Munis weaken ahead of nearly $9B new-issue calendar

Bonds

Munis were weaker to close out the week, playing catch up to Thursday’s larger U.S. Treasury losses and preparing for a larger new-issue calendar led by billion-dollar issues from the New York Dormitory Authority and triple-A rated Minnesota, along with multiple large deals from Texas school districts. U.S. Treasuries were firmer Friday and equities rallied.

Triple-A yields rose two to seven basis points, depending on the curve, while USTs improved by three to six basis points, pushing ratios slightly higher.

The two-year muni-to-Treasury ratio Friday was at 61%, the three-year at 62%, the five-year at 62%, the 10-year at 64% and the 30-year at 87%, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the two-year at 60%, the three-year at 62%, the five-year at 61%, the 10-year at 64% and the 30-year at 88% at 4 p.m.

Issuance grows this week as investors will be greeted with a new-issue calendar estimated at $8.827 billion. Bond Buyer 30-day visible supply climbed to $12.64 billion.

There are $7.218 billion of negotiated deals on tap and $1.609 billion on the competitive calendar.

The negotiated calendar is led by $1.6 billion of state sales tax revenue bonds from the Dormitory Authority of the State of New York, followed by $580 million of electric system general revenue bonds from the Long Island Power Authority, New York; $426 million of PSF-insured unlimited tax school building bonds from the Crowley ISD, Texas; and $414 million of first lien revenue bonds from the Port of Houston Authority, Texas.

Gilt-edged Minnesota will lead the competitive calendar with $1 billion of GOs in five deals Tuesday, followed by $445 million of tax anticipation notes from Miami-Dade County School District, Florida, also Tuesday.

While Treasuries improved somewhat Friday and equities improved, the focus of the week for investors was mostly on central banks, noted Barclays strategists Mikhail Foux, Clare Pickering and Mayur Patel.

The Fed raised rates 25 basis points on Wednesday, as expected, and “took a balanced, though slightly-dovish stance for its forward outlook,” said BofA strategists.

The Fed did not indicate “a September ‘skip’ as some market participants wished for, but it did clearly indicate that the current level of Fed funds rates is restrictive; it just may not be restrictive enough,” they noted.

Still, BofA strategists said the Fed gave no indication that “its tightening could extend beyond September.”

The FOMC “maintained the tightening bias in the statement, suggesting one more hike is likely within the next two meetings, while Chair Powell also stated that judgments about cuts will occur ‘a full year from now,'” Barclays strategists said.

Also at the conference call, BofA strategists noted that Fed Chair Jerome Powell expressed “his view that the Fed likely will bring inflation down to its desired target without causing a recession.”

Barclays strategists believe the FOMC will hike rates “another 25bp in November, hold through June, then make four incremental cuts to the funds rate from July until December 2024.

They also believe that “risks to this path are skewed to the upside: two more hikes seem to be somewhat more likely than no hikes at all.”

Investors, however, “seem a bit more dovish, with fed fund futures implying no more hikes after this week and at least four cuts starting in May next year,” according to Barclays strategists.

U.S. economic data reports were relatively strong this week, “with the Q2 23 GDP, durable goods and pending home sales beating expectations while continuing claims surprised slightly on the downside,” they said.

In response, USTs sold off hard on Thursday, “moving up about 15bp across the curve on the week, while tax-exempts have outperformed somewhat, with [Refinitiv] MMD-UST ratios declining slightly,” they said.

After rising about 4% once more, 10-year Treasuries “are getting close to the upper end of the trading range,” Barclays strategists said.

Even though munis have outperformed, they noted munis “are becoming somewhat vulnerable, in our view, more so because supply is expected to pick up in the next several weeks, especially if rates continue to move higher, as they would need to catch up to this move.”

In the medium term, they are not concerned, but munis could get cheaper in August.

BofA strategists said “the recent retest of the upper bounds of this year’s muni rates ranges should be a good entry point.”

Given time, they noted muni rates should fall to the lower bounds of their ranges.”

Moreover, if this is the second-to-last Fed rate hike, as BofA strategists predict, they said muni rates “should rally well and sustainably, breaking their lower bounds to reach our year-end targets.”

BofA strategists think the Fed’s “no recession” view should “encourage trades on credit spread tightening.”

“After all the pain last year and a seemingly never-ending range bound pattern this year, muni bond investors finally may look forward to a sustainable muni rates bullish turn in the near term and continued credit spread tightening,” they said.

Muni-USTs ratios are “rich across the curve, except for perhaps in the money market area,” according to BofA strategists.

The weekly muni SIFMA index is trading at 74% of one-month T-bills, which they said is “somewhat cheap in the middle of a Fed tightening cycle.”

However, BofA strategists noted “the current relative richness of munis versus Treasuries is simply the result of still bearish Treasury rates.”

If Treasury rates turn around, they said “that relative richness will quickly switch to relative cheapness.”

Secondary trading
Washington 5s of 2024 at 3.30% versus 3.18% Monday. Nevada 5s of 2024 at 3.23%-3.22%. Connecticut 5s of 2025 at 3.25%.

DC 5s of 2028 at 2.80%. NYC TFA 5s of 2028 at 2.68%. California 5s of 2029 at 2.58%.

Maryland 5s of 2031 at 2.51% versus 2.61% on 7/13. Oregon 5s of 2032 at 2.59% versus 2.62% Thursday and 2.52% Monday. Washington 5s of 2033 at 2.65% versus 2.63% original Thursday.

Bonham ISD, Texas, 4s of 2049 at 4.25% versus 4.18% original on 7/19. California 5s of 2052 at 3.65%. NYC TFA 5s of 2053 at 4.18% versus 4.16%-4.18% Thursday and 4.15%-4.14% Wednesday.

AAA scales
Refinitiv MMD’s scale was cut up to five basis points: The one-year was at 3.17% (+3) and 3.00% (+3) in two years. The five-year was at 2.66% (+4), the 10-year at 2.57% (+5) and the 30-year at 3.51% (unch) at 3 p.m.

The ICE AAA yield curve was cut two to eight basis points: 3.13% (+6) in 2024 and 3.00% (+6) in 2025. The five-year was at 2.62% (+8), the 10-year was at 2.55% (+3) and the 30-year was at 3.54% (+2) at 4 p.m.

The S&P Global Market Intelligence (formerly IHS Markit) municipal curve was cut up to four basis points: 3.16% (+4) in 2024 and 2.99% (+4) in 2025. The five-year was at 2.66% (+4), the 10-year was at 2.57% (+5) and the 30-year yield was at 3.50% (unch), according to a 3 p.m. read.

Bloomberg BVAL was cut up two to three basis points: 3.01% (+3) in 2024 and 2.90% (+2) in 2025. The five-year at 2.56% (+3), the 10-year at 2.50% (+2) and the 30-year at 3.51% (+2) at 4 p.m.

Treasuries were firmer.

The two-year UST was yielding 4.882% (-4), the three-year was at 4.529% (-5), the five-year at 4.185% (-6), the 10-year at 3.960% (-4), the 20-year at 4.220% (-3) and the 30-year Treasury was yielding 4.017% (-3) near the close.

Primary to come
The Dormitory Authority of the State of New York (Aa1/AA+//) is set to price Wednesday $1.635 billion of state sales tax revenue bonds, consisting of $1.156 billion of tax-exempts, Series 2023A-1; $406.353 million of tax-exempts, Series 2023A-2; and $72.860 million of taxables, Series 2023B. J.P. Morgan Securities. 

The Long Island Power Authority, New York (A2/A/A/), is set to price Tuesday $579.800 million of electric system general revenue bonds, consisting of $400 million of green bonds, Series 2023E, serials 2024-2043, term 2049, and $179.800 million of bonds, Series 2023F, serials 2027-2029, 2033. Wells Fargo Bank. 

The Crowley Independent School District, Texas (Aaa//AAA/), is set to price Thursday $425.775 million of PSF-insured unlimited tax school building bonds, Series 2023, serials 2024-2043, terms 2048, 2053. Siebert Williams Shank & Co. 

The Port of Houston Authority, Texas (Aa3/AA+//), is set to price Wednesday $414.375 million of non-AMT first lien revenue bonds, Series 2023. Morgan Stanley. 

The Texas Private Activity Bond Surface Transportation Corp. is set to price Thursday on behalf of the North Tarrant Express Mobility Partners’ North Tarrant Express project $406.540 million of senior lien revenue bonds, Series 2023. J.P. Morgan Securities.

The Carrollton-Farmers Branch Independent School District, Texas (Aaa/AAA//), is set to price Monday $378.240 million of PSF-insured unlimited tax school building bonds, Series 2023, serials 2024-2053. Frost Bank. 

The Northwest Independent School District, Texas (Aaa//AAA/), is set to price Tuesday $377.520 million of PSF-insured unlimited tax school building bonds, Series 2023, serials 2024, 2029-2048. RBC Capital Markets. 

The Hays Consolidated Independent School District, Texas (Aaa//AAA/), is set to price Tuesday $315.650 million of PSF-insured unlimited tax school building bonds, Series 2023. FHN Financial Capital Markets.

San Antonio, Texas (Aa2/AA+/AA/), is set to price Wednesday $287.780 million of water system junior lien revenue and refunding bonds, Series 2023A, serials 2024-2033, 2035-2043, terms 2048, 2053. Barclays. 

The Grand Parkway Transportation Corp., Texas (Aa1//AA/), is set to price Tuesday $277.440 million of Grand Parkway system subordinate tier toll revenue refunding put bonds, Series 2023, serial 2052. Barclays. 

The Leander Independent School District, Texas (/AAA/AAA/), is set to price Tuesday $273.590 million of PSF-insured unlimited tax school building bonds, Series 2023. FHN Financial Capital Markets.  

The Sherman Independent School District, Texas (Aaa/AAA//), is set to price Monday $239.525 million of PSF-insured unlimited tax school building bonds, Series 2023-B, serials 2027-2053. Raymond James & Associates.

The Bastrop Independent School District, Texas (Aaa/AAA//), is set to price Monday $218.165 million of PSF-insured unlimited tax school building bonds, Series 2023. Piper Sandler & Co.

Harris County, Texas (Aaa///AAA) is set to price Tuesday $215.415 million, consisting of $121.205 million pf permanent improvement refunding bonds, Series 2023A, serials 2025-2043, term 2048; and $94.210 million of unlimited tax road refunding bonds, Series 2023A, serials 2024-2043, term 2048. Siebert Williams Shank & Co.

The Waller Independent School District, Texas (Aaa/AAA//). is set to price Monday $188.470 million of PSF-insured unlimited tax school building bonds, Series 2023A, serials 2026-2043, terms 2048, 2053. BOK Financial Securities. 

The Austin Community College District, Texas (Aa1/AA+//), is set to price Wednesday $187.730 million of limited tax bonds, Series 2023, serial 2024-2053. RBC Capital Markets. 

The Oklahoma Water Resources Board (/AAA//) is set to price Tuesday $176.805 million of state loan program revenue bonds, Series 2023B, serials 2024-2038, terms 2043, 2048, 2053. BOK Financial Securities. 

The San Marcos Consolidated Independent School District, Texas (Aaa///), is set to price Monday $166.365 million of PSF-insured unlimited tax school building bonds, Series 2023, serials 2024-2043, term 2047. Cabrera Capital Markets. 

The Spring Branch Independent School District, Texas (Aaa/AAA//), is set to price Wednesday $165.970 million of PSF-insured unlimited tax schoolhouse bonds, Series 2023, serials 2025-2048. Wells Fargo. 

The Birdville Independent School District, Texas (/AAA/AAA/) is set to price Thursday $145.985 million of PSF-insured unlimited tax school building bonds, Series 2023-A. FHN Financial Capital Markets.

The Pennsylvania Economic Development Financing Authority (//BBB+/) is set to price Thursday $128.850 million of Presbyterian senior living refunding revenue bonds, consisting of $35.180 million of Series 2023B-1 and $93.670 million of Series 2023B-2. Piper Sandler & Co. 

The Colorado Housing and Finance Authority is set to sell Tuesday $112.500 million of single-family mortgage bonds, consisting of $50 million of Series L (AA3/AA//), serial 2053, and $62.500 million of Series M1 (Aaa/AAA//) serials 2026-2033, terms 2038, 2043, 2048. BofA Securities. 

The Nebraska Investment Finance Authority (/AAA//) is set to price $109.630 million of single-family housing revenue bonds, consisting of non-AMT social bonds, Series 2023E, and taxables, Series 2023F. J.P. Morgan Securities.

The Rhode Island Health and Educational Building Corp. (Aa3/AA-//) is set to price Tuesday $100 million of Central Falls Public School Projects state appropriation-backed revenue bonds, Series 2023, serials 2024-2043. Raymond James & Associates.

Competitive
Minnesota (Aaa/AAA/AAA) is set to sell $158.885 million of GO state various purpose bonds, Series 2023A, at 10:45 a.m. eastern Tuesday; $264 million of GO state trunk highway bonds, Series 2023B at 10:15 a.m. Tuesday; $15.015 million of taxable GO state various purpose bonds, Series 2023C, at 12:15 p.m. Tuesday; $327.020 million of GO state various purpose refunding GOs, Series 2023D, at 11:15 a.m. Tuesday; and $255.290 million of GO state trunk highway refunding bonds, Series 2023E, at 11:45 a.m. Tuesday.

The Miami-Dade County School District, Florida, is set to price $445.050 million of tax anticipation notes, Series 2023, at 11 a.m. Tuesday.

Christina Baker contributed to this story.

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