Munis ignore UST weakness after GDP report, focus on primary

Municipals were steady to slightly firmer in spots as the market absorbed the last day of sizable supply ahead of the presidential election, which included two billion-dollar-plus pricings. U.S. Treasury yields rose 10-years and in and equities ended down as the markets digested the latest economic growth data and expectations for the Fed's next moves.

Wednesday morning's gross domestic product data showed growth at 2.8% in the third quarter, which economists said will allow the Federal Open Market Committee to continue to lower rates when it meets next week.

"The primary takeaways are solid GDP growth fueled by strong consumption and strong capital equipment spending, all accompanied by inflation sliding back toward 2%," said Chris Low, chief economist at FHN Financial. Domestic demand, tracked by the Fed, "has accelerated to almost twice the growth pace the Fed finds acceptable, but even that is nothing to lose sleep over with inflation lower in the third quarter."

Still, he noted, "inflation may be a little less Fed friendly in later quarters, which is likely why short-term rates are higher." Two-year UST yields rose seven basis points in response to the release, but closed at 4.17%, five basis points higher.

"For now, however, the mix of strong growth and low inflation should be just fine from the Fed's perspective, allowing them to cut rates next week as long as employment is not unexpectedly strong on Friday," Low added.

Municipals largely stayed in their own lane Wednesday, digesting the large slate of new issues as supply dwindles heading into election week, with Bond Buyer 30-day visible supply falling to $5.56 billion.

Triple-A yields were mostly steady while USTs saw losses of two to six basis points on the short end of the curve but saw small gains out long.

The two-year municipal to UST ratio Wednesday was at 65%, the three-year at 64%, the five-year at 65%, the 10-year at 71% and the 30-year at 86%, according to Refinitiv Municipal Market Data's 3 p.m. EST read. ICE Data Services had the two-year at 66%, the three-year at 64%, the five-year at 65%, the 10-year at 71% and the 30-year at 84% at 3:30 p.m.

The muni market has benefited from "robust" investor demand as the tax-exemption has become "increasingly attractive" and elevated yields offer a "historically attractive opportunity for investors to lock in high income for a longer period," said Jon Mondillo, global head of Fixed Income at abrdn.

And "demand has been more than enough to absorb the new supply, with investors adding municipal bonds to their portfolios at a steady clip," said Mark Paris, chief investor officer and head of municipals at Invesco (IVZ).

The Investment Company Institute reported $959 million of inflows into municipal bond mutual funds for the week ending Oct. 23 after $1.524 billion of inflows the week prior.

This marks 12 consecutive weeks of inflows.

Exchange-traded funds saw $276 million of inflows after $1.205 billion of inflows the previous week.

While muni mutual funds saw outflows in 2022 and 2023, fund flows have been positive overall this year, Paris said.

"While supply is elevated, market technicals remain favorable due to robust investor demand," he said.

Munis saw four consecutive months of positive returns before the asset class reverted to losses in October. Munis are returning negative 1.59% in October, pushing year-to-date returns down to 0.67%.

Part of the decline is due to shifting market expectations around how much the Fed will cut interest rates next week, Paris said.

"Market participants, some of whom had forecast a 50 basis point Fed rate cut in November, dialed back their expectations to 25 bps," Paris said.

He views this "retreat" in muni prices as temporary and expects munis to see positive returns to conclude this year, noting the asset class saw negative returns in October 2023 before finishing the year in positive territory.

The surging issuance this year, as issuers moved to get ahead of the election, has given investors a "broader range of investment options," Mondillo said.

Wednesday was no exception as an array of credits hit the screens.

BofA Securities priced and repriced for Washington (Aaa/AA+/AA+/) $1.55 billion of GOs with yields bumped two to six basis points from the preliminary pricing. The first tranche, $891.16 million of various purpose GO refunding bonds, Series R-25B, saw 5s of 7/2025 at 3.17% (-3), 5s of 2029 at 2.93% (-2), 5s of 2034 at 3.24% (-5) and 5s of 2039 at 3.46% (-6), callable 1/1/2035.

The second tranche, $658.87 million of motor vehicle fuel tax and vehicle-related fees GO refunding bonds, Series R-25C, saw 5s of 7/2025 at 3.17% (-3), 5s of 2029 at 2.93% (-2), 5s of 2034 at 3.24% (-5) and 5s of 2039 at 3.46% (-6), callable 1/1/2035.

J.P. Morgan priced for the Pennsylvania Higher Educational Facilities Authority (A3/A/A/) $1.034 billion of Thomas Jefferson University fixed-rate revenue bonds. The first tranche, $613.35 million of tax-exempt Series 2024B-1 bonds, saw 5.25s of 11/2037 at 3.85% (uninsured), 5.25s of 2039 at 3.90% (uninsured), 5.25s of 2044 at 4.21% (uninsured), 5s of 2051 at 4.43% (Assured Guaranty (AGO)-insured) and 4.25s of 2051 at 4.55% (Assured Guaranty (AGO)-insured), callable 11/1/2034.

The second tranche, $251.51 million of tax-exempt Series 2024B-2 bonds, saw 5s of 11/2054 at 4.58%, 5.5s of 2054 at 4.42% and 4.375s of 2054 at 4.66%, callable 11/1/2034.

The third tranche, $168.725 million of taxable Series 2024C bonds, were priced at par with bonds maturing in 11/2025 at 4.961%, 4.973% in 2029, 5.282% in 2034 and 5.362% in 2037, subject to a make whole call, Assured Guaranty (AGO) insured).

BofA Securities priced for New Orleans Aviation Board (A2//A/) $606.44 million of general airport revenue bonds. The first tranche, $48.445 million of non-AMT refunding bonds, Series 2024A, saw 5s of 1/2026 at 3.16%, 5s of 2029 at 3.05%, 5s of 2034 at 3.44%, 5s of 2039 at 3.71%, 5s of 2044 at 4.08% and 5s of 2045 at 4.14%, callable 1/1/2034.

The second tranche, $464.095 million of AMT refunding bonds, Series 2024B, saw 5s of 1/2026 at 3.69%, 5s of 2029 at 3.67%, 5s of 2034 at 4.06%, 5s of 2039 at 4.28%, 5.25s of 2044 at 4.43% and 5.25s of 2045 at 4.44%, callable 1/1/2034.

The third tranche, $20.065 million of non-AMT bonds, Series 2024C-1, saw 5s of 1/2054 at 4.36%, callable 8/1/2034.

The fourth tranche, $68.825 million of AMT bonds, Series 2024C-2, saw 5s of 1/2029 at 3.67%, 5s of 2034 at 4.06%, 5s of 2039 at 4.28%, 5.25s of 2044 at 4.43%, 5.25s of 2049 at 4.50% and 5.25s of 2051 at 4.55%, callable 1/1/2034.

The fifth tranche, $5.12 million of taxables, Series 2024C-3, saw all bonds price at par: 4.7s of 1/2026 and 4.84s of 2029, noncall.

Siebert Williams Shank priced and repriced for Philadelphia (A1/A+/A+/) $594.975 million of water and wastewater revenue bonds, Series 2024C, with yields bumped up to nine basis points out long: 5s of 9/2025 at 3.07% (-1), 5s of 2029 at 2.91% (-3), 5s of 2034 at 3.35% (-5), 5s of 2039 at 3.68% (unch), 5s of 2044 at 3.98% (-4), 5.25s of 2049 at 4.12% (-9) and 5.25s of 2054 at 4.21% (-9), callable 9/1/2034.

PNC Capital Markets (PNC) priced for the Build NYC Corp. (/A-//) $150 million of Success Academy Charter Schools Project tax-exempt revenue bonds, with 5s of 9/2030 at 3.17%, 5s of 2034 at 3.54%, 5s of 2039 at 3.77% and 4s of 2044 at 4.23%, callable 9/1/2031.

Ramirez priced for the Atlanta Urban Redevelopment Agency (Aa1//AAA/) $105.45 million of surface transportation and infrastructure projects revenue bonds, Series 2024B, with 5s of 7/2025 at 3.18%, 5s of 2029 at 2.85%, 5s of 2034 at 3.18%, 5s of 2039 at 3.49% and 5s of 2044 at 3.88%, callable 1/1/2035.

AAA scales
Refinitiv MMD's scale was unchanged: The one-year was at 2.85% and 2.69% in two years. The five-year was at 2.68%, the 10-year at 3.01% and the 30-year at 3.87% at 3 p.m.

The ICE AAA yield curve was bumped up to two basis points: 2.96% (unch) in 2025 and 2.71% (-2) in 2026. The five-year was at 2.69% (-2), the 10-year was at 3.01% (-1) and the 30-year was at 3.79% (-2) at 3:30 p.m.

The S&P Global Market Intelligence municipal curve was unchanged: The one-year was at 2.90% in 2025 and 2.73% in 2026. The five-year was at 2.71%, the 10-year was at 3.01% and the 30-year yield was at 3.81% at 3 p.m.

Bloomberg BVAL was bumped up to one basis point: 2.86% (unch) in 2025 and 2.67% (unch) in 2026. The five-year at 2.71% (unch), the 10-year at 3.03% (unch) and the 30-year at 3.82% (-1) at 3:30 p.m.

Treasuries were mixed.

The two-year UST was yielding 4.131% (+5), the three-year was at 4.131 (+6), the five-year at 4.142% (+4), the 10-year at 4.28% (+1), the 20-year at 4.609% (-1) and the 30-year at 4.492% (-3) at the close.

GDP growth 'a modest positive surprise'

GDP growth has been "well above potential" for two quarters, noted Scott Anderson, chief U.S. economist and managing director at BMO Economics.

"Volatile quarterly trade flows and inventory changes will largely be ignored by the Federal Reserve," he added. With ADP reporting 233,000 private-sector jobs were added in October, "the strength of this GDP report places additional upside risk on our consumer spending and GDP growth forecast for the fourth quarter. The Fed will need to continue to emphasize a more gradual pace of rate cuts from here, if it doesn't want to ignite a growth and inflation scare down the road, especially if fiscal policy is set to loosen in 2025."

Calling the economic growth "a modest positive surprise," Matt Peron, global head of solutions at Janus Henderson Investors, noted, "On its own, this was a market friendly report, confirming the notion that economic growth is not slowing rapidly and price pressures remained contained."

The strong ADP report supported the notion, he said. "We believe the strength is continuing into the fourth quarter and have been maintaining our positive views on markets and risk assets," Peron said.

But he warned investors "to maintain a late cycle posture as the cycle advances, staying up in quality to prepare for eventual volatility."

Consumers offer no hints of slowing down, said Olu Sonola, head of U.S. Economic Research at Fitch Ratings. "With an economy this strong, it is difficult to imagine that labor market conditions will deteriorate sharply over the near term."

This GDP "report will be an important backdrop for the Fed's policy choices in November and December," Sonola said. The Fed likely will keep cutting rates, he added, as the economy remains strong and inflation moderates.

Gary Siegel contributed to this story.