Municipals were steady to close out the week, while U.S. Treasuries sold off on the heels of a stronger-than-expected jobs report. Equities rallied.
Stronger-than-expected hiring and wage growth data on Friday caused “[UST] bond yields to climb while equities are advancing because the data is helping alleviate concerns of a potential recession,” said José Torres, senior economist at Interactive Brokers.
From a broader perspective, he said “the data is reinforcing recent comments by Federal Reserve Chairman Jerome Powell that emphasized the central bank’s commitment to maintaining hawkish policies, as well as sought to temper investors’ expectations for Fed funds rate cuts this year.”
On Wednesday, the Federal Open Market Committee hiked rates 25 basis points and did not signal further rate hikes ahead,” said BofA strategists.
The market “can now focus on the economic data and other macro market conditions without imminent concern of Fed rate hikes ahead,” they said.
Barclays strategists Mikhail Foux, Clare Pickering and Mayur Patel said the FOMC “raised its policy rate 25bp [as expected] and signaled a likely pause at the June meeting,” but policymakers indicated “that they may raise rates further, if warranted, which they will determine on an ongoing basis.”
They “expect the FOMC to keep the funds rate target range at 5%-5.25% for the remainder of the year, in contrast with market expectations, as Fed fund futures currently imply up to five cuts through next January.”
With the Fed out of the equation, Barclays strategists said “investor focus has shifted to the debt ceiling and the ongoing turbulence in the banking sector.”
U.S. Treasury Secretary Janet Yellen noted on May 1 “that she estimates the government will be unable to continue to satisfy all of its obligations by early June, if Congress does not raise or suspend the debt limit before then,” they said.
She said it “is impossible to predict with certainty the exact date when Treasury will be unable to pay the government’s bills,” according to Barclays strategists.
As of late, USTs have been volatile, but BofA strategists noted that similar to April, “so far yields of all maturities have stayed inside the ranges they traced out in March — only now those ranges are even narrower.”
After J.P. Morgan absorbed First Republic Bank, Barclays strategists said it felt as if the worst had passed.
But later in the week, they said “a number of other small regional banks came under pressure, with their stock prices dramatically declining, and investor angst has returned.”
Even though UST volatility is expected “to continue for the time being due to the flight to safety,” they said they “are much less concerned about the forced selling of muni bonds by regional banks.”
First Republic Bank, Barclays strategists noted, “was the largest regional bank holder of municipals [while] the rest of the regional banks do not own that many municipal bonds, and the ones that are currently under extreme pressure hold $1 billion to $ billion at most.”
If USTs “continue to benefit from the flight-to-safety, tax-exempt yields will also decline, but will likely lag, and possibly by a wide margin,” they said.
Both rates and credit spreads moved little so far this month in the muni market, according to BofA strategists.
“We continue to hold the view that the 10-year AAA will reach 2.00% in 1H23,” they said. “For the 10- year muni AAA to break the YTD low of 2.08%, long-term Treasury yields may need to break below their ranges of the past two months.”
Municipal to UST ratios have risen this week, “mostly in the front end as long ratios were relatively stable and five-year MMD-UST ratios have reached their highest level since mid-November,” according to Barclays strategists.
They believe higher ratios are “the main near-term risk for muni investors who hedge their UST exposure.”
The two-year muni-Treasury ratio Friday was at 68%, the three-year at 68%, the five-year at 68%, the 10-year at 67% and the 30-year at 89%, according to Refinitiv MMD’s 3 p.m. ET read. ICE Data Services had the two-year at 71%, the three-year at 71%, the five-year at 69%, the 10-year at 69% and the 30-year at 90% at 4 p.m.
Taxable muni spreads, they said, “have remained stable for now, and are not far from this year’s lows.”
“We think the market calm in this muni sub-sector will likely end up being only temporary, and in our view, taxable muni spreads will likely follow corporates wider but will likely outperform as usual,” Barclays strategists said.
Calendar stands at $7.6B
Investors will be greeted Monday with a new-issue calendar estimated at $7.588 billion.
There are $6.345 billion of negotiated deals on tap and $1.243 billion on the competitive calendar.
The negotiated calendar is led by $1.09 billion of school district revenue bonds from the Dormitory Authority of the State of New York, followed by $482 million of refunding revenue bonds form the Lower Colorado River Authority and $446 million of bonds from Dallas.
Fort Worth, Texas, leads the competitive calendar with 262 million of bonds in three deals.
Virginia Public School Authority 5s of 2024 at 3.00% versus 2.90% original on 4/25. California 4s of 2024 at 2.80%-2.78%. LA USD 5s of 2025 at 2.65%-2.63% versus 2.51% on 4/20 and 2.56% on 4/18.
Georgia 5s of 2028 at 2.33%. Massachusetts 5s of 2028 at 2.37% versus 2.37% Thursday and 2.41% Wednesday. DC 5s of 2029 at 2.35%.
California 5s of 2031 at 2.31%-2.29%. NYC Municipal Water Finance Authority 5s of 2032 at 2.29%. Charlotte waters, North Carolina, 5s of 2033 at 2.34%.
NYC TFA 5s of 2044 at 3.61%-3.60% versus 3.59% Thursday and 3.64% on 4/20. Baltimore County, Maryland, 5s of 2053 at 3.52%-3.51% versus 3.32%-3.33% on 4/6.
Refinitiv MMD’s scale was unchanged: The one-year was at 2.97% and 2.66% in two years. The five-year was at 2.31%, the 10-year at 2.31% and the 30-year at 3.36% at 3 p.m.
The ICE AAA yield curve was changed a basis point or two: 3.01% (+2) in 2024 and 2.70% (+2) in 2025. The five-year was at 2.31% (flat), the 10-year was at 2.29% (flat) and the 30-year was at 3.34% (-1) at 4 p.m.
The IHS Markit municipal curve was unchanged: 2.96% in 2024 and 2.66% in 2025. The five-year was at 2.31%, the 10-year was at 2.30% and the 30-year yield was at 3.36%, according to a 4 p.m. read.
Bloomberg BVAL was cut up to one basis point: 2.80% (+1) in 2024 and 2.66% (unch) in 2025. The five-year at 2.31% (+1), the 10-year at 2.29% (unch) and the 30-year at 3.38% (unch) at 4 p.m.
Treasuries sold off 10 years and in.
The two-year UST was yielding 3.912% (+14), the three-year was at 3.632% (+14), the five-year at 3.404% (+10), the 10-year at 3.432% (+6), the 20-year at 3.836% (+3) and the 30-year Treasury was yielding 3.751% (+2) at 4 p.m.
April jobs report
With the addition of 253,000 jobs in April, Friday’s job report was better than expected, showing the labor market’s resiliency but doing little to quell fears over inflation.
“Despite all the talk of a looming recession, employers are not being deterred and continue to hire at a rapid pace,” said Jesse Wheeler, senior economist at Morning Consult.
But while jobs growth carries on, Wells Fargo Securities Senior Economist Sarah House and Economist Michael Pugliese said “clouds continue to gather over the horizon.”
With each passing month, they said “the tailwinds from efforts to restaff post-lockdowns are getting weaker, while the hiring headwinds from tighter monetary policy are getting stronger.”
The jobs market, Wells Fargo Securities economists said, “remains on solid ground, but cracks are emerging.”
“Jobless claims are ticking higher, job openings are rapidly declining, and temporary help employment fell once again in April, with the latter being a useful indicator of labor demand growth on the margin,” they said. “We look for job growth to slow more meaningfully in the second half of the year and into 2024 as the lagged effect of monetary policy tightening bites.”
Matt Peron, director of research at Janus Henderson Investors, however, said “the jobs report was uncomfortably strong for policymakers who are trying to tame inflation.”
“The best you can say from today’s report is that job growth is slowing when looking at the average over the past few months,” he noted.
However, Peron said “wages were stubbornly high and that’s a key aspect of the report for the Fed and markets.”
Sean Snaith director of the University of Central Florida’s Institute for Economic Forecasting, argued “this kind of strength in the labor market makes it more difficult for the Fed to continue its reduction in inflation.”
“What this means is inflation may drag on a little longer and so will higher interest rates,” he said.
Snaith noted “there’s an increasing probability of a 25-basis point increase at the next [FOMC] meeting.”
He said “May [inflation and employment] numbers will be released before the next Fed meeting, but the labor market appears to be staying strong.”
”Wage growth also accelerated to the fastest pace in a year, raising questions about how a data-dependent Fed will react after opening the door for a potential pause to rate hikes in June,” he said.
“It is clear that wage pressures on inflation are proving persistent,” said Fitch Ratings Chief Economist Brian Coulton. “And with the participation rate failing to improve, this jobs report will not convince the Fed that they are on top of inflation.”
“We do not believe today’s strong report meets the bar for the Fed to consider rate cuts, but instead supports our expectation for the Fed to pause and to keep rates elevated for some time,” according to a report from Morgan Stanley. “There will be one more job report and two CPI prints ahead of the June meeting, which we expect to continue to support no policy change.”
“While the Fed has laid the groundwork for a pause at the June meeting, additional strong economic data would keep them firmly on the side of a tightening bias,” said Sameer Samana, Wells Fargo Investment Institute senior global market strategist. “That remains a possible sources of major disappointment for markets, given the market’s expectations for aggressive cuts in the second half of the year.”
“In short, Strong wage growth remains an important support for continued consumer spending and economic growth, but is also an important road-block in the Fed’s efforts to bring inflation back down to earth,” said Scott Anderson, chief economist at Bank of the West.
“While such data may cool fears of near-term recession, they also fly in the face of current market pricing, which still has about 75 basis points in Fed rate cuts before the end of this year priced-in,” he said. “The more stubborn the resilience in job and wage gains, the longer the Fed will need to remain in a restrictive monetary stance, and the bigger the chance of an economic downturn at some point this year.”
Primary to come:
The Dormitory Authority of the State of New York is set to price $1.086 billion of school districts revenue bonds on Wednesday. Serials 2024 to 2043 with terms in 2050. RBC Capital Markets.
The Lower Colorado River Authority (/A/A+//) is set to price $481.5 million of transmission contract refunding revenue bonds on Tuesday. J.P. Morgan.
Dallas, Texas (/AA-/AA//) is planning to price $445.6 million of general obligation refunding and improvement bonds and combination tax and revenue certificates of obligation on Tuesday. J.P. Morgan.
The Board of Trustees of Michigan State University (A2/AA///) is slated to price $306.3 million of general revenue refunding bonds on Tuesday. Morgan Stanley.
The California Housing Finance Agency (/BBB///) is slated to price $277.3 million of social certificates, some of which are partially exempt on Thursday. Serials 2036. Citigroup Global Markets Inc.
The West Virginia Hospital Finance Authority (A2/A//) is slated to price $276.4 million of revenue bonds on behalf of the West Virginia University Health System on Wednesday. Serials 2024 to 2030, with terms in 2047 and 2053. BofA Securities.
The Arkansas Development Finance Authority (/BB-/BB/) is slated to price $240 million of environmental improvement revenue green bonds subject to the alternative minimum tax. Term bond in 2053. BofA Securities.
The Texas Water Development Board (AAA/AAA/) is set to price $195.97 million of state revolving fund revenue bonds on Tuesday. Serials 2024 to 2044. RBC Capital.
Manatee County, Fla., (A1//AAA/) is set to price $182.96 million of public utilities revenue improvement and refunding bonds on Tuesday. Serials 2025 to 2043, terms in 2048 and 2053. BofA Securities.
The Illinois Housing Development Authority (Aaa////) is set to price $160 million of revenue bonds on Tuesday. Serial bonds 2024 to 2035, with terms in 2038, 2043, 2047, 2053, and 2054. Citigroup Global Markets.
The Nebraska Investment Finance Authority (/AAA///) is set to price $157.6 million of single-family housing revenue bonds including non-AMT social bonds and taxable bonds on Tuesday. J.P. Morgan.
The Manatee County, Fla., School Board (/A+/A/) is set to price $154.3 million of certificates of participation on Wednesday. Serials 2024 to 2038. Raymond James.
The Liberty, Mo., School District #53 (/AA//) is set to price $120 million of GO school bonds on Thursday. Serials 2024 to 2043. Stifel, Nicolaus & Co.
The Ernest N. Morial New Orleans Exhibition Hall Authority (Aa3// AA+//) is set to price $114.2 million of special tax revenue bonds on Tuesday. Serials 2028 to 2042, with terms in 2047 and 2053. UBS Financial Services.
The Metropolitan Atlanta Rapid Transit Authority (Aa2/AAA//AAA/) is slated to price $112.7 million of sales tax revenue green bonds. Serials 2024 to 2032. Wells Fargo Bank.
Fresno, Calif., (/AA//) will price $100.2 million of airport revenue bonds — both AMT and non-AMT paper — insured by Build America Mutual on Thursday. Serials 2024-2037, with terms in 2042, 2047, and 2053. Raymond James.
The Michigan Strategic Fund (Aa3/A/A+/) is set to price $100 million of limited obligation revenue bonds on Tuesday. KeyBanc Capital Markets.
Marin General Hospital (/BBB/BBB//) is scheduled to price $100 million of taxable corporate CUSIP bonds on Tuesday. Morgan Stanley.
Ann Arbor Public Schools is set to sell $100 million of building and site bonds on Tuesday. Serial bonds 2024 to 2043.
Fort Worth, Tex., (Aa3/AA//) is set to sell $263.6 million of taxable bonds, certificates of obligation, and GO improvement bonds in three deals on Wednesday. Serials 2024 to 2043.