CPI decelerates

Tax-exempt, housing bond issuance accelerates

CPI decelerates — Inflationary pressures moderated somewhat in May, according to the latest data releases from the Bureau of Labor Statistics. The Consumer Price Index (CPI) releases triggered a rally in U.S. Treasuries on Wednesday. The rally occurred after the headline CPI showed no month-over-month (MoM) increase in May (vs. April’s 0.3% MoM increase) and the core CPI (which excludes food and energy) went from a 0.3% increase in April to a 0.2% increase. On an annualized basis, headline and core CPI for May were 3.3% and 3.4%, respectively. This marked the third consecutive monthly decline in headline CPI.

At last week’s meeting, the Federal Open Market Committee (FOMC) unanimously agreed to leave interest rates unchanged. The FOMC also moved its projection for rate cuts in 2024 to just one (although a projection for two cuts was missed by just several votes). The market had been pricing in two cuts since mid-April, as seen by the December 2024 futures contract (chart below). With the Fed’s somewhat dovish turn, coupled with the recent deceleration in inflationary pressures, the market has begun to increase its rate-cut expectations.

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Some measures of inflation are still proving to be sticky, though. For example, owner’s equivalent rent (OER)— the amount of monthly rent that would equate to the monthly expense of owning a property—has decelerated from its Q2 2023 peak, but remains elevated. OER represents a monthly housing cost that nearly every American must endure—and accounts for roughly a quarter of core CPI. While decelerating, OER is still rising at a nearly 6% annual clip (see chart). OER is highly momentum driven, however, so we expect its downward trend to continue.

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Tax-exempt, housing bond issuance accelerates We provided an update on municipal bonds in Talking Points earlier this year that touched on the resurgence of the tax-exempt bond market. Municipal bond issuance continues to surge, with over $200 billion issued year-to-date (YTD)—up 38% from a year ago. After two years of lagging municipal bond volume, bond issuers and investors are wondering whether 2024 will top the record $457 billion issued in 2021.

Municipal bond funds continue to see money flowing in, with just over $4 billion coming into all funds, YTD. Certain sectors within the broad fund category have benefitted greatly. For example, high-yield municipal bond funds have seen inflows in 21 of the 23 weeks, YTD. Strong inflows have translated into tighter bond spreads over the last six to eight months, as portfolio managers scramble to invest new money and reinvest proceeds received on prior investments. Even when the largest weekly volume of new issues in over two years came to market the first week of June, spreads did not widen—due to both recent inflows of new money and investors’ desire to reinvest much of the $26 billion of principal and interest payments received on June 1. (Municipal bond prices tend to rally and yields fall during the summer months, as principal and interest payments flowing back to investors usually outweigh primary new-issuance volume.)

In the housing sector, two long-term bond structures not seen since the Global Financial Crisis (GFC) have reemerged, due to strong investor demand and borrowers’ desire for lower borrowing costs. Since the GFC, Fannie Mae enhanced M-TEBs (monthly tax-exempt bonds) have been the most prominent type of long-term, tax-exempt bonds issued to finance affordable housing projects. M-TEBs have traditionally been structured with monthly payment of principal and interest (P&I), yield maintenance prepayment protection that stretched to 80-90% of the final maturity of the bonds, and the ability of investors to exchange the tax-exempt bonds for the underlying Fannie Mae-enhanced mortgage backed security (MBS).

Earlier this year, M-TEBs priced with semi-annual P&I payments and a set principal, sinking-fund schedule to mirror a more traditional municipal bond structure. More recently, a Fannie Mae credit-enhanced bond was priced that—in addition to the semi-annual P&I payments—was structured with a 10-year par call (no-yield maintenance). In addition to the Fannie Mae credit-enhancement structure, a new issue priced last week with Freddie Mac credit enhancement (10-year par call) at similar spreads to the Fannie Mae deals. 

Long-term Ginnie Mae collateralized housing bonds have also made a comeback in 2024. Two new issues priced this year with final maturities of over 40 years, with the expectation of more to come. The two deals that priced had monthly P&I, a locked-in sinking-fund schedule, and a 10-year call. The first deal priced in February at a 5.25% coupon (+168 basis points to MMD), while the second deal priced in May at a 5.00% coupon (+123 basis points to MMD). (The municipal market data, or MMD, yield curve is the most widely referenced yield curve in the municipal bond market.)

The nearby charts show how both the coupon rate and spread to MMD for Fannie Mae and Ginnie Mae-enhanced affordable housing project bonds decreased substantially from November 2023 to last week.

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The municipal bond market has changed dramatically during the past year: Year-to-date 2024 volume exceeded most firms’ highest expectations. The big question now? Can a large volume of new deals continue to come to market. Ratios of tax-exempt rates to taxable rates are rich from the perspective of investors. However, approximately $228 billion of P&I payments will flow back to investors in the second half of 2024. And much of that will be reinvested into bonds, allowing the market to absorb a continued higher weekly calendar. The tax-exempt municipal bond market—here to stay for the time being—should thus be considered for funding upcoming projects. 

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Agency CMBS — MBS volumes surged at the end of last week, as U.S. Treasuries rallied. The yield on the 10-year note fell by about 28 basis points (bps) from Monday’s high to Friday’s low. Over $400 million new issue Fannie DUS MBS traded on Thursday. Spreads frequently widen when benchmark yields dramatically fall, but Fannie DUS and Ginnie MBS spreads tightened by up to 4 bps, week-over-week (WoW).

Municipals — AAA tax-exempt yields were again lower across the yield curve, WoW. Primary new issuance plummeted last week, which is typical during weeks when the FOMC meets. We expect volume to pick up significantly this week. Municipal bond funds saw inflows of $154 million last week; these were dominated by the high-yield fund component, which had $202 million of inflows (eighth straight week of inflows).

Economic Calendar for the Week Ahead

IndicatorReleasePeriodConsensusPrior
Retail Sales Advance MoM06/18/24May0.3%0.0%
Industrial Production MoM06/18/24May0.3%0.0%
Initial Jobless Claims06/20/2415-Jun235k242k
Continuing Claims06/20/248-Jun1802k1820k
S&P Global US Manufacturing PMI06/21/24Jun P51.051.3
S&P Global US Services PMI06/21/24Jun P53.454.8
Existing Home Sales MoM06/21/24May-1.2%-1.9%
Source: Bloomberg. “MoM” = month-over-month; “P” = preliminary release

Summary of Global Fixed-Income Markets

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The information contained herein, including any expression of opinion, has been obtained from, or is based upon, resources believed to be reliable, but is not guaranteed as to accuracy or completeness. This is not intended to be an offer to buy or sell or a solicitation of an offer to buy or sell securities, if any referred to herein. Lument Securities, LLC may from time to time have a position in one or more of any securities mentioned herein. Lument Securities, LLC or one of its affiliates may from time to time perform investment banking or other business for any company mentioned.