In the primary market Wednesday, J.P. Morgan Securities LLC priced for retail for the Trustees of the California State University (Aa2/AA-//) $120 million of tax-exempt systemwide revenue bonds. Bonds in 11/2021 with a 5% coupon yield 0.13%, 5s of 2022 at 0.15%, 5s of 2026 at 0.52%, 5s of 2031 at 1.02%, 4s of 2036 at 1.41%, 3s of 2041 at 1.86%, 3s of 2046 at 2.02% and 3s of 2052 at 2.07% (not offered to retail), callable 11/1/2031.
In the competitive markets, the Collier County, Florida, Water and Sewer District (//AAA/) sold $128 million of water and sewer revenue bonds to TD Securities. Bonds in 2022 with a 5% coupon yield 0.12%, 5s of 2026 at 0.50%, 5s of 2031 at 0.96%, 4s of 2036 at 1.23%, 4s of 2041 at 1.40% and 4s of 2046 at 1.55%.
Secondary trading and scales
Trading showed firmer prints and a lot of going-away trades at that.
Hennepin County, Minnesota, 5s of 2022 traded at 0.12%-0.10%. North Carolina 5s of 2023 at 0.14%. Fairfax County, Virginia, 4s of 2027 at 0.60% versus 0.61% Tuesday.
Bellwether Maryland 5s of 2027 at 0.54%-0.53%.
Texas water 5s of 2027 at 0.59%. Hennepin County 5s of 2027 at 0.66% versus 0.69% Tuesday. California 5s of 2028 at 0.76%. New York Dorm PIT 5s of 2029 at 0.82%.
Harvard 5s of 2030 at 0.80% versus 0.86% Tuesday.
California 5s of 2032 at 1.05%. Arlington County, Virginia, 5s of 2033 at 1.02%. Arlington County 5s of 2034 at 1.05% versus 1.11% Tuesday. California 5s of 2034 at 1.09% versus 1.15%-1.14% Tuesday. Hennepin County 5s of 2035 at 1.11%-1.12% versus 1.23% a week ago.
Massachusetts water 5s of 2040 traded at 1.27% versus 1.29% Tuesday. Los Angeles Department of Water and Power 5s of 2040 at 1.22% versus 1.29% Tuesday. Energy Northwest 5s of 2041 at 1.34%. Connecticut 5s of 2041 at 1.45%. Washington 5s of 2042 at 1.32%
New York City water 5s of 2048 at 1.62%-1.57% versus 1.65%-1.63% Tuesday and 1.73% original. Georgia Road and Tollway 3s of 2049 at 1.94%-1.93% versus 1.98% Tuesday. Los Angeles Department of Water and Power 5s of 2051 at 1.51% versus 1.55%-1.53% Tuesday. Godley, Texas, ISD 5s of 2051 at 2.04%-2.01% versus 2.06%-2.04% Tuesday and 2.20% original.
According to Refinitiv MMD, short yields fell two and three basis points respectively to 0.10% in 2022 and 0.14% in 2023. The yield on the 10-year fell five basis points to 0.88% while the yield on the 30-year dropped five basis points to 1.39%.
The ICE municipal yield curve showed bonds fall one basis point in 2022 to 0.10% and to 0.14% in 2023. The 10-year maturity was better by five basis points at 0.91% and the 30-year yield fell five to 1.40%.
The IHS Markit municipal analytics curve showed short yields fall two basis points to 0.10% and 0.13% in 2022 and 2023, with the 10-year down five basis points at 0.90%, and the 30-year yield also fell five to 1.41%.
Bloomberg BVAL saw short yields fall one basis point to 0.11% and 0.13% while the 10-year fell five basis points to 0.89% and the 30-year down five to 1.41%.
Treasuries were stronger and equities were higher. The 10-year Treasury was yielding 1.315% and the 30-year Treasury was yielding 1.936%. The Dow Jones Industrial Average rose 91 points or 0.26%, the S&P 500 gained 0.35% while the Nasdaq gained 0.01%.
FOMC minutes
While the “substantial further progress” goal set to begin tapering asset purchases was not yet met, Federal Open Market Committee participants say it’s getting closer, according to minutes of the June 15-16 FOMC meeting released Wednesday.
“The Committee’s standard of ‘substantial further progress’ was generally seen as not having yet been met, though participants expected progress to continue,” according to the minutes.
As financial conditions improved since the previous meeting, with market participants confident recovery was solidifying, inflation in “the medium term would stay contained, and that monetary policy would remain accommodative.”
In discussions, some participants said they see conditions for tapering occurring “somewhat earlier than they had anticipated at previous meetings in light of incoming data,” the minutes said.
Others said the data offered “a less clear signal about the underlying economic momentum” and a better idea would be available after some more months of labor market and inflation numbers. “As a result, several of these participants emphasized that the Committee should be patient in assessing progress toward its goals and in announcing changes to its plans for asset purchases.”
The members agreed it would be “prudent” for them “to be well positioned to reduce the pace of asset purchases, if appropriate, in response to unexpected economic developments, including faster-than-anticipated progress toward the Committee’s goals or the emergence of risks that could impede the attainment of the Committee’s goals.”
Several members favored cutting mortgage-backed security purchases quicker and/or sooner than Treasury securities, while others favored an even reduction since it “would be well aligned with the Committee’s previous communications.”
Participants agreed to continue discussing tapering at future meetings and announce their intentions “well in advance of an announcement to reduce the pace of purchases.”
A survey of primary dealers and market participants, the minutes said, showed respondents expected tapering “in the first quarter of 2022, although most respondents also saw a reasonable chance that this decline could occur one quarter earlier or later,” with quantitative easing over in the fourth quarter of 2022.
“The base case is probably still for the actual taper to start around the turn of the year,” said Brian Coulton, chief economist at Fitch Ratings, although the panel is preparing to be able to act earlier if needed.
“While there’s no sense of any ‘split’ in the FOMC as such, anxiety about the recent upside surprise on inflation and the risk of short-term supply-side constraints lasting longer than expected has risen,” Coulton said. “This was manifest in the concerns expressed about the risk of long-term inflation expectations rising to inappropriate levels.”
Panelists expected the “unprecedented” economic reopening would “likely” be “uneven across sectors,” and supply chain issues and the inability of firms to find workers “complicated” projections.
“Although they generally saw the risks to the outlook for economic activity as broadly balanced, a substantial majority of participants judged that the risks to their inflation projections were tilted to the upside because of concerns that supply disruptions and labor shortages might linger for longer and might have larger or more persistent effects on prices and wages than they currently assumed,” the minutes noted. “Several participants expressed concern that longer-term inflation expectations might rise to inappropriate levels if elevated inflation readings persisted.”
Others noted downside risks to inflation, “because temporary price pressures might unwind faster than currently anticipated and because the forces that held down inflation and inflation expectations during the previous economic expansion had not gone away or might reinforce the effect of the unwinding of temporary price pressures.”
“There are no big surprises in the minutes,” said Steve Skancke, Keel Point chief economic advisor. “The most notable change was that the ‘talk about talking about’ tapering asset purchases has started.”
The “minutes clearly show the dilemma that the country is facing now,” said Aleksandar Tomic, Associate Dean for Strategy at Boston College. “There are clear and very strong inflationary pressures building, but the recovery is still somewhat fragile.”
That makes the decision on when to pull back difficult, he said. “The minutes show that there is not really consensus on it in the FOMC, which is not surprising. In short, the question remains will the Fed act soon enough and decisively enough if inflation becomes more of an issue.”
Informa: Money market muni funds rose $420M
Tax-exempt municipal money market fund assets rose $420.7 million, bringing total net assets to $93.51 billion in the week ended July 5, according to the Money Fund Report, a publication of Informa Financial Intelligence.
The average seven-day simple yield for the 162 tax-free and municipal money-market funds remained at 0.01% from the previous week.
Taxable money-fund assets increased $35.6 billion in the week ended July 5, bringing total net assets to $4.359 trillion. The average, seven-day simple yield for the 764 taxable reporting funds remained at 0.01% from the prior week.
Overall, the combined total net assets of the 926 reporting money funds fell $35.18 billion in the week ended July 5.
Primary market to come
Tempe, Arizona, (/AA+/AA+/) is set to price on Thursday $343 million of taxable certificates of participation, serials 2023-2037. RBC Capital Markets is head underwriter.
The Catholic Bishop of Chicago (Ba1///) is set to price on Tuesday $150 million of senior bonds, term 2041. PNC Capital Markets LLC is lead underwriter.
The Municipal Electric Authority of Georgia (Baa1/A/BBB+/) is set to price on Thursday $134 million of Plant Vogtle Units 3&4 Project J Bonds, Series 2021A bonds. Goldman Sachs & Co. LLC will run the books.
The New Mexico Mortgage Finance Authority (Aaa///) Is set to price on Thursday $100 million of single-family mortgage program Class I bonds, serials 2022-2033, terms 2036, 2041, 2046, 2051, 2052. RBC Capital Markets is head underwriter.
The National Finance Authority/Massachusetts Development Finance Agency (nonrated) is set to price on Wednesday $94.2 million of Ascentria Care Alliance Project revenue refunding bonds, $31.715 Series NFA, $62.575 million Series MDFA. Ziegler is head underwriter.