Bonds

Munis steady while Omicron roils other markets

Municipals were mostly steady throughout the day and the primary was the focus while U.S. Treasuries whipsawed and stocks sold off after the first Omicron case was reported in California.

The Investment Company Institute reported $974 million of inflows into municipal bond mutual funds and another round of small outflows from exchange-traded funds.

Treasuries ended the day better while triple-A benchmarks were little changed, save for some pressure around 2024.

Ratios rose slightly again with the five-year muni to UST ratio at 52%, the 10 at 75% and the 30 at 86%, according to ICE Data Services. Refinitiv MMD’s 3 p.m. read had them at 52% in five years, 72% in 10 and 83% in 30.

The Investment Company Institute reported $974 million of inflows into municipal bond mutual funds in the week ending Nov. 23, down from $1.430 billion in the previous week.

It marked the 38th straight week of positive flows into the long-term funds and brought the total inflows for this year near $81 billion. Exchanged-traded funds saw $12 million of outflows after $22 million outflows the previous week.

The primary was the focus as other markets were volatile and munis stayed in their lane.

In the primary market, BofA Securities priced for the New York Metropolitan Transportation Authority $4 billion of taxable grant anticipation notes. The notes are rated MIG-1 and SP-1-plus, mature in 11/2022 at 0.777% par, callable in 4/15/2022.

Citigroup Global Markets Inc. priced for the New York State Housing Finance Agency (Aa2///) $430.465 million of affordable housing revenue climate bond certified and sustainability bonds. The first tranche, $122.805 million of climate bond certified sustainability bonds were priced at par: 0.50% in 5/2024, 0.55% in 11/2024, 0.85% in 5/2026, 0.95% in 11/2026, 1.90% in 5/2031, 1.95% in 11/2031, 2.2% in 11/2036, 2.45% in 11/2041, 2.65% in 11/2046, 2.875% in 11/2056, 3% in 11/2061 and 3.1% in 11/2066, callable 11/1/2030.

The second, $256.985 million of CBI sustainability bonds, mature in 11/2061 with an 11/1/2026 mandatory put to yield 1%, callable 9/1/2023, and a 5/1/2027 mandatory put to yield 1.1%, callable 6/1/2024. The third, $12.605 million priced at par: 0.50% in 5/2024, 0.55% in 11/2024, 0.85% in 5/2026, 0.95% in 11/2026, 1.90% in 5/2031, 1.95% in 11/2031, 2.20% in 11/2036, 2.45% in 2041, 2.65% in 2046, 2.8% in 2051 and 2.875% in 2056, callable Nov. 1, 2030. The last, $36.57 million mature in 11/2061 with a 1% coupon, callable 9/1/2023.

BofA Securities priced for the Oklahoma Water Resources Board (//AA/) $199 million of revolving fund revenue bonds. Bond in 4/2022 with a 5% coupon yield 0.15%, 5s of 2026 at 0.55%, 5s of 2031 at 1.10%, 1.75s of 2036 at 1.84%, 2s of 2041 at 2.09%, 4s of 2047 at 1.22% and 5s of 2051 at 1.61%, callable 4/1/2031.

In the competitive market, Illinois (Baa2/BBB/BBB-/) sold $400 million of general obligation bonds. The first tranche, $200 million of general obligation bonds, went to Morgan Stanley, with 5s of 12/2022 at 0.34%, 5s of 2026 at 1%, 5s of 2031 at 1.57%, noncall. The second, $200 million went to Barclays Capital, with 5s of 12/2032 at 1.63%, 4s of 2036 at 1.89%, 3s of 2041 at 2.47%, callable 12/1/2031.

The Municipal Improvement Corporation of Los Angeles, California, (/AA-//AA) sold $154.205 million of capital equipment and real property lease revenue bonds to Wells Fargo Corporate & Investment Banking. Bonds in 11/2022 with a 5% coupon yield 0.18%, 5s of 2026 at 0.64%, 5s of 2031 at 1.14%, 5s of 2036 at 1.33%, 5s of 2041 at 1.49%, callable 11/1/2031.

Westchester County, New York, sold $118.08 million of general obligation bonds to Citigroup Global Markets Inc. with 5s of 4/2022 at 0.10%, 5s of 10/2022 at 0.10%, 5s of 2026 at 0.56%, 3s of 2031 at 1.21% and 2s of 2034 at 1.54%, callable 10/15/2029.

The Bloomberg Municipal Bond Index rebounded from a loss of 0.29% in October to a positive return of 0.85% in November, “one of the highest monthly returns of 2021 and helping to assuage fears of aggregate negative returns for the year,” said Eric Kazatsky, senior municipals strategist at Bloomberg Intelligence.

“Year-to-date, these stand at 1.35% heading into December; a far cry from the more than 5% in 2020,” he said. “When it comes to sub-index performance, November marks the first time in 2021 that all state sub-indexes had positive performance, with leaders being New Hampshire at 1.58% and Wyoming at 1.33%.”

Kazatsky noted that lower-rated credits and long-duration munis “took the reins, with the Long Bond Index returning 1.65% for the month, widening the gap over the short end of the curve. Baa rated municipals came in at 1.09%, a solid 26 basis points over AAA munis.”

Informa: Money market muni funds fall again
Tax-exempt municipal money market fund assets fell $250.1 million, bringing their total down to $87.22 billion for the week ending Nov. 29, according to the Money Fund Report, a publication of Informa Financial Intelligence.

The average seven-day simple yield for the 150 tax-free and municipal money-market funds remained at 0.01% from the previous week.

Taxable money-fund assets rose $19.18 billion, bringing total net assets to $4.475 trillion. The average seven-day simple yield for the 781 taxable reporting funds was unchanged from the prior week at 0.01%.

Secondary trading
Washington Suburban Sanitation District 5s of 2023 at 0.25%. Montgomery County, Maryland, 4s of 2024 at 0.43%-0.42%. Washington 5s of 2025 at 0.52%. Maryland 5s of 2025 at 0.48%.

Ohio water 4s of 2026 at 0.57%. New York Dorm Columbia University 5s of 2027 at 0.70% versus 0.71% Monday. Georgia 5s of 2029 at 0.95%.

California 5s of 2031 at 1.10%. Georgia 5s of 2033 at 1.07%. Texas water 4s of 2037 at 1.44%-1.43%. New York City TFA 4s of 2045 at 1.82%-1.81% versus 1.90% Friday.

Katy, Texas, ISD 3s of 2051 at 2.03%-1.90% versus 2.07%-2.05% Monday. New York EFC green 4s of 2051 at 1.78%-1.72%.

AAA scales
Refinitiv MMD’s scale was steady on the short end: the one-year at 0.15% in 2022 and at 0.24% in 2023. The 10-year sat at 1.03% and at 1.48% in 30.

The ICE municipal yield curve showed yields steady at 0.17% in 2022 and up one to 0.27% in 2023. The 10-year maturity steady at 1.05% and the 30-year yield sat at 1.50%.

The IHS Markit municipal analytics curve was steady: 0.16% in 2022 and to 0.24% in 2023. The 10-year 1.02% and the 30-year at 1.49% as of a 3 p.m. read.

The Bloomberg BVAL curve was steady at 0.17% in 2022 and 0.22% in 2023. The 10-year yield sat at 1.05% and the 30-year yield was down one basis point to 1.49%.

Treasuries were better later in the day and equities sold off.

The five-year UST was yielding 1.143%, the 10-year at yielding 1.418%, the 20-year at 1.835% and the 30-year Treasury was yielding 1.756% at the close. The Dow Jones Industrial Average lost 461 points or 1.34%, the S&P was down 1.18% while the Nasdaq lost 1.83% at the close.

Employment in focus
While inflation will determine whether the Federal Reserve speeds its plans for tapering its asset purchases, the labor market remains the key for liftoff from near-zero rates.

As such, the November employment report “is unlikely” to impact taper, said Marvin Loh, senior global macro strategist for State Street, but will have implications for rate hikes. “The Fed is likely to push back against rate hikes until it views the employment market approaching maximum employment,” he said, “a strong result will likely firm the market’s view that such a hike will begin in mid-2022.”

On Wednesday, ADP reported 534,000 private-sector jobs were added in November, above the 480,000 projected by economists polled by IFR Markets, raising “hopes for another strong showing in this Friday’s non-farm report,” Loh said.

The ADP report, he added, suggests expectations of “a post pandemic stabilized workforce.”

The service sectors were the largest contributors to the ADP rise, Loh said, although “the waning impact of the Delta variant and the recent end of employment benefits” probably played a big role. But the workforce is still 3 million shy of pre-pandemic levels “and has been stubbornly stable over the past few months even as virus concerns have faded, vaccination levels have increased and federal unemployment benefits have expired.”

And the Omicron variant now looms and threatens to keep people from returning to the workforce, he said. Wages will be pressured as workers shortages continue, although wage gains will be reversed as lower earners return to the employment rolls, Loh added.

“The ultimate size of the workforce,” he said, “will be a key for the Fed in determining if we are reaching the maximum employment level.”

While it hasn’t been smooth, Mark Hamrick, senior economic analyst at Bankrate, said job creation has been “generally constructive.”

Initial jobless claims could climb “after last week’s unexpected and outsized drop to the lowest level in more than five decades, which may have been partly a statistical aberration related to seasonal adjustment.”

While Friday’s employment report should be strong, he said, “unfortunately, COVID-19 and news of the newest variant reminds us that the pandemic continues to present a threat to the economy. …. More needs to be known, however, about the Omicron variant before we gain greater confidence regarding any new assumptions on possible impacts affecting the economy and the job market (or not).”

Grant Thornton Chief Economist Diane Swonk is looking past this report. “The key is whether the gains we see in November can be maintained,” she said. “Another Delta wave, which likely gained momentum during the Thanksgiving travel surge and the unknown risks associated with the new variant Omicron, is expected to dampen travel and tourism in December and early January.”

Employment grew at varying rates from modest to strong across districts, according to the Beige Book, released by the Fed on Wednesday. Despite “robust demand,” employers had trouble finding and keeping employees. But almost all districts saw “robust wage growth” as a result of worker shortages.

The economy “grew at a modest to moderate pace” according to the report, which covered the period from October through early November.

Inflation was an issue, with pricing growing “at a moderate to robust pace, with price hikes widespread across sectors of the economy.”

Separately, manufacturing activity showed strength in November as the Institute for Supply Management’s manufacturing PMI rose to 61.1 from 60.8 a month earlier. Economists expected a 61.0 read.

Even more positive was the large declines in the wait times for supplier deliveries and prices, said Wells Fargo Securities Senior Economist Tim Quinlan and Economist Shannon Seery, which suggest a “thaw” in supply chain issues. “The fact that this occurred alongside an improvement in orders and employment makes this ISM manufacturing release the best report card for the manufacturing sector that we have seen in months — a welcome indication that the choke points in the supply chain are clearing, if only incrementally.”

Negotiated primary to come
The Illinois State Toll Highway Authority (Aa3/AA-/AA-/) is set to price $600 million of toll highway senior revenue bonds, serials 2039-2046, on Thursday. Loop Capital Markets.

The CSCDA Community Improvement Authority (nonrated) is set to price on Thursday $335.805 million of essential housing revenue refunding social bonds (Westgate Phase 1-Pasadena). Goldman Sachs & Co. LLC.

Harris County, Texas, (Aaa//AAA/) is set to price $120 million of permanent improvement refunding bonds on Thursday. Wells Fargo Corporate & Investment Banking.

The Massachusetts Development Finance Authority (/BBB//) is set to price on Thursday $106.365 million of revenue green bonds, Springfield College Issue. HilltopSecurities.