Mutual fund inflows climb, high-yield back in the black

Municipals were stronger as the New York Urban Development Corp. led the primary with $1.76 billion of taxable and exempt sales tax bonds in the competitive market while Refinitiv Lipper reported a rebound in fund inflows.

Triple-A benchmarks were bumped a basis point in spots along the yield curve, but the asset class has underperformed the moves to lower yields in U.S. Treasuries. The 10-year UST landed at 1.515% and has fallen 10 basis points since Friday and the 30-year hit 2.016%, 15 lower than Friday. Municipals have mostly held steady as bid-wanteds have risen, but so have yields and ratios, making for a more satisfactory range for investors getting into the market at these new higher levels.

Ratios rose again as a result of the day’s moves, with the 10-year municipal-to-UST ratio at 77% and the 30-year at 83%, according to Refinitiv MMD. ICE Data Services had the 10-year at 76% and the 30 at 85%.

For 32 weeks in a row, investors put cash into municipal bond funds as their confidence seemed to be renewed, data released Thursday showed. Refinitiv Lipper said inflows into municipal bond funds totaled $461 million in the latest reporting period while high-yield funds turned positive, experiencing $45 million of inflows after two weeks of outflows.

In the primary market, the New York State Urban Development Corp. sold $396.72 million of taxable state sales tax revenue bonds to J.P. Morgan Securities LLC. Details were not available.

The New York State Urban Development Corp. sold $252.01 million of taxable state sales tax revenue bonds to Citigroup Global Markets Inc. Bonds in 3/2032 at 2.29% par, and 2.64% in 2036 at par, callable Sept. 15, 2031.

The New York State Urban Development Corp. also sold $435.015 million of exempt state sales tax revenue bonds to BofA Securities. Bonds in 3/2023 with a 5% coupon yield 0.19%, 5s of 2026 at 0.54%, 5s of 2031 at 1.33% and 5s of 2036 at 1.62%, callable Sept. 15, 2031.

The New York State Urban Development Corp. sold $447.44 million of state sales tax revenue bonds to BofA Securities. Bonds in 3/2037 with a 4% coupon yield 1.92%, 3s of 2041 at 2.29% and 3s of 2042 at 2.32%, callable Sept. 15, 2031.

The New York State Urban Development Corp. sold $451.465 million of state sales tax revenue bonds to BofA Securities. Bonds in 3/2043 with a 4% coupon yield 2.08%, 4s of 2046 at 2.18% and 4s of 2047 at 2.19%, callable Sept. 15, 2031.

The New York State Urban Development Corp. sold $429.53 million of state sales tax revenue bonds to J.P. Morgan Securities LLC with 4s of 3/2048 at 2.20% and 2.626s of 2051 at 2.75%.

Refinitiv Lipper reports $461M inflow
In the week ended Oct. 13, weekly reporting tax-exempt mutual funds saw $461.285 million of inflows, Refinitiv Lipper said Thursday. It followed an inflow of $36.870 million in the previous week.

Exchange-traded muni funds reported inflows of $132.692 million, after inflows of $143.779 million in the previous week. Ex-ETFs, muni funds saw inflows of $328.592 million after outflows of $106.909 million in the prior week.

The four-week moving average remained positive at $614.112 million, after being in the green at $812.742 million in the previous week.

Long-term muni bond funds had inflows of $284.286 million in the latest week after outflows of $343.991 million in the previous week. Intermediate-term funds had inflows of $72.269 million after inflows of $223.059 million in the prior week.

National funds had inflows of $490.357 million after inflows of $125.426 million while high-yield muni funds reported inflows of $44.780 million in the latest week, after outflows of $459.622 million the previous week.

Secondary trading
Hawaii 5s of 2022 at 0.10%. Charleston County, South Carolina, 5s of 2022 at 0.11%. Georgia 5s of 2022 at 0.13%. Prince George’s County, Maryland, 5s of 2022 at 0.14%. Minnesota 5s of 2022 at 0.12%.

California 5s of 2023 at 0.19% versus 0.20% Wednesday. Montgomery County, Maryland, 5s of 2023 at 0.21%.

California 5s of 2024 at 0.28%. Wisconsin 5s of 2025 at 0.46%. Arlington County, Virginia, 5s of 2025 at 0.42%. Maryland 5s of 2026 at 0.55%. Minnesota 5s of 2026 at 0.55%.

Massachusetts 5s of 2028 at 0.93%. Utah 5s of 2028 at 0.85%. Maryland 5s of 2029 at 1.02%. Florida PECO 5s of 2030 a 1.15%.

Montgomery County, Maryland, 4s of 2031 at 1.27%. Maryland 5s of 2032 at 1.26%-1.25% versus 1.25% Wednesday. Washington Suburban Sanitation District 5s of 2032 at 1.24%.

Washington 5s of 2040 at 1.65%-1.62%. Texas water 4s of 2044 at 1.86%-1.80%.

AAA scales
According to Refinitiv MMD, short yields were bumped one to 0.12% in 2022 and steady at 0.18% in 2023. The yield on the 10-year fell one to 1.17% and the yield on the 30-year fell one to 1.68%.

The ICE municipal yield curve showed bonds fall one basis point in 2022 to 0.12% and down two in 2023 to 0.17%. The 10-year maturity fell one to 1.13% and the 30-year yield fell one to 1.71%.

The IHS Markit municipal analytics curve showed short yields down one to 0.12% in 2022 and steady at 0.18% in 2023. The 10-year yield sat at 1.15% and the 30-year yield was down one at 1.68%.

The Bloomberg BVAL curve showed short yields steady at 0.16% in 2022 and up one to 0.17% in 2023. The 10-year yield fell one to 1.15% and the 30-year fell one to 1.70%.

In late trading, Treasuries were better as equities rallied all day.

The 10-year Treasury was yielding 1.514% and the 30-year Treasury was yielding 2.018%. The Dow Jones Industrial Average gained 534 points, or 1.55%, the S&P rose 1.72% while the Nasdaq gained 1.74%.

With taper expected, liftoff eyed
Economic data this week should allow the Federal Reserve to announce a taper at its upcoming meeting, a process that will begin before year end and be complete by the middle of 2022, so the market’s next concern is liftoff from near zero rates.

Ultimately, we believe the Fed does not want to lock itself into a preset course of rate hiking and prefers to retain optionality instead,” said Scott Ruesterholz, portfolio manager at Insight Investment. The timing and pace of rate hikes is dependent upon the future out-turns in inflation and employment. The Fed will likely want to see employment return to pre-COVID levels before raising rates — a much higher threshold than beginning taper.”

And, while liftoff could occur late next year, “if inflation runs higher for longer,” he said, “we anticipate lift-off in early 2023 as we expect inflation to moderate next year as supply chain disruptions gradually mend.”

Also, in January the voters on the Federal Open Market Committee rotate, and with the resignation of two Fed presidents and the leadership of the Fed facing the end of their terms, the panel deciding liftoff may be quite different from the current panel, Ruesterholz said.

“These individuals are likely to err on the side of being more dovish than hawkish,” he said, “which further underlines our expectation for lift off in 2023.”

While the Fed has tried to separate the talk of taper from rate hikes, “rate hikes could also be closer than many expect,” according to Interactive Brokers Chief Strategist Steve Sosnick.

However, he said, the Fed has been “cagey” about what it considers full employment, so the conditions for liftoff can be met “sometime between now and 2024.”

And while the minutes certainly suggest the Fed will hold to its expected timeline, Stifel Chief Economist Lindsey Piegza said, “a continued unevenness in the data could slow the pace of taper or extend the timeline for ending purchases.”

The Fed, by saying inflation would be transitory, has fallen behind, according to Jason Brady, president and CEO at Thornburg Investment Management. “The danger for investors is that the Fed will have to catch up and raise rates more quickly,” he said, and this will promote volatility.

Thursday’s data was positive — producer prices rose less than forecast and initial jobless claims fell below 300,000 in the week ended Oct. 9, the first time under that level since the pandemic’s economic fallout began.

PPI rose 0.5% in September, while the core grew 0.2%, compared to expectations of 0.6% and 0.5% gains, respectively.

Claims fell to 293,000 from 329,000 a week earlier, while continuing claims fell to 2.593 million in the week ended Oct. 2 from 2.727 million the week before.

“Despite the moderation in core PPI, price pressures are elevated and are likely to remain so as supply chain disruptions will take a substantial time to unwind,” said Berenberg chief economist for the U.S., Americas and Asia Mickey Levy.

While the service sector, hard hit by the Delta variant, “experienced more moderate price increases,” the overall picture suggests “a still brimming inflationary pipeline which will exert further upwards pressure on consumer prices,” he said.

The bad news, Levy said, is companies, which have passed higher costs onto consumers, “will maintain the flexibility to do so if product demand remains strong.”

As for jobless claims, Edward Moya, senior market analyst for the Americas at OANDA, said, “falling below the 300,000 level is a big deal as it suggests we could see it back to the low 200,000 levels we saw pre-pandemic.”

Chip Barnett contributed to this report.