Municipals sold off Friday with losses of up to 18 basis points, with the damage felt across the curve, and the 30-year triple-A yield closed just shy of 4%. U.S. Treasuries ended mixed after the 10-year rose to levels not seen since 2007 earlier in the session, and the reversal led to an equity rally to close out a tumultuous day and week.
Triple-A yields rose 10 to 18 basis points, moving the entire curve above 3%. Short UST made gains while the long bond saw losses of up to 11 basis points.
The three-year muni to UST ratio was at 70%, the five-year at 73%, the 10-year at 79% and the 30-year at 93%, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the three at 68%, the five at 71%, the 10 at 81% and the 30 at 93% at a 4 p.m. read.
Selling pressure was on the rise again this week. Thursday’s $2.919 billion of bonds out for the bid was only surpassed on March 19, 2020, when they hit $4.115 billion.
Bid list tallies have had only one day this month below $1 billion par but otherwise averaged $1.8 billion, a 50% increase from all of 2022, noted Kim Olsan, senior vice president at FHN Financial.
“A combination of cash raises and tax swaps appears to be behind the increased volume, but without the expected yield rise that would typically accompany such high levels,” Olsan said Friday morning.
While municipals outperformed UST, Friday saw munis catch up and yields rose. Before Friday, over the course of the last week, generic 10- and 30-year AAA spots traded in a narrow three to five basis point band — as compared to USTs with a 20-30 basis point range.
Hawkish Fedspeak has continued to put pressure on UST yields. Higher UST yields also put pressure on munis, noted Barclays PLC in a weekly market report.
UST yields moved “more decisively to new higher ranges this week, reflecting sticky high inflation and market capitulation to the strong Fed policy stance,” BofA strategists said.
The 10-year eclipsed 2007 highs earlier in the session Friday before reversing a selloff.
On Thursday, the 10-year UST rose to its highest level since October 2008, and the 30-year UST to its highest since August 2011.
“Those two months in history were occupied with seminal events: in October 2008, the US enacted the Emergency Economic Stabilization Act of 2008 and bailed out large banks in the aftermath of the Lehman Brothers collapse, and in August 2011, S&P downgraded the US’ credit rating for the first time to AA+ from AAA during the 2011 debt ceiling crisis,” they said.
They noted that today’s environment is different, but “certainly requires precaution” as they believe “something will break” given rising rates.
BofA strategists also said, “many muni bond indexes are rolling back 14 years’ worth of price gains in just 10 months.” For instance, the ICE BofA Muni Master index price returns since September 2008 is -9.65%.
“While markets across the board are waiting for something to break, it is also worth thinking about whether the Fed will be deterred if something does indeed break,” they said. “Given the recent UK/BOE episode, there is no clear answer.”
However, for munis, they said there is some comfort market risks “appear somewhat lower than most markets, as shown in October muni price action so far.”
Barclays strategists Mikhail Foux, Clare Pickering and Mayur Patel said munis had outperformed USTs “despite a sizable new-issue calendar this week consisting of a number of large taxable and tax-exempt deals; although today tax-exempts have finally come under pressure.”
Tax-exempt yields were several basis points higher this week, as of Thursday.
“With yields of the long high-grade muni index getting close to 5%, the highest level since mid-2013, there is a number of quality 5s that could be bought at par or even at a small discount to par, which should attract a lot of interest from retail,” Barclays strategists said.
Institutional total return investors may even “be incentivized to put some money to work at current yields, although tax-exempts do not look overly attractive versus Treasuries,” they said.
They noted this market technical should provide some support for the long end.
“The front end of the curve (3s10s) is extremely flat now, but the long end still has good value despite some flattening in the past several weeks,” Barclays strategists said.
“Investors might be a little cautious near term in light of the upcoming midterms,” they said. “A blue wave scenario would likely push muni yields meaningfully higher but, at current yields, we think there is rather good value in tax-exempts for investors.”
While taxable municipal yields have also reached their recent highs, credit spreads are range-bound.
“Taxable muni spreads are quite rich versus corporates; the spread differential between the two indices is at its two-year highs versus high grade corporates (making taxables very rich by comparison),” they said.
This week, several large taxable muni deals came to the market and have been “well-received by investors despite rate volatility, mainly due to scarcity of supply,” according to Barclays strategists.
They believe “taxable munis will likely continue outperforming corporates, but if credit spreads widen, taxables will likely follow.”
Investors will be greeted Monday with a new-issue calendar estimated at $8.640 billion.
There are $5.560 billion of negotiated deals on tap and $3.080 billion on the competitive calendar.
The new-issue calendar is led by the New York City Transitional Finance Authority. The authority will price $950 million in one deal in the primary market and sell $350 million in two deals in the competitive market.
Other notable deals in the primary market include $691 million from the Triborough Bridge and Tunnel Authority, $500 million from the Indiana Finance Authority and $405 million from the city of Atlanta.
California leads the competitive calendar with $1.2 billion of various purpose general obligation refunding bonds in the three deals.
Issuance in 2022 and beyond
Issuance in 2022 “is greatly distorted by a very difficult environment with an ever-elevating Fed hawkishness, rapidly rising interest rates and large outflows from mutual funds,” said BofA strategists.
If the current market environment continues for another month, ”2022’s issuance is likely to come in even lower than our twice-revised $420 billion target.”
New-money issuance volume, though, should still end the year with 3%-4% growth over 2021’s, while refunding volumes decline will be more than 50%, they said.
BofA strategists expect 2023 to “be a much friendlier year as the Fed is expected to wrap up its intensive tightening program in the first few months, and eventually begin an easing cycle later in the year during a prolonged recession.”
Long-term muni rates, they said, “should begin to decline after the second-to-last hike, and short maturity yields should begin to decline long before the actual Fed easing.”
“Investor demand should rejuvenate as such high yields were rarely available in the past decade,” and demand for new financing from muni issuers “should see large growth, while refunding should rise above this year’s dismal levels,” BofA strategists said.
They preliminarily predict total issuance for 2023 will be $500 billion, consisting of $380 billion of new money and $120 billion of refunding.
Baltimore County, Maryland, 5s of 2023 at 3.08%-3.05%. Texas 5 of 2023 at 3.03% versus 3.00% Thursday. Georgia 5s of 2024 at 3.19%. NYC TFA 5s of 2024 at 3.29%-3.21%.
NY Dorm PIT 5s of 2027 at 3.32% versus 3.21% Thursday. Ohio 5s of 2028 at 3.36%-3.55%. Massachusetts 5s of 2029 at 3.46%.
Mecklenburg County, North Carolina, 5s of 2033 at 3.53%-3.50%. California 5s of 2036 at 4.00%.
Washington 5s of 2039 at 4.10%-4.11% versus 3.77% on 10/12 and 3.85% on 10/5. St. Johns County, Florida, 5s of 2041 at 4.28%-4.23%.
Washington 5s of 2047 at 4.30%-4.26% versus 4.11% Wednesday and 4.12% on 10/13. NYC TFA 5s of 5.05%.
Refinitiv MMD’s scale was cut 15 to 18 basis points: the one-year at 3.09% (+15) and 3.13% (+15) in two years. The five-year at 3.19% (+18), the 10-year at 3.34% (+18) and the 30-year at 3.99% (+18),
The ICE AAA yield curve was cut 11 to 13 basis points: 3.11% (+12) in 2023 and 3.15% (+11) in 2024. The five-year at 3.18% (+12), the 10-year was at 3.39% (+13) and the 30-year yield was at 3.98% (+13) at a 4 p.m. read.
The IHS Markit municipal curve was cut 10 to 19 basis points: 3.04% (+10) in 2023 and 3.13% (+15) in 2024. The five-year was at 3.22% (+19), the 10-year was at 3.36% (+19) and the 30-year yield was at 3.98% (+19) at a 4 p.m. read.
Bloomberg BVAL was cut 10 to 16 basis points: 3.08% (+10) in 2023 and 3.15% (+14) in 2024. The five-year at 3.20% (+15), the 10-year at 3.35% (+16) and the 30-year at 4.01% (+16) at 4 p.m.
Treasuries ended mixed.
The two-year UST was yielding 4.479% (-12), the three-year was at 4.515% (-13), the five-year at 4.346% (-10), the seven-year 4.290% (-7), the 10-year yielding 4.290% (-1), the 20-year at 4.582% (+10) and the 30-year Treasury was yielding 4.334% (+11) at the close.
Primary to come:
The New York City Transitional Finance Authority (Aa1/AAA/AAA/) is set to price Wednesday $950 million of tax-exempt future tax secured subordinate bonds, Fiscal 2023 Series D, Subseries D-1, serials 2024-2027 and 2036-2052. Wells Fargo Bank.
The Triborough Bridge and Tunnel Authority is set to price Thursday $690.845 million of climate-certified payroll mobility tax senior lien green bonds, Series 2022E, consisting of $186.515 million of Series E-1, $99.560 million of Series E-2a and $404.770 million of Series E-2b. J.P. Morgan Securities.
The Indiana Finance Authority (Aaa///) is set to price Tuesday $500 million of environmental improvement revenue bonds, Series 2022 (Fulcrum Centerpoint, LLC Project). Morgan Stanley & Co.
Atlanta (Aa1//AA+/) is set to price Tuesday $409.705 million of bonds, consisting of $369.380 million of social general obligation public improvement bonds, Series 2022A-1; $36.620 million of general obligation public improvement bonds, Series 2022A-2 and $3.705 million of various purpose general obligation bonds, Series 2022B. J.P. Morgan Securities.
The California Statewide Communities Development Authority is set to price next week $378.860 million of bonds (Enloe Medical Center), consisting of $208.955 million (/BBB-//), Series 2022A, serials 2024-2032, terms 2037, 2042, 2047, 2052 and 2057 and $169.865 million (/AA//), Series 2022B, term 2047, insured by Assured Guaranty Municipal Corp. KeyBanc Capital Markets.
The Texas State Technical College System (A2/A+//) is set to price Tuesday $294.945 million of revenue financing system improvement bonds, Series 2022A. Piper Sandler & Co.
The Allegheny County Sanitary Authority, Pennsylvania, (Aa3/AA-//) is set to price Tuesday $289.785 million of sewer revenue bonds, Series 2022, serials 2025-2042, terms 2047 and 2053. PNC Capital Markets.
The Michigan State Housing Development Authority is set to price Thursday $268.190 million of non-AMT social single-family mortgage revenue bonds, 2022 Series D. Barclays Capital.
Palomar Health, California, is set to price Thursday $215 million of tax-exempt certificates of participation, Series 2022A. Citigroup Global Markets.
The Peralta Community College District, California, (/AA-//) is set to price Tuesday $151.605 million, consisting of $120 million of 2018 Election general obligation bonds, Series B, serials 2023-2024, term 2052 and $31.605 million of general obligation refunding bonds, Series 1, serials 2023-2034. Siebert Williams Shank & Co.
The Indiana Finance Authority (Aa3/AA//) is set to price Tuesday $150 million of green first lien wastewater utility revenue bonds, Series 2022B (CWA Authority Project). J.P. Morgan Securities.
The Missouri Development Finance Board (A1/AA-//) is set to price Tuesday $133.930 million of revenue bonds, Series 2022 (Saint Louis Zoo Projects), serials 2028-2042, terms 2044, 2047, 2052 and 2055. Stifel, Nicolaus & Co.
The Maryland Economic Development Corporation (/BBB-//) is set to price Wednesday $110.680 million of senior student housing revenue bonds, Series 2022A (Morgan State University Project), serials 2028-2033, terms 2043, 2053 and 2058. RBC Capital Markets.
Pinal County, Arizona, (/AA-/AA/) is set Thursday $109.625 million of pledged revenue obligations, Second Taxable Series 2022. Stifel, Nicolaus & Co.
The Tennessee State School Bond Authority (Aa1/AA+/AA+/) is set to sell $278.670 million of higher education facilities second program bonds, 2022 Series A (Tennessee State Aid Intercept Program), at 10:30 a.m. eastern Tuesday and $25.205 million of taxable higher education facilities second program bonds, 2022 Series B (Tennessee State Aid Intercept Program), at 11 a.m. Tuesday.
California (Aa2/AA-/AA/) is set to sell $397.625 million of various purpose general obligation refunding bonds, Bid Group A, at 10:30 a.m. eastern Wednesday; $319.065 million of various purpose general obligation refunding bonds, Bid Group B, at 11:15 a.m. Wednesday and $514.790 of various purpose general obligation refunding bonds, Bid Group C, at 12 p.m. Wednesday.
The New York City Transitional Finance Authority is set to sell $210.440 million of taxable future tax secured taxable subordinate bonds, Fiscal 2023, Subseries D-2, at 10:45 a.m. Wednesday and $139.560 million of taxable future tax secured taxable subordinate bonds, Fiscal 2023, Subseries D-3, at 11:30 a.m. Wednesday.
Spartanburg County School District No. 4, South Carolina, is set to sell $100 million of general obligation bonds, Series 2022A, at 11 a.m. Wednesday.