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Munichain Market Perspective #1

By Matthew Gerstenfeld
Market Perspective

New issue supply is set to climb higher this week following a temporary period of suppressed issuance driven by mounting investor concerns surrounding inflation and economic activity. As markets adjust to a rising rate environment, participants are planning for further action on behalf of the Fed, with the majority of forecasts calling for a 50 basis point hike during the May meeting.

Sharper government-led rate increases highlight a major shift in tone on behalf of the policy makers who originally deemed inflation to be transitory. Individuals across the nation continue to battle soaring prices for goods and services after last month’s consumer price index peaked at +8.5%, climbing to decade-high levels. Greater strain across the nation has hindered the return to pre-pandemic economic figures, presenting challenges in the years to come as state and local governments modify budgets to account for higher expenditures.

Accelerated inflation across the country has translated to ascending yields, with long-dated new issue offering yields surpassing 3%, presenting greater returns relative to US treasuries for tax-exempt focused investors. Short range and intermediate benchmark levels have also witnessed a steep uptick in recent months as the market accounts for additional hikes throughout the remainder of the year. With higher rates present in the front end of the curve, institutional and retail accounts have expressed greater appetite, resulting in oversubscriptions across select offerings under five years.

Higher yields associated with new issue offerings will present an opportunity for return-focused investors seeking to deploy capital across investment grade credits with limited default risk. On the contrary, dealers have showcased apprehension to take down new issue bonds for stock inventory given the persistent climb in yields and significant weakness registered during the first quarter. Losses associated with new issue paper over the course of Q1 have played a major factor in muni mutual fund outflows which have yet to witness a substantial inflow to mark a technical reversal.

Looking ahead, participants will be closely monitoring windows of opportunity as muni/UST ratios fluctuate and the 30YR tenor falls 100%+ of treasuries, settling above the confined ratio band noted in the belly of the curve. With additional rate increases projected, volume activity will remain a key focus as issuers across the country seek to reduce borrowing costs and adequately cover financial obligations. Acceptance of steadily increasing borrowing costs may serve as a motivating force for issuers to step up and price deals, driving a volume increase across the remaining quarters of the year.

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