Municipals were little modified Thursday as U.S. Treasuries were weaker out long and equities were off after a hotter-than-expected inflation report.
The 2-year muni-to-Treasury ratio Thursday was at 61%, the three-year at 61%, the five-year at 62%, the 10-year at 67% and the 30-year at 84%, in response to Refinitiv Municipal Market Data’s 3 p.m. EST read. ICE Data Services had the two-year at 62%, the three-year at 62%, the five-year at 62%, the 10-year at 67% and the 30-year at 83% at 3 p.m.
The market is undergoing a repricing with the Fed now expected to chop rates six times, down from eight just a few weeks ago, said Jim Robinson, CEO and CIO of Robinson Capital Management.
If the terminal rate is 3.5%, UST yields could rise 50 to 100 basis points higher on the long end, he said.
The economy continues to “chug along,” and the market is in “pretty good condition,” Robinson said.
Mutual funds flows have began to speed up, not only within the muni market but in fixed income basically, he said.
Inflows continued this week as LSEG Lipper reported fund inflows of $418.8 million for the week ending Wednesday, in comparison with $1.88 billion of inflows the prior week. This marks 15 straight weeks of inflows.
High-yield funds saw inflows of $307.9 million, down from $602.6 million the week prior.
“Flows are coming in back into the market, with no huge amount of supply,” Robinson said.
The brand new-issue calendar is estimated at $13 billion next week. Bond Buyer 30-day visible supply sits at $16.63 billion.
There’ll proceed to be an influx of supply through the presidential election in November as market participants grapple with the uncertainty over who wins, said Jennifer Johnston, director of municipal bonds research at Franklin Templeton.
“People wish to get the bonds issued beforehand,” she said.
In past years, issuers have come to the market in November and December to get deals done before the top of the 12 months, Johnston said.
There could also be a slight reprieve in issuance within the weeks after the election, but with nothing set to occur instantly whatever the winner — the inauguration just isn’t until January — issuers may benefit from the ultimate weeks of 2024 and tap the capital market, she said.
“There’s some telegraphing [from candidates] based on campaign policies and guarantees, nevertheless it’s still going to take some time before the whole lot starts to set in,” she said.
This implies things needs to be “standard” regarding issuers coming to market, in response to Johnston.
“Persons are still going to do something to issue their bonds,” she said. “There’s plenty measures on ballots this November for more bonds and lots of programs on the market that bonds have been approved for. So there’ll still be plenty to do within the muni market.”
In the first market Thursday, BofA Securities priced for the Cabarrus County Development Corp., North Carolina, (Aa1/AA+/AA+/AA+) $242.66 million of limited obligation refunding bonds, Series 2024A, with 5s of 8/2025 at 3.00%, 5s of 2029 at 2.58%, 5s of 2034 at 2.96%, 5s of 2039 at 3.31% and 5s of 2044 at 3.64%, callable 8/1/2034.
AAA scales
Refinitiv MMD’s scale was little modified: The one-year was at 2.68% (unch) and a couple of.44% (unch) in two years. The five-year was at 2.41% (unch), the 10-year at 2.75% (+2) and the 30-year at 3.66% (unch) at 3 p.m.
The ICE AAA yield curve was little modified: 2.73% (unch) in 2025 and a couple of.49% (unch) in 2026. The five-year was at 2.43% (unch), the 10-year was at 2.72% (unch) and the 30-year was at 3.61% (unch) at 3 p.m.
The S&P Global Market Intelligence municipal curve was little modified: The one-year was at 2.73% (unch) in 2025 and a couple of.47% (+1) in 2026. The five-year was at 2.42% (+1), the 10-year was at 2.72% (unch) and the 30-year yield was at 3.61% (unch) at 3 p.m.
Bloomberg BVAL was little modified: 2.72% (unch) in 2025 and a couple of.47% (unch) in 2026. The five-year at 2.44% (+1), the 10-year at 2.71% (+2) and the 30-year at 3.62% (unch) at 3 p.m.
Treasuries saw losses 10 years and out.
The 2-year UST was yielding 3.994% (-3), the three-year was at 3.907% (-2), the five-year at 3.918% (flat), the 10-year at 4.074% (+2), the 20-year at 4.417% (+3) and the 30-year at 4.384% (+4) at 3:05 p.m.
CPI
Analysts remain divided about what the stronger-than-expected consumer price index will mean for Federal Reserve policymakers because the Fed appears to be concentrating on the labor market.
The Fed is more focused on the labor market, noted Whitney Watson, global co-head and co-CIO of Fixed Income and Liquidity Solutions inside Goldman Sachs Asset Management, and that “data, nonetheless, stays within the driving seat for the Fed and we see next month’s payrolls release because the more necessary data point in determining the pace and extent of Fed easing.”
But services inflation stays “an issue,” in response to Olu Sonola, Fitch Rankings head of U.S. Economic Research. “Coming on the heels of the surprisingly strong September employment data, this report encourages the Fed to keep up a cautious stance with the pace of the easing cycle,” he said.
While the Fed stays prone to cut rates by 1 / 4 point in November, Sonola said, “a December cut mustn’t be taken without any consideration.”
Sal Guatieri, BMO senior economist, said, “A second straight high-side surprise within the core CPI could have the Fed questioning its aggressive begin to the easing cycle.”
The info “virtually rules out one other large cut in November.” He leans to a quarter-point cut next month but notes “much will rely upon whether we see a second straight strong jobs report in October.”
While last week’s nonfarm payrolls number trumps CPI in importance, John Kerschner, head of US Securitised Products at Janus Henderson Investors, said “given the present uncertainty of the Fed’s future path of rate of interest cuts, it did tackle heightened importance.”
Initial jobless claims topping expectations complicated matters, he said. There are signs “of [bond] market confusion or lack of conviction. Now the market will wait for a barrage of Fed speakers … and PPI … to try to decipher just what is occurring with this surprisingly strong economy and somewhat torn Federal Reserve Open Market Committee.”
Still, “[o]ne higher-than-expected CPI report just isn’t enough to cause panic,” noted Mercatus Center Macroeconomist Patrick Horan. “Nevertheless, it is important to do not forget that nominal GDP or total spending growth remains to be very strong relative to recent historical trends. When nominal GDP growth is just too high, inflation will even likely rise. Although [Thursday]’s report doesn’t necessarily signal reignited inflation, we don’t desire it to start out a recent trend.”
The report supports DWS U.S. Economist Christian Scherrmann’s “view that it can have been a bit premature to show a blind eye to this a part of the Fed’s response function.”
It appears “much of the frustration in core inflation got here from notoriously volatile transportation services, but a jump in medical services combined with a weaker print in housing could have implications,” he said.
“Whether we get a repeat of Q4 2023, where elevated rate cut expectations stalled the disinflationary process in Q1 2024, stays to be seen, but actually the percentages of a 50bps cut in November are fading — we even expect an upcoming discussion on a possible skip,” Scherrmann said.” For now, we remain within the 25bps camp for the November meeting, as translating today’s input into core PCE prices may lead to less disappointment.”
Neither CPI nor initial jobless claims “change our base case that the Fed will cut rates 25 bps in November and again 25 bps in December,” said Darrell Cronk, CIO for Wealth & Investment Management at Wells Fargo.
Noting the three-month rolling core rate of three.1%, higher than the Fed would love, he said that’s “not high enough to change their cutting path for the remaining of 2024.”
Seema Shah, chief global strategist at Principal Asset Management, agreed that a half-point cut in November is “highly improbable,” however the sticky CPI “mustn’t be significant enough to drastically alter the Fed’s overall rate trajectory and positively not concerning enough to discourage the Fed from pursuing policy normalization. A series of 25bps cuts over the approaching Fed meetings (November and December) stays our base case.”
Gary Siegel contributed to this story.