Municipals were a touch firmer Friday with a few stronger high-grade prints clearing at levels to move triple-A benchmarks a basis point better while U.S. Treasuries were also a basis point or two lower ahead of what will be a low-issuance week to start the summer.
All triple-A benchmark 10-year yields are now below 1%, as Refinitiv MMD bumped its 10-year to 0.99%.
Despite this week’s active economic news flow, Treasury yields were effectively unchanged, while long-dated tax-exempts outperformed slightly, Barclays strategists Mikhail Foux, Clare Pickering and Mayur Patel wrote in a weekly report.
Unless there is some larger rate volatility, “muni yields will likely stay in a narrow range and trading activity remain subdued,” they said, noting secondary trading volume was $25 billion this week, lower than $27 billion from the prior week and just below the $26 billion weekly volume average for 2021.
Municipal to UST ratios ended the week at recent levels, closing at 62% in 10 years and 67% in 30 years, according to Refinitiv MMD. ICE Data Services saw ratios on the 10-year at 62% and the 30-year at 68%.
Fed’s Reverse Repo Program spike fueled by ARP aid
Another important market development frequently discussed by investors was a dramatic increase of the outstanding balances of the Fed’s Reverse Repo Program (RRP), which skyrocketed, surpassing the levels reached in the midst of the pandemic, Barclays strategists noted in their report.
“One of the main reasons for a large increase in the use of RRP is cash received by municipalities through the American Rescue Plan, with most ending up in short-term funding markets,” they wrote.
While only $110 billion has been doled out to state and local governments thus far, they can expect another $125 billion coming soon.
“State and local municipalities have been drawing up plans for utilization of this cash for quite some time, hence we believe they will put it to work in very short order, and the RRP’s balances will decline sooner rather than later, in our view,” according to Barclays.
Corporate flows see weakness, highlighting the positive bias for munis
While tax-exempt mutual funds saw big inflows in the latest week ($1.5 billion), the recent weakness seen in corporate bond funds is continuing, especially in the high-yield sector.
Refinitiv Lipper reports that investment-grade corporate funds saw inflows drop to $911.427 million in the week ended May 26, down from $1.682 billion of inflows the week before.
But the weakness was most noteworthy in high-yield as investors continued to pull cash out of these funds.
High-yield corporate funds saw $1.369 billion of outflows in the latest week following $1.705 billion of outflows in the previous week. This month, taxable high-yield saw a drop of $672 million in the week of May 12 and a decline of $1.387 billion in the week of May 5.
Conversely, muni funds have had a strong month, with $1.466 billion of inflows in the latest week and high-yield muni funds seeing inflows of $813.818 million. Muni funds haven’t seen an outflow since the week of March 3, only the second time all year the funds saw outflows.
Many strategists and analysts have pointed out the outperformance munis have made versus their corporate counterparts and many expect this trend to continue along with the broader muni outperformance in fixed-income markets.
Secondary trading and scales
Trading was sparse, but a firmer tone was there. San Diego water 5s of 2024 traded at 0.20%. Loudoun County, Virginia, 5s of 2026 at 0.55%. Washington 5s of 2027 at 0.67%. Katy, Texas, ISD 5s of 2026 at 0.51%. Seattle 5s of 2027 at 0.72%. Loudoun County 5s of 2030 at 1.00%.
Prince George’s County, Maryland, 3s of 2033 at 1.32%. Austin, Texas, 5s of 2050 at 1.63%.
On Refinitiv MMD’s AAA benchmark scale, yields fell one basis point across the curve to 0.08% in 2022 and 0.11% in 2023, the 10-year at 0.99% and the 30-year fell to 1.52%.
The ICE AAA municipal yield curve showed yields fall one basis point to 0.08% in 2022 and to 0.12% in 2023, the 10-year stayed at 0.99% while the 30 was steady at 1.54%.
The IHS Markit municipal analytics AAA curve showed yields steady at 0.08% in 2022 and 0.11% in 2023, the 10-year was also lower by one at 0.96% and the 30-year fell one to 1.53%.
The Bloomberg BVAL AAA curve showed yields steady at 0.07% in 2022 and 0.09% in 2023, steady at 0.96% in the 10-year and the 30-year remained at 1.54%.
The 10-year Treasury was yielding 1.61% and the 30-year Treasury was yielding 2.28% near the close. Equities were up with the Dow gaining 138 points, the S&P 500 rose 0.12% and the Nasdaq gained 0.01% near the close.
The Federal Reserve Bank of Kansas City announced it will hold a modified version of its Jackson Hole summit this year, and Friday’s economic data led some economists to suggest that is when the central bank will work out a plan to taper its asset purchases.
“We expect a tapering announcement in the third quarter of this year, possibly at the Jackson Hole research conference in August,” said Wilmington Trust economists Luke Tilley and Rhea Thomas. The Fed has said it wanted to see “substantial further progress” toward its dual mandates. “We believe they will deem enough progress has been made later this year.”
And while they expect inflation to be transitory, Tilley and Thomas see an upside risk on the services side, “which has historically been more stable and a dampener for overall inflation.”
Some of the labor market conditions that could make inflation in that sector persistent are: the number of jobs available; companies including Amazon and McDonald’s raising wages because they can’t attract workers, and COVID concerns and retirements, which may add to worker shortages, they said.
Diane Swonk, chief economist at Grant Thornton, agreed a framework for tapering is likely at the Jackson Hole summit.
“The Fed will be watching for moderation in inflation pressures by year-end and any signs that the surge in inflation tied to reopening the economy could be longer lasting could move up the timeline on rate hikes,” she said.
The street consensus sees a rate hike in 2024, but Swonk sees one in 2023.
In data released Friday, personal income fell 13.1% in April after increasing a downwardly revised 20.9% in March, originally reported as a 21.1% gain, while spending rose 0.5% after an upwardly revised 4.7% climb, first reported as a 4.2% increase.
The PCE price index rose 0.6% in April after a 0.6% gain in March, first reported as a 0.5% increase. The core PCE rose 0.7% after a 0.4% rise in April. Compared to a year ago, the PCE price index jumped 3.6% and the core gained 3.1%.
Economists polled by IFR Markets expected a 14.8% drop in income, a 0.5% rise in consumption, a 0.6% climb in core PCE and 3.0% growth in core PCE on an annual basis.
The jump in PCE was “the fastest annual increase since September 2008,” said Swonk. “And core PCE saw the fastest pace of core inflation since July 1992, but still well below the 4.2% jump in the CPI measure of inflation for the month.”
Turning back to the Fed, Morgan Stanley economists believe the Fed will be forced to raise its inflation forecast in its June Summary of Economic Projections. The core PCE projection, they say, “currently at 2.2%, is likely to be revised up to 2.4% and possibly even higher.”
In other data, the University of Michigan consumer sentiment index inched up to 82.9 in the final May read from 82.8 earlier in May, but down from 88.3 in April. The index stood at 72.3 in May 2020.
Economists saw the index holding at the mid-month 82.8 level.
The current conditions index fell to 89.4 in May from 90.8 at mid-month and 97.2 in April, while the expectations index climbed to 78.8 from 77.6 earlier in the month but fell from 82.7 in April.
Separately, the Chicago Business Barometer gained to 75.2 in May — its highest reading since November 1973 — from 72.1 in April.
Economists expected a reading of 69.5.
The new orders index was the highest it’s been since December 1983, while the orders backlog index soared to levels not seen in 70 years.
Also released Friday, the Midwest Economy Index dipped to 0.61 in April from 0.62 in March and the relative MEI fell to 0.81 from 1.59. The numbers suggest the Midwest economy is growing at above-usual rates.
Primary market to come
Main Street Natural Gas, Inc. (//AA/) is on the day-to-day calendar with $771.6 million of gas supply revenue bonds, Series 2021A, serials 2022-2028, term 2051, puts due 12/01/2028. RBC Capital Markets is head underwriter.
The Metropolitan Washington Airports Authority (Aa3/A+/AA-/) is set to price $689.5 million of AMT airport system revenue and refunding bonds, Series 2021A, serials 2021-2051. Citigroup Global Markets Inc. is head underwriter.
The CSCDA Community Improvement Authority (////) is set to price on Wednesday $364.3 million of senior and mezzanine essential housing revenue refunding bonds (Pasadena Portfolio) (social bonds). Goldman Sachs & Co. LLC is lead underwriter.
The Michigan State Housing Development Authority (/AA//) is set to price on Thursday $321 million of rental housing revenue bonds, Series 2021 A (non-AMT) and Series B taxables. BofA Securities is bookrunner.
The West Contra Costa Unified School District, California, is set to price on Thursday $149.3 million of general obligation refunding bonds, Series A and Series B taxable refunding bonds. J.P. Morgan Securities LLC is head underwriter.
Bell County, Texas, (/AA+//) is set to price on Wednesday $138 million of combination tax and revenue certificates of obligation, serials 2022-2041. Raymond James & Associates, Inc. is head underwriter.
The Chicago Transit Authority is set to price on Wednesday $127.2 million of capital grant receipts revenue bonds in two series, consisting of $104.5 million of Series 5307 (/A/BBB//) and $22.7 million of Series 5337 (/A+/BBB/). BofA Securities is lead underwriter.
The Rhode Island Health and Educational Building Corp. (/AA//) is set to price $127.1 million of public schools social revenue refunding bonds, Series 2021 F (City of East Providence Issue). Oppenheimer & Co. is bookrunner.
The Fresno Unified School District (Aa3///) Is set to price on Thursday $125 million of general obligation bonds, $45 million Series D and $80 million Series A. Stifel, Nicolaus & Company, Inc. is lead underwriter.
Wake Forest University (Aa3/AA//) is set to price on Thursday $125 million of taxable Series 2021 bonds, term 2051. Wells Fargo Securities, LLC is head underwriter.
The Spokane Public Facilities District (Aa1/AA+//) is set to price on Wednesday $121.4 million of taxable sales and lodging tax refunding bonds. Barclays Capital Inc. will run the books. Indications of interest Tuesday afternoon.
The Contra Costa Transportation Authority (/AA+/AAA/) is set to price on Wednesday $103.6 million of limited tax sales tax revenue refunding bonds Wells Fargo Securities is the lead underwriter.
The Indiana Housing and Community Development Authority (Aaa/AAA/) is set to price on Wednesday $98.8 million of single-family mortgage revenue social bonds. J.P. Morgan Securities LLC is head underwriter.
The Arlington Higher Education Finance Corp. (/AAA//) is set to price on Thursday $96.6 million of Lifeschool of Dallas taxable variable rate education revenue refunding bonds, insured by the Permanent School Fund Guarantee Program. D.A. Davidson & Co. is bookrunner.
The Water Authority of Western Nassau County, New York, (A1//AA-/) is set to price on Thursday $96.4 million of water system revenue exempt and taxable green bonds. BofA Securities is head underwriter.
Chip Barnett contributed to this report.