Municipals were a touch weaker out long to close out the week while U.S. Treasuries posted losses and equities sold off after hotter-than-expected jobs data.
Municipal to UST ratios again fell on the day’s moves. The three-year on Thursday was at 69%, the five-year was at 73%, the 10-year at 82% and the 30-year at 98%, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the three at 71%, the five at 74%, the 10 at 85% and the 30 at 98% at a 4 p.m. read.
Barclays PLC strategists said the week’s developments sent conflicting signs to investors.
“On the one hand, it seems that the U.S. economy has finally started to slow down (although today’s payrolls surprised to the upside),” said strategists Mikhail Foux, Clare Pickering and Mayur Patel in a weekly report. “[O]n the other hand, OPEC+ agreed to slash output by 2 million barrels per day from November through 2023, which will likely push energy prices up and add to inflationary pressures, forcing the Fed to be more restrictive for longer.”
Marvin Loh, senior global macro strategist at State Street, said yet another strong employment report, with 263,000 non-farm jobs added in September, was close to expectations, and less robust than last month, “is still a result that will not provide the Fed with any comfort that the slowdown it is trying to manufacture is yielding the desired results.”
With the jobs market showing little signs of deceleration, “the Fed will continue to push on, and we think raise rates by an additional 125 basis points before yearend, with 75 basis points now firming as the base case at the next meeting,” Loh said.
A lack of suitable workers “continues to constrain the economy with job vacancies exceeding the number of unemployed Americans by more than 4 million and with core inflation set to rise further next week, a 75 basis point Fed hike on Nov. 2 is virtually assured,” noted James Knightley, ING’s Chief International Economist.
As many investors expected, September turned out to be “quite brutal” for all fixed income assets, and for municipals in particular, Barclays said.
“Going back to the 1990s for high grade munis, it was the fourth worst total return month (same could be said about HY and taxables); this monthly performance has turned out to be even worse than during the onset of the pandemic in 2020,” they wrote.
When rates rallied in the early part of the week, “we saw broad participation from various investor groups,” they said. “However, when Treasuries started selling, munis felt heavy again, meaning that we are not really out of the woods, in our view.”
While October is typically a busy supply month, Barclays and others have said it’s unlikely to be the case this year as “as many issuers are still staying on the sidelines, and the visible pipeline remains anemic with total issuance likely coming below our forecast.”
The primary market will see a mere $2 billion in the holiday-shortened week, the bulk of which will come from the New Jersey Turnpike Authority’s $500 million deal. Bond Buyer 30-day visible supply sits at $9.16 billion.
Barclays strategists said they are “finally getting more positive about the market outlook after the rates and muni ratio adjustment in September.”
“We don’t think it is time to get all in as of yet, but we are quite comfortable to consider adding on weakness, as rates will likely remain choppy near term, with a likely spillover effect into the municipal market, and attractive opportunities could present themselves in the near future,” they said.
Secondary trading
Washington 5s of 2023 at 2.95% versus 3.02% Thursday. Georgia 5s of 2024 at 3.03%-3.01%. Minnesota 5s of 2024 at 3.02%-3.00%.
Maryland 5s of 2027 at 3.07%-3.05%. Montgomery County, Maryland, 5s of 2031 at 3.18%. Maryland 5s of 2032 at 3.26%.
District of Columbia 5s of 2037 at 3.66% versus 3.64% Thursday. Washington 5s of 2042 at 3.98%-3.97%.
New York UDC PITs 5s of 2043 at 4.33%-4.32% versus 4.30% Thursday, 4.45%-4.42% Monday and 4.50% original.
AAA scales
Refinitiv MMD’s scale saw cuts out long: the one-year at 2.95% (unch) and 2.97% (unch) in two years. The five-year at 3.02% (unch), the 10-year at 3.18% (unch) and the 30-year at 3.76% (+2).
The ICE AAA yield curve saw small cuts: 2.98% (unch) in 2023 and 3.01% (unch) in 2024. The five-year at 3.05% (+1), the 10-year was at 3.23% (+1) and the 30-year yield was at 3.75% (+1) at a 4 p.m. read.
The IHS Markit municipal curve saw small cuts: 2.95% (unch) in 2023 and 2.97% (unch) in 2024. The five-year was at 3.08% (+2), the 10-year was at 3.16% (unch) and the 30-year yield was at 3.76% (+1) at a 4 p.m. read.
Bloomberg BVAL also saw small cuts: 2.95% (+1) in 2023 and 2.97% (unch) in 2024. The five-year at 3.03% (+1), the 10-year at 3.15% (+1) and the 30-year at 3.78% (+1) at 4 p.m.
Treasuries were weaker across the curve.
The two-year UST was yielding 4.315% (+6), the three-year was at 4.347% (+8), the five-year at 4.148% (+8), the seven-year 4.034% (+6), the 10-year yielding 3.886% (+6), the 20-year at 4.146 (+7) and the 30-year Treasury was yielding 3.847% (+6) at the close.
Primary calendar to come
The New Jersey Turnpike Authority (A1/AA-/A+/) is set to price $500 million of taxable turnpike revenue bonds on Wednesday. Serials 2042-2043, terms 2047, 2052. Wells Fargo Bank
The New York State Housing Finance Agency (Aa2///) is set to price on Wednesday $163.29 million of affordable housing revenue sustainability bonds. J.P. Morgan Securities LLC
The Leander Independent School District (/AAA/AAA/) is set to price on Wednesday $128.73 million of unlimited tax school building bonds (PSF guaranteed), serials 2024-2042,terms 2047, 2052. Ramirez & Co., Inc.
San Antonio, Texas (Aa2/AA+/AA/) is set to price on Wednesday $99.59 million of water systerm variable rate junior lien revenue and refunding bonds. Jefferies LLC
The Oklahoma Development Finance Authority (Aaa//AAA/) is set to price on Wednesday $81.565 million of taxable ratepayer-backed bonds (Summit Utilities Oklahoma, Inc.) Citigroup Global Markets Inc.
Competitive:
The St. Louis Park ISD, Minnesota (Aa2///) is set to sell $136 million of general obligation school building bonds at 11 a.m. eastern Tuesday.
North Kansas City SD #74 (Aa1/AA+//) is set to sell $140 million of general obligation improvement bonds at 11:30 a.m. eastern Tuesday.