Steady to end week; analysts cautiously optimistic on munis

Bonds

Municipals were little changed to close out the week, while U.S. Treasury yields fell slightly and equities rallied.

Muni to UST ratios were at 65% in five years, 83% in 10 years and 96% in 30 years, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the five at 64%, the 10 at 85% and the 30 at 97% at a 4 p.m. read.

Investors will be greeted Monday with a decrease in supply, with the new-issue calendar estimated at $7.26 billion.

The new-issue calendar is led by the state of Washington’s $848 million of general obligation bonds in four deals, $732 million of tax-exempt climate bond certified state personal income tax revenue green bonds in two deals from the New York State Thruway Authority and $620 million of GOs in two deals from the Metropolitan Government of Nashville, Tennessee. Miami-Dade County Public Schools is set to sell $400 million of tax anticipation notes.

In the negotiated market, Main Street Natural Gas, Georgia, headlines with $710 million of gas supply revenue bonds, $557 million of building aid revenue bonds from the New York City Transitional Finance Authority and $252 million of water revenue refunding bonds from the Metropolitan Water District of South California.

Massachusetts’s $2.7 billion of taxable business-tax-backed special obligation revenue bonds with a social designation was initially set to price next week, but the sale has been pushed until August.

The Massachusetts House of Representatives introduced legislation earlier this week that proposes allocating $300 million to the Unemployment Insurance Trust Fund, but as of Friday, the House hasn’t acted on the legislation, leading to the sale being postponed.

The deal marks the largest environmental, social and governance deal to date in the municipal market and is one of the larger taxable deals this year.

Municipals fared well the past week, digesting a large new-issue calendar amid big economic indicator releases that moved other markets.

While USTs have been rather volatile the past several weeks, Barclays strategists Mikhail Foux, Clare Pickering and Mayur Patel said high-grade tax-exempts have been “seemingly well-anchored, supported by heavy bond redemptions, low supply and slowing outflows.”

Last week, munis gained ground on USTs when they sold off, but this week they were mostly underperforming when Treasuries rallied, they noted in a weekly report.

At current ratios, munis are far from cheap, and have lost some of their appeal, they said.

“The front-end is simply rich, the belly of the curve close to fair value, and only the long end still has some potential,” Barclays strategists said. “Hence, much will depend on rates, but as global economies have been slowing while the Fed still aggressively tries to bring inflation under control, the upside in yields is likely limited.”

This week’s well-above consensus consumer price index and produce price index prints increased the likelihood of a 75 basis point rate hike in July, according to Barclays.

“Moreover, according to fed fund futures, a 35% probability of a 100 [basis point] move next week is priced in, and a 150 [basis point] combined over the next two meetings is fully priced in,” the report said. “The futures also imply that the Fed will start easing in February-June of next year.”

Additionally, a deep 2/10 UST curve inversion renewed “recession probabilities and bolstered Treasury rates bullish calls,” said BofA strategists Yingchen Li and Ian Rogow. They anticipate a mild recession in 2022, which will extend through the first quarter of 2023.

They expect the 10-year UST to go to 2.75% this year and 2.50% in 2023, while the 30-year UST will fall to 2.95% by year-end and then to 2.75% in 2023. These predictions imply a deeply inverted UST curve.

“Such an environment bodes well for the muni rates curve to bull flatten,” BofA strategists said.

The muni curve bear flattened in the first quarter, followed by a “scathing bear steepening” in the second quarter after the Fed announced its quantitative tightening intentions, they noted.

“In June, the general view switched from ‘the Fed is behind the curve’ to ‘the Fed will nail down inflation and cause a recession” after the 75 basis point hike, Li and Rogow said.

This week’s muni performance “has been quite important, as supply has finally tested the muni market and, for the most part, high-quality bonds have been positively received by investors,” Barclays said.

“Issuance will likely stay heavy through July and early August, as the 30-day visible supply is still elevated for both taxable and tax-exempts,” they said.

Barclays strategists said they aren’t concerned about “the lack of appetite from investors as cash cushions of mutual funds are still sizable, while direct retail should continue to see good value in tax-exempts at current yields, especially in high tax states.”

Bond Buyer 30-day visible supply sits at $14.81 billion.

While issuance will likely come in above average this month, they still anticipate “negative net issuance supported by heavy July coupon payments and redemptions.”

Secondary trading
New York State Urban Development Corporation 5s of 2023 at 1.31%. NY Dorm Sales Tax 5s of 2023 at 1.32%-1.30% versus 1.39% Wednesday. NYC TFA 5s of 2024 at 1.80%.

Brunswick County, North Carolina, 5s of 2028 at 2.17%. Triborough Bridge and Tunnel Authority 5s of 2029 at 2.44% versus 2.40%-2.37% Wednesday. California 5s of 2031 at 2.43% versus 2.44% Thursday.

District of Columbia 5s of 2032 at 2.58%-2.57% versus 2.62% Wednesday. Georgia 5s of 2033 at 2.56% versus 2.57% Thursday.

Tarrant County College District, Texas, 5s of 2040 at 3.04%.

District of Columbia 5s of 2047 at 3.38%-3.42% versus 3.44% Wednesday. LA DWP 5s of 2051 at 3.31% versus 3.35% Wednesday.

AAA scales
Refinitiv MMD’s scale was unchanged at the 3 p.m. read: the one-year at 1.40% and 1.70% in two years. The five-year at 2.00%, the 10-year at 2.44% and the 30-year at 2.98%.

The ICE municipal yield curve was bumped one basis point: 1.44% (-1) in 2023 and 1.74% (-1) in 2024. The five-year at 1.98% (-1), the 10-year was at 2.46% (-1) and the 30-year yield was at 3.01% (-1) near the close.

The IHS Markit municipal curve was unchanged: 1.40% in 2023 and 1.72% in 2024. The five-year was at 2.00%, the 10-year was at 2.44% and the 30-year yield was at 2.98% at a 4 p.m. read.

Bloomberg BVAL was unchanged: 1.45% in 2023 and 1.73% in 2024. The five-year at 2.02%, the 10-year at 2.49% and the 30-year at 2.99% near the close.

Treasuries were steady to firmer in spots.

The two-year UST was yielding 3.142% (-1), the three-year was at 3.150% (-1), the five-year at 3.056% (-1), the seven-year 3.035% (-2), the 10-year yielding 2.934% (-3), the 20-year at 3.346% (-3) and the 30-year Treasury was yielding 3.096% (-2) at 3:30 p.m.

Primary to come
The Main Street Natural Gas, Inc, Georgia, (A3///) is set to price Tuesday $709.785 million of gas supply revenue bonds, Series 2022B, serials 2024-2029, term 2052. Citigroup Global Markets.

The New York City Transitional Finance Authority (Aa2/AA/AA/) is set to price Wednesday $557.285 million of tax-exempt building aid revenue bonds, Fiscal 2023 Series S-1, Subseries S-1A, serials 2023-2042. RBC Capital Markets.

The Metropolitan Water District of Southern California (Aa1/AAA//) is set to price Wednesday $251.780 million of water revenue refunding bonds, 2022 Series B, serials 2026-2040. Siebert Williams Shank & Co.

The district (/AAA/AA+/) also is set to price Wednesday $135.420 million of taxable special variable rate water revenue refunding bonds, 2022 Series C. Goldman Sachs & Co.

The Humble Independent School District, Texas, is set to price Thursday $181.700 million of unlimited tax school building bonds, Series 2022, insured by the Permanent School Fund Guarantee Program. Jefferies.

The New York City Housing Development Corporation (Aa2/AA+//) is set to price Thursday $181.670 million of sustainable development multi-family housing revenue bonds, 2022 Series E. Barclays Capital.

The Cypress-Fairbanks Independent School District, Texas, (Aaa//AAA/) is set to price Tuesday $127.890 million of unlimited tax refunding series, Series 2022, insured by the Permanent School Fund Guarantee Program. Piper Sandler & Co.

The McKinney Independent School District, Texas, (Aaa/AAA//) is set to price Thursday $108.030 million of unlimited tax school building and refunding bonds, Series 2022,  insured by the Permanent School Fund Guarantee Program. Piper Sandler & Co.

The Indiana Finance Authority (/A-/A/) is set to price Wednesday $100 million of Reid Health hospital revenue bonds, Series 2022. Morgan Stanley & Co.

Competitive:
Washington (Aaa/AA+/AA+/) is set to sell $140.130 million of taxable general obligation bonds, Series 2023T, at 11:45 a.m. eastern Tuesday. 

Washington (Aaa/AA+/AA+/) is set to sell $213.825 million of various purpose general obligation bonds, Series 2023A, Bidding Group 3, at 11:15 a.m. Tuesday.

Washington (Aaa/AA+/AA+/) is set to sell $243.375 million of various purpose general obligation bonds, Series 2023A, Bidding Group 1, at 10:15 a.m. Tuesday.

Washington (Aaa/AA+/AA+/) is set to sell $250.300 million of various purpose general obligation bonds, Series 2023A, Bidding Group 2, at 10:45 a.m. Tuesday.

The Metropolitan Government of Nashville, Tennessee, (Aa2/AA/) is set to sell $286.325 million of general obligation improvement bonds, Series 2022B, at 11:30 a.m. eastern Wednesday.

The Metropolitan Government of Nashville, Tennessee, (Aa2/AA/) is set to sell $334.045 million of general obligation improvement bonds, Series 2022A, at 11 a.m. Wednesday.

The New York State Thruway Authority is set to sell $436.450 million of tax-exempt climate bond certified state personal income tax revenue green bonds Series 2022C, Bidding Group 1, at 10:30 a.m. eastern Thursday.

The New York State Thruway Authority is set to sell $296.495 million of tax-exempt climate bond certified state personal income tax revenue green bonds Series 2022C, Bidding Group 2, at 11 a.m. Thursday.

Miami-Dade County Public Schools is set to sell $400 million of tax anticipation notes, Series 2022, at 11 a.m. Thursday.

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