Bonds

Munis can’t escape macro data-led weakness

Municipals saw losses Thursday following U.S. Treasuries to higher yields, while equities sold off after GDP growth slowed in the first quarter.

While growth slowed, inflation was hotter, said ING Chief International Economist James Knightley, as the core PCE deflator rose 3.7% on an annualized basis, three-tenths of a point higher than expected.

“Unsurprisingly Treasury yields have pushed higher as it makes a near-term Federal Reserve interest rate cut look even more unlikely,” he said.

Triple-A yields rose up to five basis points while UST yields climbed four to seven basis points to push the 10-year above 4.70% and the two-year just shy of 5%.

The two-year muni-to-Treasury ratio Thursday was at 64%, the three-year at 63%, the five-year at 60%, the 10-year at 60% the 30-year at 82%, according to Refinitiv Municipal Market Data’s 3 p.m. EST read. ICE Data Services had the two-year at 65%, the three-year at 64%, the five-year at 61%, the 10-year at 62% and the 30-year at 82% at 3:30 p.m.

Inflows returned to muni mutual funds as investors added $200.3 million for the week ending Wednesday after $1.474 billion of outflows, according to LSEG Lipper.

High-yield funds also saw inflows to the tune of $82.8 million after $48.1 million of outflows the week prior, LSEG Lipper reports.

The focus in the primary Thursday was on the $3.1 billion of low investment-grade and non-rated revenue refunding bonds for the Brightline Florida Passenger Rail Project, which saw strong demand as high-yield continues to outperform the broader investment grade market.

Many new-issue levels have seen adjustments, forcing “secondary bidsides to adjust upward after several steady sessions,” said Kim Olsan, senior vice president of municipal bond trading at FHN Financial.

Along with the “elevated” calendar coming at the end of April, daily bids wanteds may add “modest pressure” after muni curves spent over a week in a holding pattern, she noted.

Over the past 10 trading sessions, she said Bloomberg’s bid platform average volume increased 30% above 2024’s figure, or $1.3 billion.

“The other metric related to effective demand is a near-flat projected 30-day supply amount between upcoming reinvestments and scheduled issues, with the 30-day net number at just negative $3 billion (certain periods of the year can balloon to a net negative figure near $20 billion),” Olsan said. Bond Buyer 30-day visible supply sits at $9.68 billion.

Premiums being paid for “premium names” are being influenced by “striking a balance between where buyers care to engage and where sellers will let bonds go,” she said.

A negotiated pricing of Oregon GOs on Wednesday saw 5s of 2034 at a “spread 25 basis points wider than the state’s GO issue from last November — noteworthy for a state where the top income tax sits at 9.9%,” she said.

Similarly, the final scale for the nearly $3 billion Los Angeles Unified School District issue “with a maximum 10-year maturity netted a spread 18 basis points wider than its October pricing — a function of the $593 million maturity size and current market conditions,” according to Olsan.

A final yield in the 2034 maturity throwing off a 6% TEY benefited in-state buyers, she noted.

Continuing the “opportunity pattern” was the release of Florida’s Brightline Rail Project issue.

In the primary market Thursday, Morgan Stanley priced and repriced for the Florida Development Finance Corp. (/BBB-/BBB-/BBB) $2.219 billion of investment-grade tax-exempt AMT Brightline Trains Florida issue revenue refunding bonds for the Brightline Florida Passenger Rail Project, with term bonds bumped 10 basis points from the preliminary pricing: 5s of 7/2034 at 4.19% (unch), 5s of 2038 at 4.56% (unch), 5s of 2044 at 4.45% (-5) (AGM insured), 5.25s of 2047 at 4.50% (-10) (AGM insured), 5.25s of 2047 at 5.00% (-10) (non-insured), 5.25s of 2053 at 4.65% (-10) (AGM insured) and 5.5s of 2053 at 5.15% (-10) (non-insured), callable 7/1/2032.

Morgan Stanley also preliminarily priced for the corporation $925 million of non-rated tax-exempt AMT AAF Operations Holdings issue revenue refunding bonds for the Brightline Florida Passenger Rail Project 12s of 7/2032 with a mandatory tender of 7/15/2028 at 12.616%.

BofA Securities priced for Valparaiso, Indiana, $173.565 million of non-rated Pratt Paper Project exempt facilities refunding revenue bonds, with all bonds priced at par: 4.5s of 1/2034, 4.875s of 2044 and 5s of 2054, callable 1/1/2034.

BofA Securities priced for the Okaloosa Gas District, Florida, (Aa3///) $107.585 million of Assured Guaranty-insured gas system revenue bonds. The first tranche, $15.155 million of taxables, Series 2024A, saw all bonds price at par: 5.375s of 10/2025 and 5/15s of 2029.

The second tranche, $93.080 million of tax-exempt refunding bonds, Series 2024A, saw 5s of 10/2029 at 3.15%, 5s of 2034 at 3.20%, 5s of 2039 at 3.62% and 5.25s of 2044 at 3.96%, callable 4/1/2034.

At the start of May, issuance will remain “active” with several large deals across healthcare, utility, school district and state GO names, including benchmark-driven Delaware GOs, Olsan said.

AAA scales
Refinitiv MMD’s scale was cut four to five basis points: The one-year was at 3.45% (+5) and 3.22% (+5) in two years. The five-year was at 2.85% (+5), the 10-year at 2.81% (+5) and the 30-year at 3.96% (+4) at 3 p.m.

The ICE AAA yield curve was cut three to five basis points: 3.44% (+3) in 2025 and 3.23% (+4) in 2026. The five-year was at 2.87% (+5), the 10-year was at 2.85% (+5) and the 30-year was at 3.92% (+5) at 3:30 p.m.

The S&P Global Market Intelligence municipal curve was cut four basis points: The one-year was at 3.47% (+4) in 2025 and 3.24% (+4) in 2026. The five-year was at 2.85% (+4), the 10-year was at 2.85% (+4) and the 30-year yield was at 3.95% (+4), according to a 3 p.m. read.

Bloomberg BVAL was cut three to five basis points: 3.46% (+4) in 2025 and 3.25% (+4) in 2026. The five-year at 2.79% (+5), the 10-year at 2.78% (+5) and the 30-year at 3.96% (+3) at 3:30 p.m.

Treasuries were weaker.

The two-year UST was yielding 4.994% (+7), the three-year was at 4.852% (+7), the five-year at 4.713% (+6), the 10-year at 4.703% (+6), the 20-year at 4.935% (+4) and the 30-year at 4.816% (+4) near the close.

GDP
First-quarter gross domestic product surprised to the downside, again giving the Federal Reserve reason to hold rates at a range between 5.25% and 5.50%.

“Real GDP grew at only a 1.6% annualized pace in Q1, held back by trade and inventories,” noted Wells Fargo Securities Senior Economist Tim Quinlan and Economist Shannon Seery Grein. “Consumer spending in the service sector is not slowing, in fact, it is ramping up at a rate seldom seen in the past 20 years. That is problematic as core PCE prices are picking up again in defiance of higher rates.”

And while the headline number fell nearly a full percentage point short of expectations, they said, “we see little in today’s report that will warrant much legitimate justification for a softer monetary policy stance.”

The report offers “more of the same in terms of the factors that are standing in the way of a lower rate environment,” they said. “Consumers are still spending, they are just prioritizing activities in the service sector.”

The report offers some mixed signals, noted BMO Chief U.S. Economist Scott Anderson. “The sharp slowdown in real consumer spending growth in the first quarter should restore some faith that the Fed’s restrictive monetary policy is having a dampening impact on consumer demand since most of the weakness came from interest-rate sensitive spending. On the other hand, the broad price inflation resurgence we saw in this report will give the FOMC pause that their work to vanquish the inflation monster is nowhere near complete.

Gary Siegel contributed to this story.

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