Munis see some strength but underperform UST

Municipals were steady to firmer in spots Monday but underperformed U.S. Treasuries that saw yields fall further while equities ended in the black led by tech stocks.

Triple-A yield curves saw one to two basis point bumps while UST ended the session four to nine better after falling double-digits earlier in the day.

Muni-UST ratios rose and were at 84% in five years, 95% in 10 years and 105% in 30, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the five at 84%, the 10 at 96% and the 30 at 106% at a 4 p.m. read.

Yields and volatility continue to surge, which Vikram Rai, head of Citigroup Global Markets’ municipal strategy group, said points to uncertainty, with the Federal Reserve as the largest unknown.

“Either the market is convinced the Fed is behind the curve with respect to fighting inflation, or it is simply responding to the sustained stream of hawkish statements that keep coming from the Fed,” he said in a Monday call.

The Fed is expected to raise short-term rates by 50 basis points at the May meeting to continue battling inflation, but many investors believe this is not aggressive enough, according to a Monday market comment from Nuveen.

“The municipal market selloff is essentially due to rising rates, as tax-exempt credit remains strong,” Nuveen said, adding that institutional managers continue to use the selloff to retool portfolios.

After 10 consecutive weeks of outflows, Rai, like many participants, said fund flows will turn positive once rates stabilize.

“For now, the constant barrage of hawkish speak from the Fed has engendered a very unstable market environment,” he said. “And that’s why rates are moving up and down.”

In past rate hike cycles, he said rates stabilized after the first rate hike, but it hasn’t been the case this time around.

“It seems that the March meeting never ended because we keep getting communique from the Fed, and that’s rocking the market,” Rai said.

Rai expects the earliest rates could stabilize would be in May following the expected 50 basis point rate hike during the next FOMC meeting.

Muni returns remain deep in the red. The Bloomberg Muni Index has posted negative 2.52% returns in April and losses of 8.59% year-to-date. High-yield is showing 3.13% losses for the month and 9.46% for 2022 while taxables have lost 5.19% month-to-date and 13.05% in 2022 so far. Bloomberg’s Impact Index is showing 3.34% losses for April and 10.92% year-to-date.

The cheapness of the market has yet to entice buyers back in a meaningful way — there are simply more sellers than buyers.

CreditSights strategists Pat Luby and John Ceffalio noted that municipal yields have been swinging between attractive and overly rich since March, which is leading to opportunities for crossover and taxable buyers.

Single- and double-A-rated muni yields were greater than the after-tax yields of intermediate to long corporates and taxable munis as of Friday’s close, they said.

The persistent outflow of municipal bond mutual funds has put considerable downward pressure on municipal bond prices, th3ey said, leading, in part, to tax-exempts’ underperformance.

The reduction in prospective reinvestment demand has also harmed prices, since overall redemptions in April will be the lowest since April 2018, according to Luby and Ceffalio.

As a result, CreditSights strategists said tax-exempt yields have risen to levels that should appeal to taxable investors subject to the 21% federal corporate income tax.

However, they said, a seasonal lull in redemptions and reinvestment demand is expected to shift course and begin to strengthen the market.

Investors will receive their May 1 principal and interest payments from issuers next week, totaling $21.1 billion. They will receive an additional $18.4 billion for the remainder of the month, but the busiest season of the year will begin on June 1, they said.

Redemptions are expected to total $26 billion on June 1. Combined with the $11 billion of interest payments on that day, Luby and Ceffalio said, investors will have $37 billion to reinvest or spend.

The rest of the month will see an additional $24 billion paid out, and for the three-month summer redemption season issuers will be returning $118 billion of principal and $42 billion of interest, totaling $160 billion, according to CreditSights.

“We expect that the reinvestment demand resulting from the influx of cash into investor accounts will provide support for the market,” they said.

With dealers reluctant to take on inventory, investors who can step in to offer liquidity to the market — not just in the secondary but also in the primary — have an opportunity to be rewarded.

They said this week’s new -issue calendar features numerous deals that are likely to attract considerable interest from crossover buyers, such as insurance companies and banks.

“Municipal bond prices and yields are dependent on retail investor sentiment and mutual fund flows, the U.S. Treasury market, the Fed and the economic conditions,” they said. “We do not expect the increase in reinvestment demand to fully offset the negative forces, but we do believe that the need for investors to put at least a portion of the maturing and called bond proceeds back into the municipal market will stabilize demand and help the market to perform better than it has over the last several months.”

In the competitive market Monday, the Madison Metro School District, Wisconsin, (/AA+/) sold $106 million of general obligation school building and facility improvement bonds, Series 2022, to J.P. Morgan Securities. Bonds in 3/2032 with a 4% coupon yield 2.00%, 3s of 2027 at 2.52%, 4s of 2032 at 3.08%, 4s of 2037 at 3.42% and 4s of 2042 at 3.65%, callable 3/1/2030.

Secondary trading
Washington 5s of 2023 at 2.01%-2.00%. Florida PECO 5s of 2023 at 2.00%. Montgomery County, Maryland, 5s of 2023 at 2.05%-2.03% versus 2.10% Friday. Hawaii 5s of 2023 at 2.08%.

Washington 5s of 2024 at 2.30%-2.29%. Maryland 5s of 2024 at 2.24%-2.23%. California 5s of 2026 at 2.51%-2.46% versus 2.51% Friday. Anne Arundel County, Maryland, 5s of 2026 at 2.46%-2.44% versus 2.49% Thursday. Columbus, Ohio, 5s of 2026 at 2.45%-2.43%. Georgia 5s of 2026 at 2.38%.

Howard County, Maryland, 5s of 2027 at 2.48%. Washington 5s of 2028 at 2.58% versus 2.60% Thursday. Mecklenburg County, North Carolina, 5s of 2028 at 2.40%-2.49%. Maryland 5s of 2028 at 2.54%. Georgia 5s of 2029 at 2.59%-2.58%.

Baltimore County, Maryland, COPs 5s of 2031 at 2.92%. Boston 5s of 2035 at 2.82%-2.81%. New York City TFA 5s of 2047 at 3.78%-3.77%, the same as Friday. New York City water 5s of 2048 at 3.71%-3.70%.

AAA scales
Refinitiv MMD’s scale was bumped up to two basis points on the short end at the 3 p.m. read: the one-year at 1.94% (-2) and 2.20% (-2) in two years. The five-year at 2.41% (unch), the 10-year at 2.68% (unch) and the 30-year at 3.03% (unch).

The ICE municipal yield curve was bumped up to one basis point: 1.95% (-1) in 2023 and 2.26% (unch) in 2024. The five-year at 2.42% (unch), the 10-year was at 2.69% (unch) and the 30-year yield was at 3.10% (unch) at 4 p.m.

The IHS Markit municipal curve was bumped one basis point: 1.96% (-1) in 2023 and 2.21% (-1) in 2024. The five-year at 2.43% (-1), the 10-year was at 2.65% (-1) and the 30-year yield was at 3.03% (-1) at 4 p.m.

Bloomberg BVAL was bumped up to one basis point: 1.93% (-1) in 2023 and 2.19% (unch) in 2024. The five-year at 2.44% (-1), the 10-year at 2.66% (-1) and the 30-year at 2.98% (-1) at the close.

Treasury yields fell.

The two-year UST was yielding 2.625% (-4), the three-year was at 2.803% (-6), five-year at 2.853% (-8), the seven-year 2.864% (-9), the 10-year yielding 2.832% (-8), the 20-year at 3.087% (-6) and the 30-year Treasury was yielding 2.895% (-5) at the close.

Primary to come:
The Regents of the University of California (Aa3/AA-/AA-/) is set to price Wednesday $3 billion of medical center pooled revenue bonds, consisting of $1.3 billion of bonds, 2022 Series P and $1.7 billion of taxable bonds, 2022 Series Q. Barclays Capital.

The Michigan Finance Authority (Aa3/AA//) is set to price Thursday $1.181 billion of Beaumont-Spectrum Consolidation hospital revenue refunding bonds, Series 2022, consisting of $1.089 billion of Series 1 and $91.530 million of Series 3. Morgan Stanley.

The Hampton Roads Transportation Accountability Commission, Virginia, (Aa2/AA//) is set to price Wednesday $421.575 million of Hampton Roads Transportation Fund senior-lien revenue bonds, Series 2022A, serials 2023-2042, terms 2047, 2052 and 2057. Wells Fargo Bank.

Austin, Texas, (A1/A+//AA-/) is set to price Tuesday $417.215 million of alternative-minimum tax airport system revenue bonds, Series 2022. Morgan Stanley.

The City and County of San Francisco, California, (Aaa/AAA/AA+/) is set to price Tuesday $326.415 million of general obligation refunding bonds, Series 2022-R1, serials 2023-2034. Wells Fargo Bank.

The Beaumont-Spectrum Consolidation, Michigan, (Aa3/AA/) is set to price Thursday $300 million of taxable corporate CUSIP bonds, Series 2022. Morgan Stanley.

The Pennsylvania Housing Finance Agency (Aa1/AA+/) is set to price Tuesday $292.965 million of social non-alternative minimum tax single-family mortgage revenue bonds, Series 2022-139, serials 2022-2034, terms 2037, 2042, 2047 and 2052. Jefferies.

The Oregon Facilities Authority (A1/A+//) is set to price Wednesday $289.560 million of Legacy Health Project revenue bonds, consisting of $99.340 million of tax-exempt bonds, 2022 Series A, term 2052; $101.355 million of taxable bonds, 2022 Series B, term 2052; and $88.885 million of tax-exempt bonds, 2022 Series C, serial 2030. RBC Capital Markets.

Gilbert, Arizona, (Aaa/AAA//) is set to price Wednesday $199.785 million of general obligation bonds, Series 2022, serials 2024-2042. Wells Fargo Bank.

The Northwest Independent School District, Texas, (Aaa//AAA/) is set to price Wednesday $193.985 million of unlimited tax school building bonds, Series 2022, serials 2023 and 2026-2047, insured by the Permanent School Fund Guarantee Program. RBC Capital Markets.

The Public Facilities Financing Authority of the City of San Diego, California, (/AA/AA/) is set to price Tuesday $164.920 million of subordinated sewer revenue bonds, Series 2022A, serials 2023-2042, terms 2047 and 2051. Wells Fargo Bank.

The Fort Bend Independent School District, Texas, (/AAA/AAA/) is set to price Tuesday $158.900 million of unlimited tax refunding bonds, Series 2022A, insured by the Permanent School Fund Guarantee Program. Piper Sandler & Co.

The school district is also set to price Tuesday $100 million of variable rate unlimited tax school building bonds, Series 2022B, insured by the Permanent School Fund Guarantee Program. Baird.

Phoenix, Arizona, (Aa1/AA+/AAA/) is set to price Tuesday $143.160 million of general obligation refunding bonds, Series 2022. Piper Sandler & Co.

The Rhode Island Housing and Mortgage Finance Corporation (Aa1/AA+//) is set to price Tuesday $118.095 million of homeownership opportunity bonds, consisting of $98.095 million of social non-alternative minimum tax bonds, Series 77-A and $20 million of taxable bonds, Series 77-T. Morgan Stanley.

The Rhode Island Student Loan Authority (/AA//) is set to price Thursday $105.670 million of senior education loan revenue bonds, consisting of $64.850 million of alternative minimum tax bonds, 2022 Series A, serials 2026-2031 and 2041 and $40.820 million of taxable bonds, Series 2022-1, serials 2025-2029 and 2041. RBC Capital Markets.

Competitive:
Washington (Aaa/AA+/AA+/) is set to sell $217.090 million of motor vehicle fuel tax general obligation bonds, Series R-2022D Bid Group 2 at 11:45 a.m. eastern Tuesday, $279.475 million of motor vehicle fuel tax general obligation bonds, Series R-2022D Bid Group 1 at 11:15 a.m. Tuesday, $407.730 million of various purpose general obligation refunding bonds, Series R-2022C Bid Group 1, at 10:15 a.m Tuesday and $448.565 million of various purpose general obligation refunding bonds, Series R-2022C Bid Group 2, at 10:45 a.m Tuesday.

Clark County, Nevada, is set to sell $200 million of indexed fuel tax and subordinate motor vehicle fuel tax highway revenue bonds, Series 2022, at 11:30 a.m. eastern Wednesday.