Always lagging taxables, muni yields rise as do ratios

Municipal bond yields rose by as much as seven basis points in the belly of the curve Thursday, playing catch-up to the U.S. Treasury market, while Refinitiv Lipper reported another large round of inflows, a nod from investors that they remain engaged in the market, regardless of low rates.

Refinitiv Lipper reported $1.85 billion of inflows into municipal bond mutual funds, of which, $649.772 million was high-yield, down from $2.5 billion and $817 million, respectively, the week prior.

The move in municipals Thursday and the subsequent reversal of UST rates from Wednesday’s highs moved municipal-to-UST ratios higher, with the 10-year rising to 64% in 10 years while the 30-year was at 69%, according to Refinitiv MMD. ICE Data Services had the 10-year muni-to-Treasury ratio at 63% and the 30-year ratio stood at 70%. Ratios in 10-years were 57% Wednesday.

“While I would not call this a selloff, I could say it was a slight correction after munis sat out the remainder of yesterday while UST were clearly pointing to concerns about the Fed,” a New York trader said. “Given UST settling back today, the primary done for the week and those Lipper flows, we’re in for a quiet end to the week.”

It’s hard to argue against the fundamentals — 15 consecutive weeks of billion-plus inflows, high-yield having a record year, state and local governments on the strong road to recovery and a reinvestment season in full swing. Supply, while above late-spring totals, still only reaches $12.6 billion for the next 30 days. That imbalance skews toward lower rates for the balance of the summer.

Secondary trading showed weaker prints across the curve, but especially around the belly. Some trades of note:

Arlington County, Virginia, 5s of 2031 traded at 1.00% versus 0.93%-0.92% Wednesday. New York Dorm PIT 5s of 2031 at 1.19%. NYC water 5s of 2031 at 1.04%.

Connecticut 5s of 2032 at 1.18% versus 1.09% Wednesday. Connecticut 5s of 2033 at 1.21% versus 1.12% Wednesday. Arlington 5s of 2033 at 1.08% versus 0.99%-1.00% Wednesday and 0.98% original.

In the primary, several new issues of size were priced.

Barclays Capital Inc. priced the Port of Seattle’s $810.8 million of refunding bonds on Thursday with first lien revenue refunding bonds Series 2021 $43.7 million (Aa2/AA-/AA/) AMT 5s of 2022 yielding 0.21% and 5s of 2026 at 0.72%, noncall. The second series, $47 million of intermediate lien revenue and refunding bonds (A1/A+/AA-/) with 5s of 2021 at 0.15%, 5s of 2026 at 0.63%, 5s of 2030 at 1.17%, noncall. The third, $149.7 million of non-AMT, 5s of 2022 at 0.18%, 5s of 2026 at 0.60%, 5s of 2031 at 1.22%, 4s of 2036 at 1.45% and 4s of 2040 at 1.74%, callable in 6/1/2031. The last series, $528.8 million of AMT, saw 5s of 2022 at 0.26%, 5s of 2026 at 0.78%, 5s of 2031 at 0.78%, 4s of 2036 at 1.81%, 4s of 2041 at 2.01% and 5s of 2046 at 2.01%, callable in 8/1/2031. The issuer also priced $41.6 million of taxables.

BofA Securities priced $114.1 million of tax-exempt power supply system revenue refunding bonds for the Oklahoma Municipal Power Authority (/A/A/) with 5s of 2022 at 0.20%, 5s of 2026 at 0.63%, 5s of 2031 at 1.16%, 4s of 2036 at 1.63%, 3s of 2041 at 2.00% and 4s of 2047 at 1.90%, callable in 1/1/2031.

BofA Securities priced $139.2 million of AMT airport revenue refunding bonds for Lee County, Florida, (A2//A/A+) with 5s of 2023 at 0.30%, 5s of 2026 at 0.79%, 5s of 2031 at 1.42%, 5s of 2032 at 1.54%.

J.P. Morgan Securities repriced with three to four basis point bumps $125 million of Children’s Hospital of Philadelphia Project hospital revenue refunding bonds for the Philadelphia Authority for Industrial Development (Aa2/AA//). Bonds in 2025 with a 5% coupon yield 0.40% (-4), 5s of 2031 at 1.14% (-4) and 5s of 2032 at 1.22% (-3).

New Mexico sold $307.665 million of Series 2021A severance tax bonds to BofA Securities. Bonds in 2022 with a 5% coupon yield 0.18%, 5s of 2026 at 0.61% and 5s of 2031 at 1.15%.

The University of Illinois sold $137.48 million of taxable facility systems revenue bonds to Mesirow, with bonds in 2022 with a 3% coupon yielding 0.18%, 5s of 2026 at 0.60%, 5s of 2031 at 1.18%, 3s of 2036 at 1.75%, 2.125s of 2041 at 2.25%, 2.375s of 2047 at 2.45% and 2.375s of 2051 at 2.47%, with bonds in 2033-2051 insured by Build America Mutual.

Secondary trading and scales
Washington Suburban Sanitation District 5s of 2022 traded at 0.12%-0.10%. NYC TFA 5s of 2022 traded at 0.10%. Mecklenburg County, North Carolina, 5s of 2023 at 0.14%. Fairfax County, Virginia, 5s of 2023 at 0.14%. Maryland 5s of 2024 traded at 0.22%-0.19%. These and other trades moved short benchmark yields up from recent lows of 0.04%-0.05% on one-year debt.

Ohio 5s of 2028 traded at 0.68%-0.66%. NYC TFA 5s of 2027 at 0.92%-0.91%. Delaware 5s of 2028 at 0.69%.

Some weakness out longer was also evident. Massachusetts clean water 5s of 2035 at 1.17%-1.16% versus 1.08% Friday. Hawaii 5s of 2039 at 1.38%-1.37% and 5s of 2040 at 1.42%-1.41%. Los Angeles Department of Water and Power 5s of 2041 traded at 1.35%-1.37% versus 1.34%-1.33% Tuesday.
Arlington County 5s of 2041 at 1.36%-1.34% versus 1.26% Friday.

High-grade municipals were weaker on all triple-A benchmarks on Thursday. According to Refinitiv MMD’s AAA, short yields rose five basis points to 0.11% and 0.13% in 2021 and 2022. The yield on the 10-year rose seven basis points to 0.96% while the yield on the 30-year rose four basis points to 1.46%.

The ICE AAA municipal yield curve showed short maturities rise three basis points in 2022 to 0.08% and 0.12% in 2023. The 10-year maturity rose five basis points to 0.96% and the 30-year yield was three basis points higher at 1.47%.

The IHS Markit municipal analytics AAA curve showed short yields three higher at 0.10% and 0.13% in 2021 and 2022, respectively, with the 10-year rising six to 0.94% and the 30-year yield up four to 1.46%.

Bloomberg BVAL AAA curve showed short yields rose three basis points to 0.09% and 0.14% in 2021 and 2022, with the 10-year was six basis points higher at 0.94% and the 30-year yield rose by four to 1.46%.

In late trading, the 10-year Treasury was yielding 1.51% and the 30-year Treasury was yielding 2.11%. Equities were mixed near the close, with the Dow Jones losing 209 points, the S&P 500 down 0.042% while the Nasdaq gained 0.87%.

Economic Data
Jobless claims rose unexpectedly as an uneven economic recovery continues, which will allow the Federal Reserve “flexibility,” according to one analyst.

“The first increase in seven weeks should not detract from the overall trend of improvement with claims and the job market,” said Mark Hamrick, senior economic analyst at Bankrate. “It could be that improvement in payrolls is more restrained in the coming months, even while the central bank maintains the view that the recent surge in inflation should mostly be temporary.”

Initial jobless claims climbed to 412,000 on a seasonally adjusted annual basis in the week ended June 12 from a revised 375,000 in the prior week, originally reported at 376,000. It marked the first increase since the week ended April 24 when the number rose to 590,000 from 566,000.

IFR Markets had anticipated a drop to 359,000 claims in the week.

Continuing claims gained to 3.518 million in the week ended June 5, up from a revised 3.517 million in the prior week, initially reported at 3.499 million. IFR expected 3.458 million continuing claims.

“As Chairman Powell said several times, there needs to be some humility, which translates to flexibility and caution, in their forecasts in that things can and will probably change,” Hamrick said. “The Federal Reserve remains fairly confident that the recovery will remain intact in the coming months, as it stuck to its forecast, collectively speaking in terms of FOMC members, for an unemployment rate of 4.5% by the end of the year.”

The future remains “uncertain with many questions yet to be answered,” he said. “What the claims information doesn’t tell us is how much faster the job market will heal or where so-called full employment will ultimately be.”

Also unanswered is whether businesses will able to find the right workers, and how many will eventually be hired. “We don’t know how many individuals will opt to return to the workforce or their old jobs, or will be willing to accept the wages they’re offered,” Hamrick added.

“In aggregate, today’s data is consistent with our view of an economy that is recovering at a significant pace,” according to Scott Ruesterholz, portfolio manager at Insight Investment. “While there will be bumps along the way and data can be noisy, the trend remains that of an economy growing well above potential, thanks to strong consumer demand and recovering business orders. There clearly is currently significant pricing pressure, though much of this may prove transitory as supply fully comes back online.”

Separately, the Leading Economic Index grew 1.3% to 114.5 in May after a 1.3% gain a month earlier, while the coincident index ticked up 0.4% to 105.1 after a 0.3% rise a month earlier, and the lagging index fell 2.2% to 103.0 after a 3.0% jump a month earlier, the Conference Board reported Thursday.

Economists polled by IFR Markets estimated the leading index would increase 1.3%.

LEI topped its January 2020 high (112.0), said Ataman Ozyildirim, senior director of economic research at The Conference Board, “suggesting that strong economic growth will continue in the near term.”

The thinktank says second quarter real gross domestic product growth “could reach 9% annualized.”

“Over the past three months as vaccinations became widespread and the economy reopened, there has been a marked increase in the pace of expansion as measured by leading indicators,” noted Ruesterholz. “We anticipate this feeding over into official data with GDP likely to accelerate from 6.4% in Q1 toward 10% in Q2.”

Also released Thursday, the Federal Reserve Bank of Philadelphia’s manufacturing report on business showed activity continued to “grow” in June, while “price increases remain widespread.”

The general activity index dipped to 30.7 in June from 31.5 in May.

Economists predicted a 31.0 read.

The prices paid index climbed to 80.7 — its highest level since June 1979 — from 76.8 and the prices received gained to 49.7 — its highest level since October 1980 — from 41.0.

Respondents don’t foresee prices dropping in the next six months, as the expectations for prices paid rose to 71.1 from 66.7, while for prices received the index jumped to 67.8 from 58.4.

“There does remain substantial pricing pressure, though the recent moderations in key commodities markets like steel rebar and lumber may help to alleviate some of these pressures,” said Ruesterholz. “The backdrop for the manufacturing sector is very robust given strong consumer incomes and balance sheets. As a consequence, output is being constrained not by a lack of demand but by supply challenges, which should elongate the recovery well into 2022.”