Bonds

Municipals were slightly firmer Friday, outperforming a U.S. Treasury selloff after a hotter-than-expected jobs report. Equities rallied.

Triple-A yields were firmer by up to four basis points while Treasuries were weaker by up to 15 on the short end.

Short ratios fell as a result. The two-year muni-Treasury ratio Friday was at 66%, the three-year at 69%, the five-year at 69%, the 10-year at 70% and the 30-year at 90%, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the two-year at 69%, the three-year at 71%, the five-year at 70%, the 10-year at 72% and the 30-year at 93% at 4 p.m.

Debt ceiling-related investor concerns have dissipated, and “the focus is shifting back to the U.S. economy, which has continued exhibiting underlying strength, as well as tightness in the labor market, which has been highlighted with this week’s JOLT, ADP and today’s payrolls release,” said Barclays strategists Mikhail Foux, Clare Pickering and Mayur Patel in a weekly report.

While “some other economic releases this week have come in lower than expected (most notably housing and manufacturing),” they said “the overall economy is still doing quite well, and the US Economic Surprise Index has not only recovered from its lows, but has been steadily trending higher.”

Quite unexpectedly, BofA strategists said “May turned out to be just like February for munis in that it reversed all of the rally from the prior two months.”

The Fed’s “surprisingly coherent hawkish rhetoric” triggered the February selloff, but “by March the onset of regional bank problems turned the Fed away from that stance,” they said,

While the muni market worked quite well in March and April, they said, “by early May, the successful containment of the regional bank problem led to a Fed’s hawkish hold posture.”

BofA strategists said economic strength and slower-than-expected inflation declines in April justified that posture.

Policymakers are split on whether the Fed will continue to hike rates, according to Barclays strategists.

Some have argued for skipping a rate increase at June’s Federal Open Market Committee Meeting, while others prefer to continue 25 basis point rate increases, they said.

Barclays’ strategists now see the FOMC continuing with two additional 25bp hikes in at its June and July meetings, “bringing the target range to 5.50-5.75% by the end of the year, slightly above the current market consensus.”

BofA strategists said there is now a high probability of at least one more rate hike by the FOMC this summer, according to the Fed funds futures, and the first rate cut has been possibly delayed to early 2024, they said.

“This shift led to an overall rise of Treasury yields across the curve to the upper boundaries of their February-April ranges in a truly unexpected development,” they noted.

May’s muni market selloff is more passive, as muni-UST ratios “were at rich levels at the start of the month, which made it more vulnerable in a Treasury market selloff despite favorable supply/demand conditions,” according to BofA strategists.

When the Treasury market sold off, they said “muni yields moved up more due to ratio adjustments.”

The favorable supply/demand condition, BofA strategists noted, was “working through credit paper, as those provided slightly more yield protection.”

Barclays strategists said May was a major divergence for munis from a long-term trend.

Over the past two decades, they said “IG munis performed worse in May only once (in 2013), and the IG index lost money only a handful of times.”

Meanwhile, they noted “the muni high-yield index had the worst performance in May since 2004.”

These negative total return results “came in despite a very strong performance this week, with both indices recovering 0.4%-0.7% in a few trading sessions,” according to Barclays strategists.

In June, muni performance is historically more mixed.

“After investors position for strong summer market technicals in May, there is frequently a bit of a letdown after that,” they said.

Over the past two decades, the average index performance in May for IG was 0.7% and HY was 1.4%, Barclays strategists said.

But in June, they said munis “on average lost money, albeit just slightly: -0.2% for IG and -0.1% for HY.”

Despite this, Barclays strategists are relatively optimistic in the near term.

“With the debt ceiling standoff behind us, we might see some rate volatility, but it should not be overwhelming, in our view, as U.S. Treasuries seem to be stuck in the middle of the 50bp range where they have spent most of their time since last fall,” they said. “There is little doubt that investors will be extremely sensitive to economic releases, but at least for now they seem to be taking the glass-half-full approach.”

As such, they said valuations, which have become more attractive in May, and technicals, which over the summer months remain support, will be the main focus.

There is room for the parts of the muni market have been underperforming earlier this year to catch up, they said.

Calendar stands at $8.2B
For the coming week, investors will be greeted with a new-issue calendar estimated at $8.213 billion.

There are $6.365 billion of negotiated deals on tap and $1.849 billion on the competitive calendar.

The negotiated calendar is led by $900 million of revenue bonds from the California Community Choice Financing Authority, followed by $735 million of health system revenue bonds from the Indiana Finance Authority, $715 million of consolidated bonds from the Port Authority of New York and New Jersey and $700 million of tax and revenue anticipation notes from Los Angeles County.

Prince George’s County, Maryland, leads the competitive calendar with $227 million of GOs, followed by $221 million of transportation revenue bonds from the Virginia Transportation Board.

Secondary trading
Columbus, Ohio, 5s of 2024 at 3.22%-3.13% versus 3.22% on 5/17. Georgia 5s of 2025 at 2.98%. North Carolina 5s of 2026 at 2.86%-2.84% versus 3.02% on 5/25.

Ohio 5s of 2028 at 2.73%-2.71%. West Virginia 5s of 2028 at 2.73%-2.70%. NYC TFA 5s of 2029 at 2.85%-2.83% versus 2.85% Thursday and 2.91% Tuesday.

Washington 5s of 2032 at 2.64% versus 2.67%-2.66% Thursday. California 5s of 2033 at 2.65%-2.64%. DASNY 5s of 2033 at 2.56%-2.55% versus 2.60% Thursday and 2.62%-2.61% Wednesday,

Charleston waters, South Carolina, 5s of 2047 at 3.56%. Baltimore County, Maryland, 5s of 2049 at 3.62%-3.61%. Massachusetts Transportation Funds 5s of 2052 at 3.82%.

AAA scales
Refinitiv MMD’s scale was bumped up to four basis points: The one-year was at 3.13% (-3) and 2.99% (-3) in two years. The five-year was at 2.66% (-4), the 10-year at 2.59% (unch) and the 30-year at 3.50% (unch) at 3 p.m.

The ICE AAA yield curve was bumped up to one basis point: 3.17% (flat) in 2024 and 3.01% (flat) in 2025. The five-year was at 2.65% (-1), the 10-year was at 2.60% (-1) and the 30-year was at 3.55% (flat) at 4 p.m.

The IHS Markit municipal curve was bumped up to four basis points: 3.12% (-3) in 2024 and 2.99% (-3) in 2025. The five-year was at 2.66% (-4), the 10-year was at 2.58% (unch) and the 30-year yield was at 3.49% (unch), according to a 4 p.m. read.

Bloomberg BVAL was bumped up to one basis point: 3.05% (-1) in 2024 and 2.95% (-1) in 2025. The five-year at 2.63% (-1), the 10-year at 2.55% (-1) and the 30-year at 3.53% (-1) at 4 p.m.

Treasuries sold off.

The two-year UST was yielding 4.494% (+15), the three-year was at 4.138% (+15), the five-year at 3.836% (+13), the 10-year at 3.686% (+8), the 20-year at 4.032% (+5) and the 30-year Treasury was yielding 3.876% (+4) at 4 p.m.

Jobs report comes in well above expectations
Friday’s report “continues to point to a soft landing for the economy and should keep market expectations for a July hike in play,” said Morgan Stanley Research strategists.

The jobs report blew past expectations in May, increasing by 339,000, much higher than the forecast of 195,000, noted Wells Fargo economists Sarah House and Michael Pugliese.

Additionally, there was an upward revision of 93,000 jobs to the past two months, highlighting the strength of job creation, said James Knightley, ING’s chief international economist, while Wells Fargo economists said the upward revisions “further flattered the headline reading,” they noted.

These figures “suggest businesses are continuing to hire at a rapid clip despite signs pointing to slowing economic activity and softening consumer spending,” said Mickey Levy and Mahmoud Abu Ghzalah of Berenberg Capital Markets.

However, they said “the separately derived household measure of employment told a much different story.”

“There was more weakness in the household survey, which saw a 310,000 decline in employment, pushing the unemployment rate up from 3.39% to 3.65% in May,” Morgan Stanley Research strategists said.

Some softening in the trend of wage growth, Wells Fargo strategists said, “offered additional evidence that the labor market is continuing to cool, albeit gradually.”

“Robust job gains relative to expectations reflect ongoing peculiarities in the post-pandemic U.S. economy,” said Gurpreet Gill, macro strategist for Fixed Income & Liquidity Solutions at Goldman Sachs Asset Management.

However, he said “the uptick in the unemployment rate and moderation in wage growth together signify progress in rebalancing the labor market.”

This, Gill noted, is necessary to bring inflation back toward target.

Economists had different views on the strength of the jobs report.

“The jobs report was surprisingly strong, which is at odds with the narrative of impending recession,” said Matt Peron, director of research at Janus Henderson Investors.

“While the Fed can take some comfort in stabilizing wage inflation, such strength complicates their calculus as to whether they can pause hiking rates,” he said.

Netting it all, Peron said “while a strong economy is good for markets in the near term, continued rate hikes, or higher-for-longer rates, pose a challenge for equity markets in the intermediate term as there could be pressure on multiples and eventually the effect of sustained higher rates will flow through to earnings.”

Olu Sonola, head of U.S. Regional Economics at Fitch Ratings, argued the May jobs report was a mixed bag.

“The strength of the payroll survey is clearly a big surprise, largely on the back of robust job growth in the healthcare sector and the business and professional services sector,” he said.

However, Sonola said the “0.3% increase in the unemployment rate is the highest monthly increase since April 2020.”

Labor force participation, he said, “remained steady and the 0.3% month-on-month wage growth continues the recent trend of moderation.

“As the Fed contends with whether to pause, skip or hike at the next meeting, the broader backdrop still reflects a labor market that refuses to crack,” Sonola said. “The inflation report next week may provide a bit more clarity, but the rationale for a pause or skip may have just gotten more difficult to articulate.”

Market participants’ expectations for additional rate hikes “have edged a little higher on the back of this very mixed report,” Knightley noted.

“Such divergent outcomes between the household survey and the payrolls number mean that the June FOMC ‘skip’ narrative is seemingly holding for now,” he said.

He noted that labor data lags “of all the data releases and is the worst guide for where the economy is actually heading.”

Knightley said “we are at the peak for the Fed funds target range, but we have to remember that we get CPI the day ahead of the June 14 FOMC meeting and a 0.4% print for core (as the consensus is currently expecting) or 0.5% could yet swing the market back in favor of a hike.”

With Friday’s strong employment report, Wells Fargo economists argue it “adds to a recent run of solid economic data that on their own argue for another 25 bps rate hike at the FOMC’s June 13-14 meeting.”

Yet, they said “recent signals from key Fed officials have been dovish and more consistent with a June ‘pause’ or ‘skip.'”

Wells Fargo economists “lean toward the FOMC leaving policy unchanged at the June meeting as the most likely outcome, but [they] would not be shocked by a rate hike either.”

Morgan Stanley Research strategists said they do not think Friday’s jobs “report was strong enough to meet the bar for the Fed to hike in June, but raises the risk that the Fed could hike in July.”

Despite the strength of payroll numbers — which increased by 283,000, up from the consensus of 168,000 — they said “the FOMC will also be focused on the unemployment rate.”

“The FOMC tends to operate under the law of inertia, once it stops it will be difficult to start hiking again,” Morgan Stanley Research strategists noted.

They believe “the jobs and inflation data we receive between the June and July FOMC meeting will not compel the Fed to restart hiking.” They think there will be no rate hike at the June FOMC meeting and the Fed will remain on hold before cutting in the first quarter of 2024.

Primary to come
The California Community Choice Financing Authority (A2///) is slated to kick off the negotiated activity with $900 million of Series 2023 D clean energy project revenue green bonds on Tuesday. Goldman Sachs.

The Indiana Finance Authority (Aa2/AA/AA/) is set to price $735.260 million of health system revenue bonds on behalf of Indiana University Health — $335.260 million of Series 2023A fixed rate bonds, $300 of Series 2023B long-term rate bonds and $100 million of Series 2023C FRN rate bonds. Serials 2041 to 2043; terms in 2046, 2053, 2062. Citigroup Global Markets.

The Port Authority of New York and New Jersey (Aa3/AA-/AA-/) is set to price $715 million of bonds — $465 million of 239th series taxable consolidated bonds and $250 million of 238th AMT Series bonds on Tuesday. Citigroup Global Markets.

Los Angeles County, California, is slated to price $700 million of tax and revenue anticipation notes on Wednesday. Serial 2024. Citigroup Global Markets.

The New York City Housing Development Corp. (Aa2/AA+//) is slated to price $641.750 million of multifamily housing revenue sustainable development bonds on Thursday, with a retail order period on Wednesday. Serials 2026 to 2035; terms 2038, 2043, 2048, 2053, 2058, and 2063. Barclays Capital.

The Colorado Health Facilities Authority (Aa2/AA/AA/) is set to price $286.175 million of Series 2023 hospital revenue bonds for AdventHealth Obligated Group on Tuesday. J.P. Morgan.

The Metropolitan Water District of Southern California (Aa1/AAA//) is set to price $261.125 million of Series 2023 A water revenue and refunding bonds on Wednesday. Serials 2024 to 2043; terms in 2048 and 2053. Siebert Williams Shank & Co.

The Orlando Utilities Commission (Aa2/AA/AA/) is set to price $247.110 million of Series 2023 utility system revenue bonds on Tuesday. J.P. Morgan.

The Pasco, Washington, School District No. 1 (Aaa///) is set to price $217.240 million of unlimited tax GO improvement and refunding bonds insured by the Washington State School District Credit Enhancement Program on Wednesday. Piper Sandler & Co.

The Texas Department of Housing and Community Affairs (Aaa/AA+//) is set to price $200 million of Series 2023 A non-AMT single family mortgage revenue bonds on Tuesday, following a retail order period on Monday. Barclays Capital.

The Sacramento, California, Municipal Utility District (/AA/AA/) is slated to price $200 million of Series 2023 K electric revenue green bonds that are climate bond certified on Tuesday. Serials 2037 to 2043; terms 2048 and 2053. BofA Securities.

The Pittsburgh, Pennsylvania, Water and Sewer Authority (A3/A+//) is set to price $176.285 million of Series 2023 A water and sewer system first lien revenue bonds and Series 2023 B water and sewer system first lien revenue refunding bonds on Wednesday. Serials 2024 to 2043. BofA Securities.

The Dallas Housing Finance Corp. is set to price $118.755 million of Series 2023 A and Series 2023 B residential development revenue bonds next week. Goldman Sachs.

Harris County, Texas, (Aa2//AA/) is set to price $117.880 million of Series 2023 A toll road first lien revenue refunding bonds on Wednesday. Serial bonds 2026 to 2035. HilltopSecurities/

The Connecticut Health and Educational Facilities Authority (Aaa/AAA//) is slated to price $112.100 million of Yale University revenue bonds Series 2017 B-2 on Monday. Barclays Capital.

The Sacramento, California, Municipal Utility District (/AA-/AA/) is set to price $100 million of Series 2023 D subordinated electric revenue refunding bonds on Tuesday. Barclays Capital.

Competitive
Prince George’s County, Maryland, (Aaa/AAA/AAA/) is set to sell $226.15 million of 2023 A general obligation consolidated public improvement and refunding bonds on Wednesday. Serials 2024 to 2043. 

The Virginia Transportation Board (Aa1/AA+/AA+/) is set to sell $220.720 million of 2023 transportation revenue bonds on Wednesday on behalf of the U.S. Route 58 Corridor Development Project. Serial bonds 2024 to 2048. 

Arlington County, Virginia, is set to sell $187.375 million of Series 2023 GO public improvement bonds on Tuesday.

The Corpus Christi, Texas, Independent School District is slated to sell $110 million of Series 2023 unlimited tax school building bonds on Thursday. Serials 2028 to 2053.

The Louisiana Public Facilities Authority is slated to sell $105 million of hospital revenue bonds on behalf of the Louisiana Children’s Medical Center Project on Tuesday. 

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