Munis stays on the sidelines as markets digest another 75bps, Powell hawk

Munis stays on the sidelines as markets digest another 75bps, Powell hawk

Municipalities were a little firmer in lighter secondary trading on Wednesday, but mostly spent the day as traders digested another 75 basis point hike from the Federal Reserve’s Open Market Committee and its impact. in larger markets.

US Treasury yields rose and stocks sold off after Federal Reserve Chairman Jerome Powell’s press conference signaled a more hawkish tone.

Markets initially interpreted the Federal Open Market Committee’s statement as acknowledging a slowdown in rate hikes after the panel approved a fourth straight three-quarter point hike, but at his press conference Powell threw a bit of a punch. cold water on those thoughts, saying the Fed “has a ways to go” and it was “premature” to discuss a break from hikes.

Noting that further hikes “will be appropriate to achieve a monetary policy stance tight enough to bring inflation down to 2%,” the statement added, the FOMC “will take into account the cumulative tightening of monetary policy, the lags with which the monetary policy affects economic activity and inflation, and economic and financial developments.”

“References in the statement to the lagged impact of the ‘cumulative’ hikes to date and ‘achieving a sufficiently tight stance’ indicate that rates will peak early next year,” Brian Coulton said. , chief economist of Fitch Ratings. “That said, nothing here suggests a desire to pivot to rate cuts later in 2023 – rates are more likely to be suspended for the remainder of next year.”

The Fed’s key point “is that rather than debating the speed of rate hikes, the FOMC now prefers to debate the length of the tightening cycle,” said Eric Winograd, senior vice president and US economist at AllianceBernstein. “It’s more about the terminal rate now than the pace of rate hikes.”

James Ragan, director of wealth management research at DA Davidson, said Powell’s comments about inflation and rates staying higher longer “pushed back the Fed pivot narrative.”

“We think there’s a very good chance the Fed will need to continue raising the funds rate next year beyond the 5% implied by the OIS market,” said Jim Solloway, chief market strategist. and Senior Portfolio Manager of SEI. “The instinctive market reaction to the statement (equities up, yields down) reflects investors’ anticipation that the Fed’s tightening cycle will end sooner rather than later. SEI believes this view is overly optimistic given the the resilience of the US economy and the stickiness of inflation. During the press conference, stock prices fell and yields rose slightly.”

SEI expects long-term inflation to remain between 3% and 4%.

Daytime moves have kept the muni/UST ratios at recent levels. The three-year muni-UST ratio was 70%, the five-year 75%, the 10-year 82% and the 30-year 98%, according to the 15-hour reading of Refinitiv MMD. ICE Data Services had the three at 70%, the five at 74%, the 10 at 84% and the 30 at 99% at 4 p.m.

“Exaggerated inflation has proven to be a stubborn adversary and we find that the effects of the Fed’s aggressive tightening cycle have yet to produce consistent results with price stability,” said Jeff Lipton, CEO of credit research at Oppenheimer Inc.

While today’s persistent inflation “has been catalyzed by a number of unprecedented factors”, Lipton said he believes “patience must be applied throughout the tightening cycle as the rise rates is poised to break inflationary fever for the foreseeable future”.

Munis has so far been flat this week amid the FOMC meeting after “spending much of the past week easing independence with tax-exempt returns holding up despite more favorable technical considerations.” and rally the USTs, Lipton said.

Despite the muni’s underperformance in the last week of October, the munis outperformed the UST for the entire month.

“The Fed’s path to stopping runaway inflation by pursuing restrictive interest rate policy has created a sea of ​​red across fixed income, but munis are outperforming US and corporate stocks [year-to-date].”

20+ maturities “significantly underperformed the broader muni market last month as this part of the curve caught up with the selling of the UST at certain times of the month and saw active bid listings. with large withdrawals from municipal bond mutual funds,” according to Lipton.

Municipal bond mutual funds posted more losses on Wednesday, with the Investment Company Institute reporting another week of multibillion-dollar outflows, bringing year-to-date losses to $119.5 billion. .

Investors withdrew $3.843 billion from mutual funds in the week ending Oct. 26 after $3.876 billion in outflows the previous week, according to ICI. ETFs saw inflows of $1.007 billion after inflows of $334 million the previous week, according to data ICI.

High secondary selling pressure and continued exits, along with Fed policy, have helped keep issuers out of the primary market.

“The market volatility caused by the Fed’s aggressive tightening policy has kept a number of issuers out, especially since every FOMC meeting is considered big,” he said. “This dynamic certainly impacts pricing, placement and performance and creates a very uncertain market.”

Secondary trading
Charlotte, NC, 5s of 2023 at 3.11% -3.06%. California 5s of 2023 at 3.09%-3.08%. Washington 5s of 2024 at 3.19%-3.18% from the original 3.20%-3.19% on Friday.

Triborough Bridge and Tunnel Authority 5s of 2027 at 3.28% from 3.33% on Tuesday. DC 5s of 2028 at 3.27%-3.25%. Maryland 5s of 2028 at 3.22%-3.23% vs. 3.34%-3.31% on 10/21 and 2.98%-3.01% on 10/13.

California 5s of 2034 at 3.65% vs. 3.70% on Tuesday and 3.42%-3.40% on 10/14. Maryland 5s of 2035 at 3.64%-3.62% vs. 3.69% on Tuesday and 3.45%-3.44% on 10/13. NYC TFA 5s of 2036 at 4.10% vs. 4.22% on Tuesday.

NYC 5s of 2042 at 4.50% vs. 4.58% on Tuesday. Washington 5s of 2044 at 4.21% vs. 4.32%-4.28% on Tuesday and 4.32%-4.31% on 10/24. City and County of Denver 5s of 2044 at 4.13%.

THE DWP 5s of 2047 at 4.28%-4.26% vs. 4.47%-4.46% on 10/26. NYC TFA 5s of 2051 at 4.71%-4.70%. Virginia 5s of 2052 at 4.13% vs. 4.35% Monday and original 4.39% on 10/26.

AAA scales
Refinitiv MMD’s scale was bumped two basis points: the one-year to 3.09% (-2) and 3.14% (-2) in two years. The 5 years at 3.18% (-2), the 10 years at 3.32% (-2) and the 30 years at 4.04% (-2).

The ICE AAA yield curve was moved by two to five basis points: 3.10% (-4) in 2023 and 3.14% (-4) in 2024. The 5-year at 3.19% (-4 ), the 10-year at 3.40% (-4) and the 30-year yield was 4.14% (-5) at 4 p.m.

The IHS Markit municipal curve was bumped by two basis points: 3.08% (-2) in 2023 and 3.14% (-2) in 2024. The 5-year was at 3.19% (-2), the 10-year was at 3.31% (-2) and the 30-year yield was 4.03% (-2) at 4 p.m.

Bloomberg BVAL was shaken up by one to three basis points: 3.07% (-1) in 2023 and 3.13% (-2) in 2024. The 5-year at 3.18% (-2), the 10 years at 3.31% (-3) and 30 years at 4.05% (-1) at 4 p.m.

Treasuries were weaker.

The two-year UST yielded 4.595% (+5), the three-year at 4.537% (+4), the five-year at 4.281% (+1), the seven-year at 4.185% (+2), the 10-year yielded 4.078% (+4), the 20-year 4.404% (+4) and the 30-year Treasury bond yielded 4.121% (+3) at the close.

Has the FOMC signaled a slowdown?
“The FOMC has left the door open for less dramatic Fed action in future meetings,” said Brent Ciliano, chief investment officer at First Citizens Bank Wealth Management. “Members are poised to slow the pace of increases as higher rates fuel the financial system. That said, we still expect markets to remain volatile as investors grapple with slowing global growth, inflation and rising interest rates.

Given the historical nine to twelve months between the last hike and the first cut, said Jan Szilagyi, CEO of Toggle AI, “it is reasonable to expect the first cut to occur at the end of 2023 or at later in the first quarter of 2024″.

But some disagreed.

“At first glance, it looked like Christmas might have come early for Wall Street,” said Edward Moya, senior market analyst at OANDA. But “the Fed remains data dependent and that should suggest that while the next two inflation readings and nonfarm payrolls reports remain hot, they will remain aggressive in pushing policy further into restrictive territory.”

“No matter how hard you squint, there’s no way to see today’s announcement from the Fed as a pivotal one,” said John Leer, chief economist at Morning Consult. “Looking ahead, Chairman Powell and the committee need to see evidence of the core PCE slowing and inflation expectations receding before he eases off, and last week’s data has given them no reason to. swing.”

Powell said it’s more important to determine the level at which to stop rather than the pace of the rides. “We still have some way to go,” he said, declining to suggest a half-point hike at the December meeting would be the likely outcome. “It’s very premature to think about taking a break.”

While inflation must come down “decisively”, Powell said that alone was not the test for slowing rate hikes.

A soft landing is still possible, he said, but “the trajectory has narrowed” since inflation has not come down enough.

“While the policy statement was initially seen as dovish, the press conference is decidedly hawkish as the Fed pledges to continue bringing inflation back to its targets,” said Marvin Loh, global macro strategist at State Street. . “And while longer-term inflation expectations remain fairly well anchored, continued high realized inflation risks detaching consumer expectations from longer-term stability. From this perspective, the Fed will need to likely to continue until it sees a series of decisive improvements in inflation prints, which pushes back any major policy changes to the second quarter of 2023 at the earliest.”

Upcoming primary:
The City and County of Denver, Colo. (Aa3/AA-/AA-/), is expected to price Thursday for and on behalf of its Department of Aviation $850 million non-AMT fixed-rate airport, fixed-rate AMT fixed and AMT forward bond-revenue system. Barclay Capital.

The Public Finance Authority, Wisconsin, (Baa2/AA//) is expected to price Thursday at $210 million in Project Revenue Bonds (CFP3 – Eastern Michigan University Student Housing Project), including $209.250 million in exemptions , Series A-1 and $750,000 Tax, Series A-2, insured by Build America Mutual Assurance. Barclay Capital.

Bexar County, Texas, (Aaa/AAA/AAA/) is expected to sell $196 million in combined Tax and Tax Liability Certificates on Thursday, including $46 million in Series 2022A, Series 2023-2048 and $150 million series 2022B, series 2023-2048. HilltopSecurities.

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