Municipals held steady Thursday, keeping to a theme that the market remains unlikely to take movements in U.S. Treasuries and equities into account for the asset class, as issuance fades and year-end approaches.
Triple-A benchmarks were little changed while Treasuries improved and equities saw losses, led by tech stocks.
Ratios were slightly higher with the moves, the muni-to-UST ratio was at 51% in five years, 72% in 10 and 79% in 30, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the five at 49%, the 10 at 74% and the 30 at 80%.
Thirty-day visible supply sinks to a paltry $2 billion while Bloomberg data shows net negative supply sitting at $10.3 billion. Year-to-date issuance is at $466.610 billion, approaching, but likely falling short of 2020’s $484 billion record. Those figures do not include corporate CUSIP issuance.
Fed policy, macroeconomic events, and the COVID overhang have not bled into the muni market. Despite all those pressures, municipal fundamentals are strong with improving credit pictures, issuers flush with federal cash, and the ongoing supply-demand imbalance. All else being equal, municipals look to end the year without much excitement.
Muni CUSIP requests fall 5.1%
The aggregate total of all municipal securities, including municipal bonds, long-term and short-term notes, and commercial paper, fell 9.7% versus October totals, according to CUSIP Global Services. On an annualized basis, total municipal CUSIP identifier request volumes were down 5.6% through November. For muni bonds specifically, there was a 5.1% decline month-over-month, and they are down 2.2% on a year-over-year basis as of November’s data.
“Overall CUSIP request volume has been particularly strong this year and we’re currently on track for slight year-over-year increases in request volumes for corporates, but municipal requests have lagged behind the historic highs we saw in 2020,” said Gerard Faulkner, director of operations for CUSIP Global Services. “We anticipate that CUSIP request volume will be an important indicator of issuer sentiment in a likely rising-rate environment in the year ahead.”
CUSIP identifier requests for the broad category of U.S. and Canadian corporate equity and debt fell 5.6% versus October totals. The decrease was driven largely by a decline in requests for U.S. corporate debt and medium-term notes. On a year-over-year basis, corporate CUSIP request volume rose 1.3%.
AAA scales
Refinitiv MMD’s scale was unchanged: the one-year at 0.15% and 0.25% in 2023. The 10-year sat at 1.03% and at 1.48% in 30.
The ICE municipal yield curve showed yields were at 0.16% in 2022, 0.28% in 2023 and 1.04% in 2031, down a basis point. The 30-year yield held steady at 1.49%.
The IHS Markit municipal analytics curve was steady: 0.17% in 2022 and at 0.26% in 2023. The 10-year was at 1.02% and the 30-year at 1.49% as of a 3 p.m. read.
Bloomberg BVAL was steady at 0.17% in 2022 and 0.23% in 2023. The 10-year was at 1.04% and the 30-year at 1.49%.
Treasuries were stronger and equities mixed.
The five-year UST was yielding 1.181%, the 10-year yielding 1.43%, the 20-year at 1.908% and the 30-year Treasury was yielding 1.871% at the close. The Dow Jones Industrial Average lost 30 points, or 0.09%, the S&P was down 0.88% while the Nasdaq lost 2.47% at the close.
Fed follow-up
Despite the Federal Reserve’s hawkish tone, policy remains dovish, said Gautam Khanna, senior portfolio manager at Insight Investment
“Perspective is important,” he said. “Although a hiking cycle is now on the horizon, this is the lowest the Fed has let unemployment fall before hiking rates since 1980. This does not mean the Fed is now moving too late. If anything, over the last few cycles it moved too quickly, given its long previous battle with disinflation.”
While the Fed will end asset purchases in March, liftoff will not be immediate, he said. “Uncertainty is never far away, as the emergence of the Omicron COVID-19 variant reminds us,” Khanna noted.
Liftoff will depend on the pace of inflation. “If inflation does not moderate below 3% by end-2022 as we expect, rates will likely rise faster,” he said. “If the employment picture disappoints, [rate hike will come] more slowly.”
And inflation remains the key. “We expect, amid elevated uncertainty, that inflation will not fall enough to avoid some sharp upward pressure on U.S. Treasury yields as 2022 progresses,” said R.J. Gallo, senior portfolio manager at Federated Hermes. If inflation doesn’t moderate, “a tantrum-like reset higher in longer-term Treasury yields may occur as deeply negative real yields prompt total-return-oriented investors to sell high quality bonds.”
Despite higher inflation projections, the Fed remains confident in the recovery despite the rise of the Omicron variant. “If the Fed is right, then the expected tightening should not materially dent the economy,” said Luigi Speranza, chief global economist, BNP Paribas Markets 360. “By contrast, if Omicron proves to be a bigger headwind than the Fed thinks, the Fed will probably need to become more cautious.”
BNP sees a June liftoff, “but risks are clearly skewed toward an earlier move,” with “more cumulative tightening than is currently priced into U.S. rates markets.”
Still, the statement sets the stage for liftoff. “The big issue is how much the Fed will have to raise rates,” said Berenberg Capital Markets Chief Economist for the U.S. Americas and Asia Mickey Levy, who is a member of the Shadow Open Market Committee. “We think higher than the Fed and markets anticipate.”
While the Fed works to end asset purchases, “further significant gains are expected in labor markets and wages, and it’s virtually in the cards that core inflation will rise further, with core PCE inflation rising close to 5%,” Levy added. “So, while the Fed took favorable steps in its December FOMC meeting and SEPs, it will find that it has fallen even further behind the curve even before it begins raising rates.”
The Fed’s position was hailed by Marvin Loh, senior global macro strategist for State Street. “By increasing rates sooner, they do not need to aggressively change their longer-term forecast.”
Hiking rates to halt inflation “and a stable forward rate outlook is the recipe to keep the yield curve flatter, and remains supportive of risk assets,” he said. “We think that this will be a trend that can continue into the start of next year.”
Thursday’s data “mostly supports the Fed’s hawkish course,” said Edward Moya, senior market analyst at OANDA. The labor market remains tight, housing is still hot and the “Philly Fed survey did not impress at all,” he said.
Initial jobless claims rose to 206,000 in the week ended Dec. 11 from an upwardly revised 188,000 a week earlier.
Housing starts rose to a larger-than-expected 1.679 million pace in November from 1.502 million a month earlier, while building permits climbed to 1.712 million from 1.653 million.
The Philly Fed manufacturing index slumped to 15.4 in December from 39.0 in November, “but the bright spot was that pricing pressures eased,” Moya said. Prices paid dropped to 66.1 from 80.0, while prices received declined to 50.4 from 62.9.
Industrial production gained 0.5% in November, while capacity utilization crept to 76.8%.