Municipals were firmer Thursday in a relatively quiet trading session as investors waited to see how many nonfarm payroll jobs were added in March. U.S. Treasuries and equities were mixed.
The two-year muni-Treasury ratio was at 60%, the three-year at 60%, the five-year at 62%, the 10-year at 64% and the 30-year at 90%, according to Refinitiv MMD’s 3 p.m. ET read. ICE Data Services had the two-year at 60%, three-year at 59%, the five-year at 59%, the 10-year at 64% and the 30-year at 91% at 3 p.m.
Entering 2023, the focus was on inflation, the Fed and economic performance, said Arthur Aaronson, senior fixed-income portfolio manager at State Street Global Advisors.
“You get any volatility in any of those indicators, and all of a sudden the market can experience volatility, which moves one way or the other,” he said. “The volatility in the economic data, as we experienced [Wednesday] with the ADP number, anything that’s non-consensus can cause volatility.”
After another week of yields falling, Aaronson said institutional buyers are avoiding the front end of the curve because they can get better yields in the corporate and other markets.
He said he’s noticed separately managed accounts have not been as active over the past month or so, and it’s harder to find bonds.
“If you are looking on the long end, it’s hard to find block sizes that you want to add; it’s harder to find decent credits that you want to add,” he said.
Ratios continue to be tight and rich.
“I think it’s hard to find value out there as a buyer, but the SMA buyer seems not to really care about ratios,” he said. “The SMA buyer has a hole to fill and he’s the one who’s out there driving the market in here.”
“It’s certainly not the institutions because they’re not a fan of the front end and when they get to the intermediate end … it’s hard to find good value,” he said.
He said the $2.6 billion of various purpose GOs from California on Wednesday was oversubscribed and shows “there is demand in certain portions of the curve for the larger, high-quality names.”
“You just have to be willing to bite the bullet a little bit because spreads are a little bit tighter than we’d like them to be,” he noted.
After the volatility in March, he believes performance will be driven more by “the curve and rate and duration and less so by credit quality.”
Spreads have moved tighter, and he said it’s hard to find good names.
Supply remains an interesting factor, Aaronson said. Supply for this week was estimated at $5.4 billion, according to Ipreo and The Bond Buyer. However, if the largest deals —the $2.6 billion California deal and $985 million from the San Francisco Public Utilities Commission — were removed, then supply was lacking.
Supply was down 30% year-over-year in March, and down 27% for the first quarter of 2023 year-over-year. If new issuance continues to come in lighter, he said that will likely hold the market firm.
Aaronson expects to see lower rates and steeper curves in the future, and spreads may “widen a little bit, primarily because people are a little bit reluctant to commit to these lower rates.”
“So they’re going to want to get paid a little bit more, which will drive spreads,” he said.
Fund flows are down year-to-date, though a reversal could happen if supply ticks up, he said.
He said January saw strong fund flows, but that reversed in February and through March.
For the week ending Wednesday, outflows lessened as Refinitiv Lipper reported $91.713 million was pulled from municipal bond mutual funds after $194.097 million of outflows the week prior.
High-yield saw $147.958 million of inflows after $148.621 million of inflows the week prior, while ETFs saw inflows of $305.465 million after $90.242 million of outflows the previous week.
Aaronson said April is traditionally a better supply month and coupon payments and maturities are low this month.
“Technicals may improve for the market and put more pressure on it,” he said.
Recent downward revisions in municipal bond volume forecasts for 2023 have led Aaronson to believe “we’re not going to have as much supply as we’ve had in the past, which would put pressure on rates in the market because the institutional buyer and the retail buyer will be competing to get debt.”
Looking ahead, tax-exempt “yields remain mostly too rich to appeal to banks and insurance companies leaving the market still reliant on direct and indirect demand from individual investors,” said CreditSights strategists Pat Luby and Sam Berzok.
However, Luby and Berzok said they have “not seen evidence of meaningful amounts of new money getting allocated to municipals, so we believe that demand is primarily a function of reinvestment of called and matured bond proceeds and rebalancing of existing portfolios.”
With redemptions hitting a low in April, they “expect the market to be biased weaker this month, with demand favoring higher-credit quality and intermediate duration bonds.”
However, they “anticipate sentiment will improve towards the end of April.”
May will start with $20 billion of municipal bond principal and interest payments on May 1, and the next policy adjustment from the Fed is expected to follow the Federal Open Market Committee meeting on May 2-May 3.
Calendar stands at $3.4B
Investors will be greeted Monday with a new-issue calendar estimated at $3.358 billion.
There are $1.666 billion of negotiated deals on tap and $1.692 billion on the competitive calendar.
The negotiated calendar is led by $467 million of various capital projects lease revenue bonds from the California State Public Works Board, followed by $434 million of special tax revenue bonds from the Irvine Facilities Financing Authority, California.
Portland Public Schools, Oregon, leads the competitive calendar with $420 million of GOs in two deals.
North Carolina 5s of 2024 at 2.40%. University of California 5s of 2024 at 2.20%-2.18% versus 2.36% on 3/31 and 2.44% on 3/30. Louisville-Jefferson County Metro Government waters, Kentucky, 4s of 2025 at 2.32%-2.36%.
Triborough Bridge and Tunnel Authority 5s of 2027 at 2.11%-2.10% versus 2.43% on 3/17 and 2.62% on 3/14. NYC TFA 5s of 2028 at 2.14%-2.13% versus 2.24% Tuesday. Florida BOE 5s of 2029 at 2.07% versus 2.11% Wednesday and 2.23%-2.21%.
Wake County, North Carolina, 5s of 2032 at 2.10% versus 2.12% Wednesday and 2.26% on 3/30. Maryland 5s of 2034 at 2.15% versus 2.18% Wednesday and 2.48% original on 3/16.
Massachusetts Bay Transportation Authority 5s of 2052 at 3.48%-3.47% versus 3.57%-3.53% Tuesday and 3.68% on 3/28. California 5s of 2052 at 3.41%-3.40% versus 3.45% Wednesday and 3.68%-3.70% on 3/23. Baltimore County, Maryland, 5s of 2053 at 3.32%-3.33% versus 3.51% on 3/30 and 3.57% in 3/14.
Refinitiv MMD’s scale was bumped up to four basis points. The one-year was at 2.41% (unch) and 2.28% (-2) in two years. The five-year was at 2.10% (-2), the 10-year at 2.10% (-4) and the 30-year at 3.18% (-2) at 3 p.m.
The ICE AAA yield curve was bumped up to four basis points: 2.46% (flat) in 2024 and 2.33% (-1) in 2025. The five-year was at 2.03% (-4), the 10-year was at 2.11% (-4) and the 30-year was at 3.22% (-3) at 3 p.m.
The IHS Markit municipal curve was bumped up to four basis points: 2.39% (unch) in 2024 and 2.26% (-2) in 2025. The five-year was at 2.07% (-2), the 10-year was at 2.08% (-4) and the 30-year yield was at 3.17% (-2), according to a 3 p.m. read.
Bloomberg BVAL was bumped one to three basis points: 2.36% (-2) in 2024 and 2.29% (-1) in 2025. The five-year at 2.07% (-2), the 10-year at 2.09% (-3) and the 30-year at 3.17% (-3) at 3 p.m.
Treasuries were mixed.
The two-year UST was yielding 3.825% (+3), the three-year was at 3.594% (+2), the five-year at 3.366% (flat), the seven-year at 3.333% (-1), the 10-year at 3.295% (-1), the 20-year at 3.658% (-2) and the 30-year Treasury was yielding 3.540% (-2) at 3:30 p.m.
March jobs report preview
“Wall Street looks like it is ready for both a long weekend and a nonfarm payroll report that will likely show labor market weakness is happening,” said Edward Moya, senior market analyst at The Americas OANDA.
“All the employment data leading up to the nonfarm payroll report has confirmed a clear trend that a labor market slowdown has begun,” he said.
An additional 230,000 jobs are believed to have been created in March, “with the unemployment rate remaining steady at 3.6%, while wages tick higher from a month ago, but cool down year-over-year from 4.6% to 4.3%,” Moya said.
“We have been positing that corporate expense controls amid prospects for slowing growth support scheduled layoffs, which would eventually show up in the employment numbers,” said Jeff Lipton, managing director of credit research at Oppenheimer Inc. “The March payrolls print may or may not affirm our expectation, but if not, we can expect near-term evidence of more relaxed labor market conditions.”
Should Friday’s release of March employment data “reveal a below-consensus non-farm payrolls print of magnitude, bond yields would be poised lower with an even stronger argument made by a number of stakeholders for a pause at the May policy meeting, although we suspect that a weakish number is already baked into the market,” he said.
“Labor market conditions remain tight, although they are loosening and consistent with a mid-3% unemployment rate,” said James DiChiaro, senior portfolio manager at Insight Investment.
Many have pondered “over the strength of labor markets given an expectation of a slowing of the economy but the data itself has been skewed towards the services sector when you look under the hood,” he said.
Despite a rising labor participation rate, DiChiaro said, “the number of early retirements and other demographic factors has left certain parts of the labor market in short supply, within services specifically.”
The Fed, he noted, is trying “to tighten financial conditions with the hopes that it leads to a slowdown in demand and consumption that alleviates the current pricing pressures.”
One of the first ways in which companies “look to reduce expenses is with labor costs,” DiChiaro said.
“The jobs data is evidence that central banks have been effective in their goal of bringing down inflation,” he said.
DiChiaro said the unemployment rate does not need to significantly rise to “get inflation down to the Fed’s 2% target.
“The job openings that we are seeing are in lower-paying jobs so it is possible and likely that the headline jobs data remains healthy,” he said. “However, average hourly earnings and hours worked continue to tick down, driving disinflation.”
The economy is expected to slow down in 2023 and the pace may be accelerated due to recent events in the banking sector, DiChiaro said.
“Ultimately, the slowdown in economic activity will weigh on consumer prices especially if we see increasing lay-offs in the higher-paying job markets that can have a more meaningful impact on demand destruction,” he said.
Mutual fund details
Refinitiv Lipper reported $91.713 million of municipal bond mutual fund outflows for the week that ended Wednesday following $194.097 million of outflows the previous week.
Exchange-traded muni funds reported inflows of $305.465 million after outflows of $90.242 million in the previous week. Ex-ETFs, muni funds saw outflows of $397.177 million after outflows of $103.855 million in the prior week.
Long-term muni bond funds had inflows of $398.555 million in the latest week after inflows of $198.168 million in the previous week. Intermediate-term funds had outflows of $200.169 million after outflows of $103.188 million in the prior week.
National funds had outflows of $89.062 million after outflows of $150.414 million the previous week while high-yield muni funds reported inflows of $147.958 million after inflows of $148.621 million the week prior.
Primary to come
The California State Public Works Board (Aa3/A+/AA-/NR/) is set to price Wednesday $467.265 million of various capital projects lease revenue bonds, consisting of $51.245 million of new-money bonds, Series 2023A, serials 2023-2043, term 2047, and $416.020 million of refunding bonds, Series 2023B, serials 2023-2037. RBC Capital Markets.
The Irvine Facilities Financing Authority, California (/AA//) is set to price Wednesday $434.608 million of Build America Mutual-insured Irvine Great Park Infrastructure Project special tax revenue bonds, Series 2023A, consisting of $418.360 million of current interest bonds, serials 2026-2043, terms 2048, 2053 and 2058, and $16.248 million of capital appreciation bonds, serials 2049-2050, term 2045. Stifel, Nicolaus & Co.
The Idaho Housing and Finance Association (Aa1/NR/AA+/NR/) is set to price Wednesday $368.145 million of Transportation Expansion and Congestion Mitigation Fund bonds, Series 2023A, serials 2024-2043, term 2048. Citigroup Global Markets.
The Los Angeles County Metropolitan Transportation Authority (Aa1/AAA/NR/NR/) is set to price Tuesday $238.265 million of senior Proposition C sales tax revenue refunding Bonds, Series 2023-A, serials 2024-2038. Citigroup Global Markets.
The Modesto Irrigation District Financing Authority, California (/A+/AA-/) is set to price Thursday $174.575 million of electric system revenue bonds, consisting of $126.575 million of new-money bonds, Series 2023A, and $48 million of refunding bonds, Series 2023B. Goldman Sachs.
Raleigh, North Carolina, is set to price Thursday $150.565 million of GOs, consisting of $145.835 million of public improvement bonds, Series 2023A, serials 2024-2043, and $4.730 million of taxable housing bonds, Series 2023B, serials 2024-2043. PNC Capital Markets.
The North Carolina Housing Finance Agency is set to price Tuesday $150 million of non-AMT social home ownership revenue bonds, Series 50, serials 2024-2035, terms 2038, 2043, 2046 and 2054. Wells Fargo Bank
The South San Francisco Unified School District (Aa1///) is set to price Wednesday $149.995 million of Election of 2022 GOs, Series 2023, serials 2024-2025 and 2033-2043, terms 2048 and 2052. RBC Capital Markets.
The Indiana Housing And Community Development Authority (Aaa/NR/AAA/NR/) is set to price Tuesday $148.215 of social single-family mortgage revenue bonds, consisting of non-AMT 2023 Series B-1 bonds, AMT 2023 B-2 bonds and taxable 2023 Series B-3 bonds. J.P. Morgan Securities.
The Texas City Independent School District (/AAA//) is set to price Tuesday $139 million of PSF-insured unlimited tax school building bonds, Series 2023, serials 2024-2053, Raymond James & Associates.
The Rhode Island Health and Educational Building Corp. (A2/A/NR/NR/) is set to price Wednesday $114.070 million of Providence College Issue higher education facility revenue bonds, Series 2023, serials 2025-2043, terms 2047 and 2053. Citigroup Global Markets.
The Ventura Unified School District, California (A1///), is set to price Thursday $113.000 of Election of 2022 GOs, Series A, serials 2024-2025 and 2032-2043, terms 2048 and 2052. RBC Capital Markets.
The Pleasanton Unified School District, California (Aa2///), is set to price Tuesday $100 million Election of 2022 GOs, Series 2023, serials 2024-2025 and 2032-2043, terms 2048 and 2052. Stifel, Nicolaus & Co.
Louisiana (Aa2/AA-//) is set to sell $251.105 million of GOs, Series 2023-A, at 10:15 a.m. eastern Thursday.
Anne Arundel County, Maryland, (Aaa/AAA//) is set to sell $203.345 million of GOs, including $135.830 million of consolidated general improvement bonds, Series 2023, and $67.515 million of consolidated water and sewer bonds, Series 2023, at 10:45 a.m. Thursday.
The county is also set to sell $63.670 million of GOs, consisting of $41.405 million of refunding consolidated general improvement bonds, Series 2023, and $22.265 million of refunding consolidated water and sewer bonds, Series 2023, at 11:15 a.m. Thursday.
New Mexico is set to sell $233.320 million of capital projects GOs, Series 2023, at 10 a.m. Thursday.
Portland Public Schools, Oregon (Aa1/AA+//), is set to sell $230.775 million of GOs, Series 2023, Bidding Group 1, at 11 a.m. Thursday.
The school system is also set to sell $189.225 million of GOs, Series 2023, Bidding Group 1@, at 11:15 a.m. Thursday.