Benchmark yields fall; ICI reports billion-plus inflows

Bonds

Municipals saw one to three basis point bumps to benchmark yield curves while new issues repriced by as much as 10 basis points lower into a stronger, issuer-friendly market, as the 10-year fell below 1% on most scales.

The Investment Company Institute reported $1.27 billion of inflows into municipal bond mutual funds, marking the 11th week in a row for inflows.

The only week ICI reported outflows in 2021 was the week of March 3 with $568 million. Exchanged-traded funds saw $187 million of inflows versus $309 million the week prior.

New issues fared well Wednesday, with some hesitation on short coupons out longer on those deals.

“Some of the shine has certainly come off the 2% and 3% coupons, but other than that the front five years continues to be a safe-haven area of short duration and yields in 10 years and longer, which offer a 1% handle, continue to entice buyers in an ongoing bull flattener bias, much like Treasuries,” said Refinitiv MMD Managing Analyst Greg Saulnier.

Municipal to UST ratios edged lower, closing at 63% in 10 years and 67% in 30 years on Wednesday, according to Refinitiv MMD. ICE Data Services saw ratios on the 10-year at 62% and the 30-year at 65%.

In the primary, BofA Securities priced $355.8 million of university facilities program green bonds for the University of Nebraska Facilities Corp. (Aa1/AA//) with bumps and cuts to scales. The first, $266.5 million of series 2021A, saw 5s of 2031 at 1.08% (-4), 2.5s of 2056 at 2.60% (+10), 4s of 2059 at 2.05%, 3s of 2059 at 2.40% (+10), 4s of 2062 at 2.10%. The second, $89.4 million of green Series 2021B, saw 5s of 2051 at 1.68% (-2) and 3s of 2054 at 2.30% (+10).

UBS Financial Services Inc. repriced $259.5 million of first lien revenue refunding bonds for the Houston Combined Utility System (/AA/AA/) with bumps of four to 10 basis points from morning wires. Bonds in 2022 with a 3% coupon yield 0.10% (-4), 5s of 2026 at 0.56% (-8), 5s of 2031 at 1.19% (-6), 4s of 2036 at 1.43% (-10), 4s of 2041 at 1.63% (-8), 4s of 2046 at 1.77% (-8), 4s of 2051 at 1.82% (-8), 3s of 2051 at 2.15% and 2.375s of 2051 at 2.50%.

Morgan Stanley & Co. LLC repriced $137.6 million of highway revenue bonds for Hawaii (Aa2/AA+//) with 5s of 2027 at 0.60% (-3), 5s of 2030 at 1.02% (-3), 5s of 2036 at 1.31% (+1) and 5s of 2041 at 1.49% (-5), callable in 11/1/2031.

Preliminary volume figures for May show a 25.8% drop from a year prior with $22.984 billion in 800 issues, down from $30.991 billion in 1,071 deals in 2020.

Part of the reason for the lower figure is just how hard COVID hit the primary market in March and April of 2020 and how state and local governments played catch up last May.

Issuers, however, have been slower to come to market this month as they contemplate federal government aid, better-than-expected tax receipts and a wait-and-see approach on potential national infrastructure plans. Thirty-day visible supply sits at $9.15 billion.

All of that is keeping the supply-demand imbalance skewed toward better pricing for issuers while investors have to stomach the ultra low-yield environment it has created. But with higher taxes imminent in some form at the federal level, tax-exempt — and even taxable munis — are still a better alternative for investors seeking some shelter.

Tax-exempt issuance in May was down 25.8% to $17.903 billion from $24.122 billion in 2020 and taxables fell 28.5% to $4.615 billion from $6.451 billion last year.

New-money fell 22.1% to $14.515 billion from $18.627 billion in 2020 and refundings dropped 46.9% to $4.287 billion from $8.078 billion last year, also explaining the drop in taxable issuance in May.

These figures will creep higher as the last of this week’s deals price, but the drop in May issuance is clear and explains how fund inflows, improving credit and the reopening of governments are keeping this market issuer friendly.

Secondary trading and scales
Trading showed firmer prints outside of 10 years, but an overall stronger market was evident. Georgia 5s of 2023 traded at 0.12% versus 0.15% Monday. Vermont 5s of 2024 traded at 0.24%. New York City TFA 5s of 2024 at 0.29%. North Carolina 5s of 2024 at 0.25%.

North Carolina 5s of 2027 at 0.64%. New York Dorm PIT 5s of 2028 at 0.71%-0.70%. District of Columbia 5s of 2028 at 0.83% versus 0.84% Monday and 0.86% Friday.

Baltimore County 5s of 2030 at 1.00%. Washington 5s of 2031 traded at 1.07%. Louisiana 5s of 2032 at 1.17% versus 1.20%-1.19% Tuesday.

Fairfax County 4s of 2040 traded at 1.48% versus 1.65% original. Washington 4s of 2040 at 1.51% versus 1.54% Friday.

New York Dorm PIT 5s of 2049 at 1.81%. Los Angeles DWP 5s of 2050 at 1.53% versus 1.58% Monday.

On Refinitiv MMD’s AAA benchmark scale, yields were steady at 0.09% in 2022 and bumped two to 0.11% in 2023, the 10-year fell one basis point to 1.00% and the 30-year dropped three basis points to 1.53%.

The ICE AAA municipal yield curve showed yields steady at 0.09% in 2022 and fall one to 0.13% in 2023, the 10-year fell a basis point to 0.99% while the 30 fell three to 1.54%.

The IHS Markit municipal analytics AAA curve showed yields steady at 0.09% in 2022 and 0.12% in 2023, the 10-year was also steady at 0.97% and the 30-year fell two basis points to 1.54%.

The Bloomberg BVAL AAA curve showed yields steady at 0.07% in 2022 and 0.10% in 2023, steady at 0.97% in the 10-year and the 30-year fell two to 1.54%.

The 10-year Treasury was yielding 1.58% and the 30-year Treasury was yielding 2.26% near the close. Equities were up with the Dow gaining 7 points, the S&P 500 rose 0.19% and the Nasdaq gained 0.54% near the close.

Inflation discussion goes on
The inflation outlook “is less than clear,” Federal Reserve Bank of Kansas City President Esther George said in a speech Wednesday, perhaps explaining why economists can’t agree on the topic.

“What the current pace of inflation means for the inflation outlook for the medium term is less than clear,” she told the Oklahoma Bankers Association, according to prepared remarks released by the Fed. “Many factors that have boosted current inflation seem likely to fade over time. All the same, I am not inclined to dismiss today’s pricing signals or to be overly reliant on historical relationships and dynamics in judging the outlook for inflation.”

Since the economy is quite intricate and has been disrupted by a pandemic, George said, “policymakers will be well served to take a flexible approach to monetary policy decisions, in my view.”

The recent spike in inflation “will be temporary,” said Vice Chair for Supervision Randal Quarles in a speech on Wednesday according to prepared text released by the Fed. “If we’re wrong, we know how to bring inflation down. But if our assessment is correct that inflation is temporary, it would be unwise for us to take actions that might slow the recovery prematurely by trying to stay ahead of inflation, when our best estimate is that we are not far behind.”

Should “my expectations about economic growth, employment, and inflation over the coming months” be correct or if the numbers are stronger than expected, Quarles said, “it will become important for the FOMC to begin discussing our plans to adjust the pace of asset purchases at upcoming meetings.”

While he believes inflation is mostly transitory, Joe Kalish, chief global macro strategist at Ned Davis Research, said it could take six months to a year before we know if that’s true, since supply-chain bottlenecks have to ease.

With inventories low and order backlogs “at record highs,” he said, it will take time for the supply-chain issue to resolve.

“To get wild inflation, employment and wage costs would need to come way up and I don’t see that happening anytime soon,” Kalish said.

Benjamin Johnston, chief operating officer of Kapitus, agrees inflation is “temporary.”

Supply-chain disruptions resulting from the pandemic left manufacturers short of certain materials. “At the same time, the pandemic caused consumers to delay certain purchases and rethink how they spend money,” he said.

With the economy reopening, “consumers are making up for lost time,” but their habits have changed. “Given these changes in consumer spending, it will take time for the supply chain, which scaled back significantly at the start of the pandemic, to bounce back and meet demand,” Johnston said. “We are however confident that over the course of the next year the supply chain will rise to meet demand and much of the inflation we are seeing today will subside.”

Gautam Khanna, a senior portfolio manager at Insight Investment, doesn’t see persistent inflation since the home shelter and healthcare components of the consumer price index, have been tame. Those components make up about 40% of the index. “A structural overshoot in Inflation is unlikely unless it is felt in these areas,” Khanna said.

However, Michelle Connell, owner of Portia Capital Management, LLC, believes inflation is “here for the long haul.” She sees “some very real, very large impacts on the economy in the near future,” based on housing and wage prices.

“Home prices have risen an average of more than 38% since 2016 and last year, the average home price went up almost 13%,” she said. Despite low mortgage rates, affordability remains an issue, leaving many “priced out of the housing market,” and allowing rent prices to climb.

“A quarter of renters paid more than 50% of their income on rent, according to a housing study of Harvard 2020,” Connell said.

The minimum wage increases, some dictated by government policy, also raises prices, since the costs are passed on to consumers, she said.

The combined impact of these two factors are “significant” and need to be “taken into account,” Connell added.

But don’t expect the Federal Reserve to react just yet, according to BCA Research. “It will follow its current forward guidance and only lift rates off zero once the labor market has reached maximum employment,” BCA said in a report. “However, once the first rate hike has occurred, the Fed will shift its focus toward inflation and inflation expectations.”

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