A touch softer, but primary action to come will help direct benchmarks

Municipals were little changed with a slightly weaker tone outside of 10 years Monday ahead of a larger and diverse primary as the second week of July reinvestment kicks into gear.

U.S. Treasuries fluctuated but held mostly steady after midday auctions. The 30-year UST sat just at 2% near the close while triple-A municipal benchmark yields were little changed, reflecting that municipals had some catch up to do to taxables last week and investors were content to keep munis steady at Friday’s levels.

Most participants expect better performance for munis in the near-term. Longer-term, a lot depends on rates, COVID and other outside factors, such as infrastructure.

“We thought we were bullish on high-quality tax-exempts, when we expected [municipal-UST ratios] to be in the 70% range — little did we know,” said Barclays strategists Mikhail Foux, Clare Pickering and Mayur Patel in a report on second-half performance. “With ratios reaching 50s-low 60s (levels that have never been reached before), it felt that there was too much emotion in this trade to reach such low levels. The price action in late June 2021 showed some pronounced weakness, and while we can discuss a number of reasons for this, one is simply investor fatigue at such rich levels.”

Municipal-to-UST ratios were steady Monday at 62% in 10 years and 66% in 30, according to Refinitiv MMD. ICE Data Services had the 10-year muni-to-Treasury ratio at 63% and the 30-year at 67%.

“At current valuation we see limited upside, and, ratios will end the year higher compared with the current levels, even though we think demand for tax-exempt should remain relatively solid,” they said.

Much depends on interest rates.

Tension continues between two prevailing market views, according to Nuveen’s John Miller and Anders Persson.

“One camp believes low interest rates will produce inflation (and higher interest rates). The other camp believes rates will remain lower for longer, with the recovery taking much longer than expected,” they wrote in a report Monday. “The lower-for-longer camp won last week.”

They said that because economic recovery is slowing in China, many fear the Delta variant of COVID-19 may further slow China’s progress, which would hurt the global recovery.

“This fear caused the 10-year Treasury yield to decline to 1.25% last week, the lowest since February 2021 as the recovery was emerging,” they said. “We believe fixed income in general should remain well bid until there is more evidence that global economies are recovering.”

Indeed, COVID poses unprecedented challenges to policymakers and it’s still difficult to determine which will be persistent and which will be temporary factors on inflation, Federal Reserve Bank of New York President John Williams said Monday.

“Today, it is still hard to underline what is a persistent factor of inflation and what is temporary, as coming out of COVID is not part of a normal business cycle — too much is happening to identify those types of things,” Williams said at the Bank of Israel/Centre for Economic Policy Research conference on Monday morning. “We just need to be humble, sit back and learn as we go.”

Since high uncertainty remains, Williams suggested the Fed be patient and wait for more data before making any decision on removing accommodation.

Williams said the Fed will deliver 2% inflation, although “it may take time to get there.”

How this affects fixed-income markets broadly and municipals specifically, Barclays said, the road ahead will be more challenging and “much will depend on rates.”

“Rates are always one of the main contributors to muni returns, as well as a driver of muni fund flows,” they said. “The current Treasury outlook could not be more uncertain, due to a combination of strong growth and increased inflation expectations on one hand, and a likely start of tapering in the second half of the year.”

The resurgence of COVID-19 “with new more contagious strains may negatively affect some sectors as well as state and local economies,” Barclays said.

But in terms of supply, Barclays expects “marginally more supply in 2H21 compared with the first half (with a possibility of the upside surprise in 4Q if an infrastructure package is passed and is effective immediately),” they wrote. “However, it will likely be easily absorbed, and demand for munis as well as fund inflows will likely remain solid, although it may decline somewhat from the current pace.

“Tax-exempts will likely outperform our rather subdued expectations for the year (total returns of 0.5% for IG and 4.5% for HY), as returns in the first half of the year have already surpassed these numbers,” Barclays said. “However, as we find current valuations quite rich and challenges abundant, our expectations for the second half remain subdued.”

The Bloomberg Barclays Municipal bond index has returned 1.73% year-to-date, while the high-performing high-yield index is now up to 6.96% YTD and taxables are at 0.99% YTD.

In the primary, Loop Capital Markets priced for retail investors $580 million of New York City Transitional Finance Authority (Aa3/AA/AA/) building aid revenue refunding bonds, Fiscal 2022 Series S-1, Subseries S-1A. Bonds in 2022 with 3% and 5% coupons yield 0.13%, 3s and 5s of 2026 at 0.76%, 5s of 2031 at 1.07%, 4s of 2036 at 1.43% and 3s of 2041 at 1.83%.

Secondary trading and scales
Trading was light. Austin, Texas, ISD 5s of 2022 traded at 0.09%-0.16%. California 5s of 2022 at 0.11%-0.10%. Wisconsin 5s of 2023 traded at 0.12%. California 5s of 2024 at 0.23%.

Maryland 5s of 2024 at 0.22%-0.20%. Montgomery County, Maryland, 5s of 2024 at 0.23%-0.22%. Virginia 5s of 2024 at 0.18%. Hawaii 5s of 2024 at 0.27%-0.25%.

New York City general obligation bonds traded out of the gates. NYC 5s of 2024 at 0.24%, 5s of 2025 at 0.36% and 5s of 2026 at 0.46%.

New York MTA 5s of 2025 at 0.47%. Lonestar, Texas, College 5s of 2026 at 0.40%.

Georgia 5s of 2029 at 0.73%-0.72%. Washington 5s of 2035 at 1.07%-1.06% versus 1.13% Wednesday and 1.25% at the end of June.

Massachusetts water 5s of 2040 at 1.19%. Connecticut special tax 5s of 2041 at 1.40% versus 1.45% Wednesday.

New York City TFA 4s of 2049 at 1.74%-1.69% versus 1.62% Thursday after opening the month at 1.87%-1.84%.

According to Refinitiv MMD, short yields were steady at 0.08% in 2022 and 0.12% in 2023. The yield on the 10-year sat at 0.84% while the yield on the 30-year was steady at 1.33%.

The ICE municipal yield curve showed bonds steady at 0.08% in 2022 and to 0.12% in 2023. The 10-year maturity held at 0.87% and the 30-year yield at 1.35%.

The IHS Markit municipal analytics curve showed short yields at 0.07% and 0.10% in 2022 and 2023, respectively, with the 10-year steady at 0.84%, and the 30-year yield also unmoved at 1.35%.

Bloomberg BVAL saw short yields at 0.10% and 0.12% while the 10-year was at 0.85% and the 30-year remained at 1.35%.

Treasuries were weaker and equities hit new highs. The 10-year Treasury was yielding 1.369% and the 30-year Treasury was yielding 2.00% near the close. The Dow Jones Industrial Average rose 130 points or 0.37%, the S&P 500 was up 0.35% while the Nasdaq gained 0.21%.

More inflation assessments
“The key to assessing inflation spikes this year is that they are likely not sustainable,” said Steven Oh, global head of credit and fixed income at PineBridge Investments, “so we believe a lower interest rate environment will continue over the long term despite near-term pressure arising from the current supply-demand imbalance.”

Indeed, runaway inflation looks “increasingly unlikely,” said Brian Koble, chief investment officer at Hefren-Tillotson. “As long as higher inflation is a byproduct of a stronger economy, not a broken economy, risk assets like stocks should perform well.”

The bond market has come around to the Fed’s view that inflation will prove transitory, said Luis Alvarado, investment strategy analyst at Wells Fargo Investment Institute. “The bond markets are now expressing the same view as the Fed and this is being reflected in the decline in Treasury yields over the past month, as the inflation expectations component of yield has come down — however, those views did not agree during Q1 when yields soared from all time low-levels on better growth prospects and higher inflation expectations.”

Alvarado said, WFII believes yields will move higher in the second half and inflation may prove more “sticky” than the Fed expects. “Not all inflation will be entirely transitory. It is important to differentiate inflation that is produced by supply constraints (cost-push) versus the inflation that is produced by excess demand (demand-pull).”

“Members’ perception of the upside risk to inflation certainly increased” between March and June, he said. “There is still uncertainty (slight differences) around inflation between FOMC participants and Fed staff.”

But the Fed may be floating a trial balloon, said Karissa McDonough, chief fixed income strategist at People’s United Advisors. The Fed’s message had been consistent “until June’s surprise dot plots that were seemingly at odds with previous messaging about the timing of the first hike not until 2023 — the timing appeared to be pulled forward by a whole year!”

The purpose, she said, is to alert the market “we’re nearing the end of the extremely accommodative policy” that was needed as a result of the COVID crisis. “The inconsistent and sometimes contradictory messaging is probably on purpose to allow the idea of a taper of bond purchases and rate hikes happening relatively soon to be slowly accepted by the bond market — and this time it appears that it is working — no tantrum has been in evidence — we already had the significant backup in rates from under 1% to 1.75% in 1Q.”

Separately, consumers expect higher inflation in the short-term, according to the latest Federal Reserve Bank of New York consumer expectations survey.

According to the June survey, median one-year inflation expectations rose to 4.8%, the highest it’s been, from 4.0% in the prior, while three-year expectations held at 3.6%.

Inflation uncertainty rose at the one-year mark and were unchanged at three years, but both “are elevated relative to pre-COVID-19 as well as their 2020 readings,” the report said.

Primary market to come
The Water Works Board of the City of Birmingham, Alabama, (Aa2/AA//) is set to price on Monday $469.3 million of senior taxable water revenue refunding bonds, Series 2021, serials 2022-2036, term 2043. Raymond James & Associates, Inc.

The Rector and Visitors of the University of Virginia (Aaa/AAA/AAA/) is set to price on Wednesday $300 million of taxable general revenue pledge refunding bonds, term 2051. Barclays Capital Inc.

The Rector and Visitors of the University of Virginia (Aaa/AAA/AAA/) is also set to price on Tuesday $100 million of general revenue pledge bonds, Series 2021A. Goldman Sachs & Co. LLC.

Ohio (Aa2/AA//) is set to price on Wednesday $270.4 million of Cleveland Clinic Health System Obligated Group hospital revenue Series 2021A bonds $69.445 million, serials 2047-2049 and $201 million of forward delivery hospital revenue refunding bonds, serials 2023-2039. Barclays Capital Inc.

The Dormitory Authority of the State of New York is set to price $250 million of exempt and taxable New York University revenue bonds, $224.1 million of exempts and $25.9 million of taxables on Tuesday. BofA Securities.

The Florida Development Finance Corp. (A2///) is set to price on Thursday $221.2 million of Lakeland Regional Health Systems healthcare facilities revenue refunding bonds. J.P. Morgan Securities LLC.

The California Community Housing Agency is set to price on Tuesday $215.7 million of essential housing revenue bonds, Series 2021A-1 senior bonds and Series 2021A-2 junior bonds (Fountains at Emerald Park). Jefferies LLC.

The Central Florida Expressway Authority (A1/A+/A+/) is set to price on Thursday $200.9 million of senior-lien revenue bonds, serials 2026-2035, Series 2021D. RBC Capital Markets.

The Michigan Finance Authority (/AAA//) is set to price $198.75 million of taxable student loan asset-backed notes, Series 2021-1, consisting of $60 million of fixed rate and $138.75 million of floating rate. BofA Securities.

The Maryland Department of Transportation (A1//A/) is set to price on Wednesday $195.4 million of special transportation project revenue bonds (Baltimore/Washington International Thurgood Marshall Airport), Series 2021B (qualified airport bonds-AMT), serials 2026-2041, terms 2046, 2051. Citigroup Global Markets Inc.

The Arlington Higher Education Finance Corp., Texas, (Aaa/AAA//) (PSF guarantee) is set to price $182.86 million of educational revenue and refunding bonds (Harmony Public Schools), $155.8 million of exempt Series 2021A, serials 2024-2041, terms 2046, 2051, $4.3 million of taxable Series 2021B, serials 2024-2025, and $22.675 million of forward-delivery Series 2021C, serials 2022-2024. Truist Securities Inc.

The City of Clarksville, Tennessee, (Aa2//AA/) is set to price $180.84 million of water, sewer & gas revenue bonds, Series 2021A. Morgan Stanley & Co. LLC.

The California Health Facilities Financing Authority (/AA-/AA-/) on Tuesday is set to price $170 million of Children’s Hospital of Orange County revenue and refunding revenue bonds, $88.7 million of Series 2021A and $81.3 million of refunding Series 2021B. Morgan Stanley & Co. LLC.

Charlotte, North Carolina, (Aa2/AA+/AA+/) on Wednesday is set to price $164.1 million of refunding certificates of participation transit projects, Series 2021A. Goldman Sachs & Co. LLC.

The Catholic Bishop of Chicago (Ba1///) is set to price $150 million of Series 2021 senior bonds, term 2041. PNC Capital Markets LLC.

Weld County School District No. 6 (Aa2/AA//) is set to price on Tuesday $145 million of general obligation bonds, serials 2022-2041, term 2045, Colorado State Intercept Program. RBC Capital Markets.

The South Dakota Housing Development Authority (Aaa/AAA//) is set to price on Wednesday $139.285 million of homeownership mortgage bonds, $119.285 million of non-AMT Series 2021 B, serials 2021-2033, and terms 2036, 2041, 2051 and $20 million of Series C taxable refunding bonds, serials 2022-2030. Wells Fargo Securities.

The JEA, Florida, (Aa3/AA+/AA/) is set to price on Tuesday $128.765 million of water and sewer system revenue refunding bonds, serials, 2023-2041. Wells Fargo Securities

Westmoreland County, Pennsylvania, is set to price on Wednesday $126.48 million of taxable general obligation bonds, serials 2021-2041. Boenning & Scattergood, Inc.

The New York State Bridge Authority (Aa3/A+//) is set to price on Wednesday $112.95 million of general revenue and general revenue refunding forward-delivery bonds, $76.475 million of series A, serials 2028-2041, terms 2046, 2051, $36.48 million of Series B, 2022-2036. RBC Capital Markets.

Oberlin College, Ohio, (Aa3/AA-//) is set to price $110.59 million of bonds, $80.65 million of green taxable bonds (Climate Bond Certified) and $29.94 million of corporate CUSIP bonds. Morgan Stanley & Co. LLC.

The Wisconsin Health and Educational Facilities Authority (/AA-/AA-/) is set to price on Wednesday $104.9 million of Gundersen Health System refunding revenue bonds. BofA Securities.

Grand Rapids, Michigan, (Aa2/AA//) is set to price on Tuesday $102 million of taxable sanitary sewer system revenue refunding bonds, serials 2022-2035, term 2042. Citigroup Global Markets Inc.

San Antonio, Texas, Education Facilities Corp. (Baa1///) is set to price $100.3 million of higher education revenue improvement and refunding bonds (University of the Incarnate Word Project), Series 2021A, serials 2038-2054. Raymond James & Associates, Inc.

In the competitive market, Colorado is set to sell $370 million of educational loan program tax anticipation notes, maturing 6/29/2022, at 11 a.m. eastern on Tuesday.

Broward County, Florida, (MIG1//) is set to sell $160 million of tax anticipation notes, maturing 6/30/2022, at 11 a.m.

Orange County Sanitation District, California, (Aaa/AAA/AAA/) is set to sell $135.5 million of wastewater refunding obligation bonds at 10:45 a.m.

On Wednesday, Santa Clara County, California, (/AAA/AA+/) is set to sell $350 million of taxable general obligation bonds at 10:30 a.m.

The New York City Transitional Finance Authority is set to sell $210.3 million of taxable building aid revenue bonds at 10:15 a.m.

San Jose, California, (Aa1/AA+/AAA/) is set to sell $200 million of general obligation bonds at 10:30 a.m.

New Hampshire is set to sell $123 million of Series 2021 C exempt at 10:30 a.m. and $10.2 million of taxable bonds at 11 a.m.

On Thursday, Memphis, Tennessee, is set to sell $160 million of general improvement refunding bonds at 10:30 a.m.