Municipals closed the month and the primary half of 2024 on a quiet note ahead of the Fourth of July holiday-shortened week and a new-issue slate coming in at a measly $240 million — though there was much to observe on the sidelines.
Munis outperformed U.S. Treasuries Friday by holding regular as govies saw some losses and equities were also within the red following May personal consumption data coming in largely as expected, further solidifying expected future Federal Reserve moves. This a day after the primary U.S. presidential debate.
For the previous, “PCE inflation is progressively falling, but it surely continues to be above the Fed’s 2% goal,” noted Mercatus Center macroeconomist Patrick Horan’s evaluation of May PCE inflation data. “I might not expect today’s data release to [change] the Fed’s considering on rate of interest cuts. Straight away, we should always not expect an rate of interest cut before September.”
The market is now “giving the Fed the green light to think about a rate cut at their Sept. 18 meeting,” said John Kerschner, head of U.S. Securitised Products at Janus Henderson Investors. “While Federal Reserve officials are prone to stay on message in the approaching weeks, saying they’re ‘data dependent,’ we shall be taking note of see if they fight to speak down these rate cut expectations or maybe even reinforce them.”
“We still have two rounds of inflation data before that meeting, and it’s looking increasingly likely that the slowing inflation data will give the Fed cover to begin rate cuts later this yr,” Kerschner added.
The markets were less reactionary to the headline-driving Thursday debate between President Joe Biden and former President Donald Trump.
“The U.S. electorate stays polarized, and we expect to see an amazing deal of debate over whether investment portfolios ought to be reexamined,” noted Solita Marcelli, chief investment Officer Americas, UBS Global Wealth Management. “But we expect adjusting one’s longer-term financial statement abruptly within the wake of a single debate entails its own risks, and will ultimately prove counterproductive.”
What might need more of an impact on the general public finance industry, no less than within the nearer term, are U.S. Supreme Court decisions handed down this week, one which found the Securities and Exchange Commission cannot use administrative court proceedings in cases where it seeks civil penalties, which can close down one lane the SEC uses to implement the market, but it surely won’t altogether change how the Public Finance Abuse Unit operates.
Other SCOTUS decisions to observe are Loper Vivid Enterprises v. Raimondo and Relentless, Inc. v. Department of Commerce, which ruled against the so-called Chevron doctrine that permits federal agencies to depend on their very own rules and interpretations.
For the general public finance-focused participants, the markets this week saw Treasury yields “meaningfully” increase “due mostly to heavy auctions, in addition to a plunge within the yen to its lowest level for the reason that mid-Eighties,” Barclays PLC strategists said in a weekly report. “Tax-exempt yields have moved largely consistent with USTs.”
Nonetheless, the muni market “successfully pushed through a heavy primary market in June, with muni to Treasury ratios staying relatively tight,” BofA Global Research strategists said in a weekly report.
Indeed, the market digested nearly $45 billion of new-issuance in June, coming in above the 10-year average and pushing total issuance through the primary half of 2024 greater than 30% higher than 2023 levels.
Following Friday’s moves, ratios were little modified with the two-year muni-to-Treasury ratio at 66%, the three-year at 66%, the five-year at 67%, the 10-year at 65% and the 30-year at 84%, in line with Refinitiv Municipal Market Data’s 3 p.m. EST read. ICE Data Services had the two-year at 66%, the three-year at 67%, the five-year at 68%, the 10-year at 68% and the 30-year at 84% at 3:30 p.m.
“As we enter July, supply/demand dynamics will experience a sharp shift in favor of bond investors,” BofA strategists Yingchen Li and Ian Rogow said.
BofA expects $37 billion of recent long-term bond issuance in July, “heavily outweighed by $65 billion of principal redemption and coupon payments,” they said. “We consider current muni market hesitation as a good opportunity to enter positions ahead of our expected 100-basis-point rally in 2H24.”
Barclays expects July’s issuance to be no less than within the mid $30 billion area, also noting that July is the biggest redemption month this summer, “and never only in high grade; Puerto Rico redemptions ought to be near $1.5 billion,” strategists Mikhail Foux and Clare Pickering said.
They imagine technicals in early July ought to be supportive for the market, “even when yields proceed to ascend as we expect, and rate volatility continues.”
Despite this week’s selloff, Treasury yields are down about 20 basis points in June, “which has helped the muni market,” Barclays said.
They noted that high-grade BBBs have outperformed again, but AAAs have also done well, “though they’re still within the red for the yr.” Single-A and double-A parts of the market have underperformed this month, they said.
Returns as of Friday morning for the Bloomberg Municipal Index show munis at 1.51% within the black for June while still within the red at -0.43% for 2024. High-yield, nevertheless, returned 2.46% in June and 4.15% in 2024 to date. Taxable munis are at +1.59% in June and +0.45% in 2024.
AAA scales
Refinitiv MMD’s scale was unchanged: The one-year was at 3.15% and three.11% in two years. The five-year was at 2.88%, the 10-year at 2.84% and the 30-year at 3.72% at 3 p.m.
The ICE AAA yield curve was little modified: 3.19% (unch) in 2025 and three.11 (unch) in 2026. The five-year was at 2.92% (unch), the 10-year was at 2.88% (unch) and the 30-year was at 3.72% (flat) at 3:30 p.m.
The S&P Global Market Intelligence municipal curve was unchanged: The one-year was at 3.17% in 2025 and three.11% in 2026. The five-year was at 2.88%, the 10-year was at 2.88% and the 30-year yield was at 3.70% at 3 p.m.
Bloomberg BVAL was unchanged: 3.17% in 2025 and three.12% in 2026. The five-year at 2.93%, the 10-year at 2.84% and the 30-year at 3.73% at 3:30 p.m.
Treasuries were weaker.
The 2-year UST was yielding 4.726% (+1), the three-year was at 4.522% (+3), the five-year at 4.341% (+4), the 10-year at 4.355% (+7), the 20-year at 4.616% (+8) and the 30-year at 4.514% (+9) at 3:40 p.m.