New deals easily absorbed while inflows ebb

Bonds

Municipal benchmarks were unchanged top to bottom Wednesday as investors focused on the robust primary offerings, underwriters repriced bonds to lower yields while issuers saw good demand in the competitive markets as munis largely ignored FOMC taper talk and the weakness in U.S. Treasuries that followed the news.

Discussions about tapering asset purchases could soon be appropriate if recovery continues, a number of Federal Open Market Committee members said, according to minutes released Wednesday. Treasury yields rose afterward moving municipal to UST ratios lower.

Municipal to UST ratios closed at 60% in 10 years and 66% in 30 years on Wednesday, according to Refinitiv MMD. ICE Data Services saw ratios on the 10-year at 59% and the 30-year at 67%.

The Investment Company Institute reported another week of inflows, but at a lower clip than recent weeks with $541 million coming into municipal bond mutual funds and $309 million into exchange-traded funds for the week ending May 12. This follows $928 million and $285 million, respectively, the prior week.

In the competitive market on Wednesday, the Virginia College Building Authority (Aa1/AA+//) sold $535.2 million of educational facilities revenue bonds, Series 2021A (21st Century Collage and Equipment Programs) to J.P. Morgan Securities. Bonds in 2022 with a 5% coupon yield 0.10%, 5s of 2026 at 0.52%, 5s of 2031 at 1.07%, 3s of 2036 at 1.57% and 3s of 2041 at 1.94%.

Seattle (Aa1/AA+//) sold $111 million of drainage and wastewater system improvement and refunding revenue bonds to Morgan Stanley & Co. LLC. bonds in 2022 with a 5% coupon yield 0.12%, 5s of 2026 at 0.55%, 5s of 2031 at 1.08%, 4s of 2036 at 1.35%, 4s of 2041 at 1.58%, 4s of 2046 at 1.73% and 4s of 2051 at 1.78%.

Ladue School District, Missouri, (/AAA//) sold $126 million of unlimited tax general obligation bonds to Morgan Stanley with 4s of 2022 at 0.12%, 4s of 2026 at 0.53%, 2s of 2031 at 1.30%, 2s of 2036 at 1.84% and 2s of 2041 at 2.04%, callable in 3/1/2027.

In the negotiated space, BofA Securities repriced $691.5 million of general obligation bonds with one to 10 basis point bumps in scales for Connecticut (Aa3/A+/AA-/). The first, $300 million 2021 Series B social bonds, saw 3s of 2022 at 0.16% (-2), 4s of 2026 at 0.60% (-3), 4s of 2031 at 1.25% (-1), 2s of 2036 at 2.12% (-2) and 5s of 2041 at 1.62% (-5).

The second, $169.3 million 2021 Series C refunding GOs, saw 5s of 2021 at 0.12% (-2), 5s of 2022 at 0.14% (-2) and 5s of 2024 at 0.31% (-3).

The last, $222.2 million 2021 Series D forward delivery social refunding bonds, saw 5s of 2025 yield 0.21% (-4), 5s of 2026 at 0.70% (-4) and 5s of 2031 at 1.27% (-10).

J.P. Morgan repriced $500 million of Rural Colorado certificates of participation (Aa2/AA-//) with one to 9 basis point bumps, with 5s of 2021 at 0.11% (-1), 5s of 2022 at 0.15%, 5s of 2026 at 0.63% (-4), 5s of 2031 at 1.26% (-2), 4s of 2036 at 1.56% (-8) and 4s of 2040 at 1.71% (-9).

Barclays Capital Inc. priced $175.6 million of single-family mortgage revenue bonds for the Pennsylvania Housing Finance Agency (Aa2/AA+//). The first, $136.7 million Series 2021-135A (non-AMT social bonds), saw bonds maturing in 10/2030 with a 1.57% coupon priced at par, 1.74% at par in 4/2031, 1.8s of 10/2031 at 1.78%, 2.05s of 10/2036 at 2.03%, 2.25s of 10/2041 at par, 2.375s of 10/2046 at 2.40% and 3s of 10/2051 at 0.85% (PAC bonds). The second, $38.9 million of Series 2021-135B AMT social bonds saw 5s of 2022 yield 0.22%, 5s of 4/2026 at 0.92%, 5s of 10/2026 at 0.99%, 5s of 4/2030 at 1.57% and 5s of 10/2030 at 1.61%.

J.P. Morgan priced $155.3 million grant anticipation revenue bonds, Series 2021, for the state of Louisiana (/AA//). Bonds in 2022 with a 5% coupon yield 0.12%, 5s of 2026 at 0.65%, 5s of 2031 at 1.23% and 5s of 2033 at 1.30%.

Secondary trades and scales
Secondary trading showed Maryland 5s of 2022 at 0.10%. California 5s of 2026 at 0.52%. New York City GOs 5s of 2028 at 0.94%. California 5s of 2030 at 1.08%.

North Carolina 5s of 2033 at 1.25%. Washington 5s of 2033 at 1.20%. North Carolina 5s of 2034 at 1.30%.

New York City TFA 4s of 2046 at 1.95%.

On Refinitiv MMD’s AAA benchmark scale, yields were steady across the curve at 0.10% in 2022 and 0.14% in 2023, the 10-year stayed at 1.01% and the 30-year at 1.58%.

The ICE AAA municipal yield curve showed yields at 0.12% in 2022 and 0.16% in 2023, the 10-year stayed at 1.01% while the 30-year fell to 1.59%.

The IHS Markit municipal analytics AAA curve showed yields at 0.10% in 2022 and 0.13% in 2023, the 10-year sat at 0.98% and the 30-year at 1.57%.

The Bloomberg BVAL AAA curve showed yields steady at 0.08% in 2022 and 0.10% in 2023, 0.97% in the 10-year and the 30-year sat at 1.59%.

The 10-year Treasury was yielding 1.67% and the 30-year Treasury was yielding 2.37% near the close. Equities fell for the third day with the Dow losing 287 points, the S&P 500 fell 0.66% and the Nasdaq lost 0.42%.

FOMC minutes
Discussions about tapering asset purchases could soon be appropriate if recovery continues, a number of Federal Open Market Committee members said at their April meeting, according to minutes released Wednesday.

“A number of participants suggested that if the economy continued to make rapid progress toward the Committee’s goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases,” according to the minutes.

The “minutes showed the Fed is finally a lot closer to thinking about raising interest rates,” said Ed Moya, senior market analyst for the Americas at OANDA. “First they taper, then everyone starts the countdown until the rise with interest rates.”

And while the minutes showed the Fed’s optimism, he said, “it will be quite some time before enough substantial progress is reached for them to go full-fledged tightening mode.”

But not everyone saw this as a major change in Fed policy. “Broadly speaking, I don’t see any material new information here with respect to the Fed’s reaction function for tapering QE or their views on inflation,” said Ed Al-Hussainy, senior interest rate and currency analyst at Columbia Threadneedle.

“The nominal UST curve has been rangebound since March, with 5-year yields in a 20-basis-point range between 75 and 95 bp,” he said. “Real yields have been pinned to the lows as breakevens have moved higher alongside risk and commodity prices. As a result, real yields are now rich and vulnerable to an unwind on any marginal changes around the Fed’s taper signal.”

The Fed needs to communicate clearly “its assessment of progress toward its longer-run goals well in advance of the time when it could be judged substantial enough to warrant a change in the pace of asset purchases,” according to “many participants. The timing, of course, would depend on the Fed’s progress toward its dual mandate.

“The committee needs to remain patient as the employment picture improves — however it needs to start firmly laying the groundwork for a less accommodative monetary policy,” said Sean Simko, managing director and head of fixed income portfolio management at SEI’s Investment Management Unit.

He added, the Fed needs to be careful to avoid falling “behind the curve” on inflation. “A gradual increase in rates should be better received by financial markets than a sharp move higher,” Simko said. “Any hint of a planned policy change would be beneficial for the economy in the long run, although it will likely create increased volatility in the short run if the change comes sooner than expected.”

The committee views the risks of inflation as “balanced,” and their economic outlook was “broadly unchanged.”

“On the upside, bottlenecks, supply disruptions, and historically high rates of resource utilization were seen as potential sources of greater-than-expected inflationary pressures,” the minutes stated. “Alternatively, the possibility that inflation would be held down by low underlying trend inflation and a weaker-than-expected response to resource utilization was seen as an important downside risk.”

The anticipated “surge in demand” from the economy reopening, “with some transitory supply chain bottlenecks” would push personal consumption expenditure inflation temporarily over 2%.

”A number of participants remarked that supply chain bottlenecks and input shortages may not be resolved quickly and, if so, these factors could put upward pressure on prices beyond this year,” the minutes said.

Simko remains concerned about “mounting inflationary pressures,” and would like the FOMC to address them. “Viewing rising pricing pressures as transitory is not a long-term solution,” he said.

Bullard sees inflation
While not at levels that will impact monetary policy, Federal Reserve Bank of St. Louis President James Bullard sees higher inflation for “years to come.”

“We will see higher inflation, above 2% for 2021, and I want to see more inflation data before I change my forecast,” he said. And while “inflation data is very noisy right now,” the Fed president expects inflation above 2% through 2022, with some moderation after that.

With the Fed’s new framework, inflation can run higher than 2% without any policy action since inflation was below 2% for most of the past decade.

“We are going to have to be nimble, ready to react,” Bullard said. “We will alter plans if necessary but we aren’t there yet, as I don’t want to make changes while we are still in the pandemic tunnel, as I want to avoid having COVID take an unexpected turn and then we have to go back into emergency mode.”

As long as market-based inflation expectations don’t “run away,” he said, he won’t worry. “But we have not seen that yet and I think we are in good shape now in terms of inflation.”

The economic expansion, which has surpassed projections, is the main driver of supply chain problems, he said. “This economy is not geared to grow at 6% to 8% for a whole year,” Bullard said. “Companies are producing at maximum capacity, the only way they could produce more is to build another plant and that would take years,” he said. “A lot of products, you have to wait in line and that is just the way it is now.

Bullard is not a voting member of the Federal Open Market Committee.

Primary still to come
The Charlotte-Mecklenburg Hospital Authority, North Carolina, (Aa3/AA-//) is set to price on Thursday $300 million of taxable healthcare revenue bonds Series 2021A, serial 2051. Citigroup Global Markets Inc. is bookrunner.

The authority is also set to price on Thursday $300 million of variable rate healthcare revenue bonds, three-, seven- and 10-year Series 2021B, C and D. Citigroup Global Markets Inc. is bookrunner.

The Maricopa County Special Health Care District, Arizona, (Aa3//AA-/) is set to price on Thursday $243 million of general obligation bonds, Series 2021 D. J.P. Morgan Securities LLC is head underwriter.

The Sioux Falls School District No. 49-5, Minnehaha and Lincoln Counties, South Dakota, (/AA+//) is set to price on Thursday $159 million of general obligation refunding bonds, taxable Series 2021. D.A. Davidson & Co. is bookrunner.

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