Munis steady to close out month of large losses; $3.8B on tap

Municipals were little changed Friday to close out a month that saw triple-A yields rise more than three-quarters of a point on the front end, $7.6 billion flow out of mutual funds and issuance fall by 43%.

U.S. Treasuries were weaker and equities ended in the red after a month of central bank rate hikes, ever-increasing inflation data and resulting global market volatility.

Municipals were not immune and are poised to close out September with 3.84% losses while high-yield is at 6% in the red and taxables at negative 4.61%, per Bloomberg indices.

Ratios rose throughout the month, along with rates. The three-year on Friday was at 74%, the five-year was at 78%, the 10-year at 87% and the 30-year at 104%, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the three at 74%, the five at 78%, the 10 at 90% and the 30 at 104% at a 4 p.m. read.

With the third quarter coming to an end, “munis showed no sign of reversing the recent selloff despite a large Treasury rally on Wednesday which made munis look relatively cheaper,” said BofA strategists Yingchen Li and Ian Rogow. “To be fair, the muni market itself does not appear to be the issue.”

“Outflows from mutual funds did rise, but more in line with February and March levels and significantly lower than those from April and May,” they said. “At this point, investors are more focused on tax loss swapping and some new purchases at recent higher yields.”

And “while USTs yield volatility remains extreme, tax-exempts simply cannot keep up,” according to Barclays PLC.

Barclays strategists Mikhail Foux, Clare Pickering and Mayur Patel said “muni yields have moved higher in the early part of the week, but have outperformed.”

When UST yields fell Wednesday, munis also participated in the rally but to a much smaller degree, they said.

“Muni yields have continued to rise, reaching levels last seen in 2010,” Barclays strategists said.

“On a positive note, at current levels, interest from direct retail investors is finally starting; as high-quality five percent coupon tax-exempt bonds are starting to trade at a discount, retail have become more active and should provide some support,” they said.

In general, tax-exempts lagged USTs this week, and ratios continued moving higher, they noted.

“Muni ratios are becoming attractive across the curve, but especially for long-dated municipals,” Foux, Pickering and Patel said.

Long-dated ratios in the 110%-115% range historically have attracted crossover interest, “similar to May 2022, and now are not that far from that level,” they noted.

“The muni yield curve had become very steep until this week, when it has dramatically bear-flattened, with the 5s30s slope decreasing nearly 25bp in a very short time after the short end and the belly of the curve became pressured,” they said. They think the long end might continue to outperform but to a lesser degree.

Calendar subdued to start the fourth quarter
Investors will be greeted Monday with a new-issue calendar estimated at $3.816 billion.

There are $3.308 billion of negotiated deals on tap and $508.1 million on the competitive calendar.

The negotiated calendar is led by the $1.35 billion of GOs from New York City in two deals.

New York City will dip its toes into the social bond municipal market for the first time when it offers a $400 million taxable general obligation deal.

This is the city’s first sale of social bonds.

Proceeds from the sale of the social bonds will go to supporting more than 3,000 units of affordable housing under the mayor’s “Housing Our Neighbors: A Blueprint for Housing and Homelessness“ plan.

The city also will price $950 million of tax-exempt fixed-rate bonds after a one-day retail order period on Monday.

Other notable deals include $500 million of revenue bonds from Austin, Texas, in two tranches and $308 million of unlimited tax schoolhouse bonds from the Spring Branch Independent School District, Texas.

The Bridge City Independent School District, Texas, leads a small competitive calendar with $72 million of GOs.

Secondary trading
Maryland 5s of 2023 at 3.07% versus 2.96% Tuesday. Georgia 5s of 2025 at 3.12%-3.10% versus 2.93% a week ago. Maryland 5s of 2027 at 3.18%-3.15%. Boston 5s of 2027 at 3.16%-3.14%.

North Carolina 5s of 2028 at 3.17%. Delaware 5s of 2029 at 3.19%-3.17%. California 5s of 2029 at 3.27%.

Maryland 5s of 2033 at 3.46%. New York City TFA 5s of 2035 at 3.97%.

Texas waters 4.75s of 2042 at 4.63%-4.60% versus 4.75% original. Washington 5s of 2046 at 4.26%-4.25% versus 4.28% Thursday and 4.13% a week ago. Denver City and County 5s of 2047 at 4.20%-4.19% versus 4.25% original.

New York City TFA 5s of 2047 at 4.65%-4.63% versus 4.21% on 9/19. Los Angeles DWP 5s of 2052 at 4.30% versus 4.27% Thursday.

AAA scales
Refinitiv MMD’s scale was unchanged: the one-year at 3.06% and 3.09% in two years. The five-year at 3.12%, the 10-year at 3.30% and the 30-year at 3.90%.

The ICE AAA yield curve was little changed: 3.07% in 2023 and 3.11% in 2024. The five-year at 3.16%, the 10-year was at 3.36% and the 30-year yield was at 3.89% at a 3:30 p.m. read.

The IHS Markit municipal curve was little changed: 3.04% in 2023 and 3.10% in 2024. The five-year was at 3.16%, the 10-year was at 3.32% and the 30-year yield was at 3.91% at a 4 p.m. read.

Bloomberg BVAL was little changed: 3.02% in 2023 and 3.05% in 2024. The five-year at 3.10%, the 10-year at 3.24% and the 30-year at 3.88% (-1) at 4 p.m.

Treasuries were weaker.

The two-year UST was yielding 4.244% (+4), the three-year was at 4.262% (+4), the five-year at 4.072% (+5), the seven-year 3.963% (+3), the 10-year yielding 3.814% (+2), the 20-year at 4.074% (+3) and the 30-year Treasury was yielding 3.767% (+4) at the close.

Primary to come:
New York City (Aa2/AA/AA-/AA+/) is set to price Tuesday $950 million of tax-exempt general obligation bonds, Fiscal 2023 Series B, Subseries B-1, serials 2024-2047. Citigroup Global Markets.

The city also is set to price Tuesday $400 million of taxable general obligation social bonds, Fiscal 2023 Series B, Subseries B-2, term 2052. Citigroup Global Markets.

The Spring Branch Independent School District, Texas, (Aaa/AAA//) is set to price Tuesday $308.430 million of unlimited tax schoolhouse bonds, Series 2022, insured by the Permanent School Fund Guarantee Program. Jefferies.

Austin, Texas, (Aa2/AA/AA-/) is set to price Thursday $299.500 million of water and wastewater system revenue refunding bonds, Series 2022. Jefferies.

The city also is set to price $200.010 million of forward-delivery water and wastewater system revenue refunding bonds, Series 2023. Jefferies.

The Sabine-Neches Navigation District, Texas, (Aa2///) is set to price Tuesday $173.370 million of Sabine-Neches Waterway Project limited tax bonds, Series 2022, serials 2024-2042, terms 2047 and 2052. Jefferies.

California (Aa2/AA+/AA/) is set to price Wednesday $166.935 million of non-AMT veterans general obligation bonds, Series CU, serials 2023-2034, terms 2037, 2042, 2046 and 2052. Wells Fargo Bank.

Competitive:
The Bridge City Independent School District, Texas, is set to sell $72.400 million of unlimited tax Permanent School Fund Guarantee Program school building bonds, Series 2022, at 12 p.m. eastern Wednesday.