Municipals were little changed and lightly traded ahead of the midterm elections while U.S. Treasuries were weaker across the curve and equities improved.
Triple-A yields were little changed to a basis point or two firmer 10 years and out while the U.S. Treasury two-year climbed to another high not seen since 2007.
Muni to UST ratios fell slightly on the day’s moves. The three-year muni-UST ratio was at 69%, the five-year at 73%, the 10-year at 79% and the 30-year at 94%, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the three at 69%, the five at 73%, the 10 at 82% and the 30 at 97% at a 4 p.m. read.
Voters will decide on more than $60 billion of bond ballot measures Tuesday with New York voters faced with the largest amount at $4.2 billion.
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“Many issuers decided to take a pause in issuing last week due to the Fed rate hike decision as many expected the Fed to raise rates by 75 basis points,” said Jason Wong, vice president of municipals at AmeriVet Securities.
And “given the low new-issue supply and the FOMC meeting last week, it is not surprising that trading volume slowed from the pace of the last several weeks,” said CreditSights strategists Pat Luby and John Ceffalio.
The average daily par amount reported by Municipal Securities Rulemaking Board was down 18% from the week ended Oct. 28, they noted.
Wong said “supply is not expected to pick up anytime soon as we have Veterans day on Friday and the Thanksgiving holiday coming a few weeks later.”
Last week, “the major news on the municipal side was not constructive,” Tom Kozlik, managing director head of municipal research and analytics at HilltopSecurities, said. “The Fed’s outlook, the fund outflows, and jobs number all point to more uncertainty, volatility and higher interest rates most likely.”
Kozlik said activity is likely to keep interest rates higher for a longer period and that is going to keep refunding activity very low.
He said there will be many barriers to issuance, bringing monthly volume to record levels. “Supply is going to be very, very low for November and December,” he said.
“We will probably see the lowest levels of issuance in those months that we have seen for some time,” Kozlik added, pointing to high rates, Fed activity, project costs, election year impact, and inflation.
Issuance projections for 2023 are beginning to roll in with a high of $500 billion from BofA Securities while HilltopSecurities is coming in with a low of $350 billion. Volume predictions from 2021 were a different market landscape, with a high of $550 billion to a low of $390 billion
Kozlik’s colleague, Yaffa Rattner, head of municipal credit and public finance, said perpetual fund outflows coupled with FOMC actions have created challenges for many high-yield deals that were scheduled to price.
“During the last few weeks, we have also noticed that transactions that were perceived by investors as having greater incremental risk when compared to their published credit rating, priced more consistently with lower-rated deals,” she said.
Additionally, Kozlik spoke of the presence of “an immense amount of sticker shock” where tax-exempt yields and overall debt costs right now is forcing many issuers to stay out of the market.
“The tone is one of disbelief for some,” Kozlik said, acknowledging the swift rise in yields this year.
Midterm elections
“The upcoming midterm elections will have a major impact on future federal and state policy decisions, yet we expect limited impact on the municipal market and municipal credit quality,” CreditSights strategists said.
They said a “change in control of Congress would have a limited impact on municipal credit quality.”
Edward Moya, a senior market analyst at OANDA, said that “the democratic lock on Congress is likely coming to an end.”
A divided government “means we won’t be seeing a big fiscal stimulus response next year when the economy is in a recession,” he said.
Investors, though, are so fixated with this week’s inflation data instead of the midterm election “that it seems highly likely the Republicans will win one of the chambers this week,” he noted.
A Republican takeover “would reduce the chance of future emergency or stimulus-type aid to state and local governments, but this is not proposed at this point anyway,” CreditSights strategists said.
If Republicans take both houses of Congress, they “expect they’ll attempt to extend major provisions of the 2017 [Tax Cuts and Jobs Act] (including the limit on SALT deductions), but those would need to be negotiated with the President.”
If the Republicans win one or both houses, they worry “about a destabilizing debt ceiling crisis, which would have far-reaching impacts well beyond municipals.”
Even if the Republicans win both the House and Senate, Moya said “the bullish reaction for risky assets might be short-lived.”
A Republican sweep would confirm that the market “won’t see a major fiscal response from the Biden administration once the economy falls into a recession,” he said.
Secondary trading
Ohio 5s of 2024 at 3.23%-3.21%. Louisiana gas & fuels 5s of 2024 at 3.19% versus 3.23% Thursday. District of Columbia 5s of 2025 at 3.27%-3.25%.
New York City 5s of 2032 at 3.64%-3.61%. Triborough Bridge & Tunnel MTA green 5s of 2032 at 3.65%-3.62% versus 3.65%-3.64% Thursday. Monmouth, New Jersey, 5s of 2034 at 3.54%, same as Friday.
New York City 5s of 2041 at 4.47%-4.46%. California 5s of 2042 at 4.13%-4.09%. Washington 5s of 2046 at 4.34% versus 4.45%-4.30% Thursday.
AAA scales
Refinitiv MMD’s scale was bumped up to two basis points: the one-year at 3.12% (unch) and 3.17% (unch) in two years. The five-year at 3.22% (unch), the 10-year at 3.34% (-2) and the 30-year at 4.06% (-2).
The ICE AAA yield curve was cut one basis point in spots: 3.13% (+1) in 2023 and 3.19% (+1) in 2024. The five-year at 3.29% (+1), the 10-year was at 3.43% (+1) and the 30-year yield was at 4.18% (flat) at a 4 p.m. read.
The IHS Markit municipal curve was bumped two basis points out long: 3.12% (unch) in 2023 and 3.18% (unch) in 2024. The five-year was at 3.23% (unch), the 10-year was at 3.35% (unch) and the 30-year yield was at 4.05% (-2) at a 4 p.m. read.
Bloomberg BVAL was bumped a basis point in spots: 3.09% (unch) in 2023 and 3.16% (unch) in 2024. The five-year at 3.20% (unch), the 10-year at 3.35% (unch) and the 30-year at 4.08% (unch) at 4 p.m.
Treasuries were weaker.
The two-year UST was yielding 4.723% (+6), the three-year was at 4.645% (+6), the five-year at 4.390% (+6), the seven-year 4.313% (+6), the 10-year yielding 4.218% (+6), the 20-year at 4.566% (+7) and the 30-year Treasury was yielding 4.327% (+8) at the close.
Primary to come:
The JobsOhio Beverage System (Aa3/AA+//) is set to price Tuesday $617.245 million of taxable statewide senior lien liquor profits revenue bonds, Series 2022, terms 2032 and 2038. Citigroup Global Markets.
The South Carolina Public Service Authority (A3/A-/A-/) is set to price Tuesday $500 million of revenue obligations, consisting of $38 million of tax-exempt refunding bonds, Series C; $280 million of tax-exempt improvement bonds, Series E; $137 million of taxable refunding bonds, Series D; and $45 million of taxable improvement bonds, Series F. J.P. Morgan Securities.
The Los Angeles Unified School District (Aa3//AAA/AAA/) is set to price Wednesday $500 million of sustainability dedicated unlimited ad valorem property tax general obligation bonds, Series QRR, consisting of $474.475 million of Series 1 and $25.525 million of Series 2. Morgan Stanley & Co.
The Tarrant County Cultural Education Facilities Finance Corporation, Texas, (Aa3/AA-//) is set to price Wednesday $500 million hospital revenue bonds (Baylor Scott & White Health Project), consisting of $250 million of fixed rate bonds, Series 2022D, terms 2047 and 2051, and $250 million of fixed rate hard put bonds, Series E, term 2052. Citigroup Global Markets.
The Philadelphia Authority for Industrial Development (/A-//) for is set to price Tuesday $200 million of university revenue bonds (Saint Joseph’s University Project), Series 2022. Morgan Stanley & Co.
The Antelope Valley Community College District, California, (Aa2/AA//) is set to price Wednesday $127.420 million of Election of 2016 general obligation bonds, Series C, consisting of $5 million of Series CIB, serial 2042, and $122.420 million of Series CABS, serials 2027-2047. Stifel, Nicolaus & Co.
Ohio (Aa2/AA//) is set to price Wednesday $112.240 million of major new state infrastructure project revenue bonds, Series 2022-1. Goldman Sachs & Co.
The Sterling Ranch Community Authority Board, Colorado, is set to price Tuesday $110.929 million of bonds, consisting of $98.365 million of Series 2022A, terms 2032, 2042 and 2053, and $12.564 million of Series 2022B, term 2053. Jefferies.
Pinal County, Arizona, (/AA/AA/) is set to price next $109.965 million of taxable pledged revenue obligations, Second Series 2022, serials 2023-2037, term 2042, insured by Assured Guaranty Municipal Corp. Stifel, Nicolaus & Co.
The Minnesota Housing Finance Agency (Aa1/AA+//) is set to price Wednesday $100 million of social residential housing finance bonds, consisting of $24.290 million of AMT bonds, Series 2022L, serials 2024-2032, term 2036, and $75.710 million on non-AMT bonds, Series 2022M, serials 2024, terms 2037, 2042, 2045 and 2053. RBC Capital Markets.
The Clovis Unified School District, California, (/AA//) is set to price Tuesday $100 million of Election of 2022 general obligation bonds, Series B, serials 2023-2024 and 2031-2042, term 2047. Stifel, Nicolaus & Co.
Competitive:
Shelby County, Tennessee, is set to sell $159.280 million of general obligation public improvement and school bonds, 2022 Series A, at 11 a.m. eastern Tuesday.
California is set to sell $127.060 of taxable various purpose general obligation bonds and refunding bonds (Bid Group A) at 11:15 a.m. eastern Wednesday.
The state also is set to sell $549.545 million of taxable general obligation bonds (Bid Group B) at noon Wednesday.
The Florida Department of Transportation (Aa2/AA/AA/) is set to sell $189.190 million of turnpike revenue bonds, Series 2022C, at noon Tuesday.