Focus moves to primary while USTs whipsaw

Munis were mixed Tuesday as the secondary took a backseat to the larger primary that began pricing, while U.S. Treasuries whipsawed into a rally as economic data signaled the Federal Reserve’s actions are cooling the economy while equities improved on better corporate earnings.

Triple-A yields were little changed to weaker by a basis point or two while Treasury yields fell by 15 basis points on the 10-year to close the session.

Muni to UST ratios rose slightly as a result of the moves, improving relative value, after munis have mostly outperformed UST of late.

The three-year muni to UST ratio on Tuesday was at 72%, the five-year at 76%, the 10-year at 83% and the 30-year at 95%, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the three at 71%, the five at 74%, the 10 at 82% and the 30 at 92% at a 4 p.m. read.

While muni performance has turned negative for October, “the asset class is significantly outperforming UST,,” said Jeff Lipton, managing director of credit research at Oppenheimer Inc.

The Bloomberg Municipal Index has seen losses of 0.63% in October, bringing year-to-date losses to 12.69%. High-yield has lost 1.78% month-to-date and 17.52% in 2022 while taxable munis have lost 3.59% in October and 22.18% year-to-date.

With the muni outperformance, he said, “comes less relative value across the tax-exempt curve,” particularly out long.

The 10- and 30-year ratios stand at 83% and 95%, respectively, per Refinitiv, compared to a month ago when the 10 and 30-year ratios were 83% and 101% respectively.

Lipton said “retail investors are showing interest in the attractive cash-flow opportunities offering equity-like returns,” and he expects “retail to remain involved with rates moving potentially higher, but the opportunities may very well come with unforeseen volatility and so appropriate entry points with an understanding of call optionality must be key to the investment calculus.”

He said market participants were “greeted with a sizable calendar last week with another heavy plate of offerings lined up for this week.”

“Pre-sale orders came with a number of well-known market stalwarts and overall, deals received favorable reception,” Lipton said. “Strong carry-through in the competitive market with active bidding is expected this week as we will continue to see large household names in the mix.”

Last week’s negotiated business was “priced somewhat cheaper with many deals being bumped on the reprice,” and certain names were oversubscribed, he said.

“Return seeking institutional interest was visible on the front end prior to Friday’s heavy scale adjustments,” he noted.

Lipton said liquidity was “pressured before the end-of-week cuts, yet became close to non-existent just after.”

Nevertheless, he said, overall liquidity in the muni market “has not been as thin as the liquidity experienced in other areas of fixed income, despite consecutive weeks of muni fund outflows.”

“Demand for muni product seems to respond well to an 18% decline in new-issuance year-over-year, and it is this technical backdrop which seems to be driving muni outperformance year-to-date,” according to Lipton.

Munis worth the wait?
“Conflicting value versus trend dynamics have made day-to-day price trends more volatile; however, this creates opportunities for accounts that can manage near-term paper losses,” said Matt Fabian, a partner at Municipal Market Analytics.

In effect, he noted, at least $170 billion of munis have relocated to new holders this year, which includes $97 billion of fund outflows, inclusive of both long-term funds and exchange-traded funds, and $70 billion of excess tax-exempt issuance.

“With dealers limited — by more onerous capital charges and more conservative risk management — from ferrying this migration for very long, it follows that all of the $170 billion has already found at least a semi-permanent allocation elsewhere,” he said.

“Assuming a material portion of this found demand is less trading oriented [and] more laddered/separately managed account strategies, secondary volumes, once stability returns (at some point in 2023), may be sparse,” Fabian noted.

But even if the 2023 tax-exempt primary is $350 billion to $400 billion, he said $240 billion of that is already spoken for via scheduled amortization/reinvest.

“This suggests a faster pricing rebound, achieved via fewer traded bonds, once that stability occurs: a tantalizing prospect for current and ostensible holders who, before anything happens, must still digest more basis points of loss while the Fed keeps raising rates,” he said.

The best prospects are now at the intermediate and long ends “where the larger new-issue calendar has required highly concessionary primary offered levels,” Fabian said.

Since most of the curve reads this way, it suggests that issuers “with the ability to wait a few months” to issue debt, “should strongly consider doing so.”

In the primary market Tuesday, BOK Financial Securities priced for Northwest ISD, Texas, $145.565 million of unlimited tax school building bonds, Series 2022A, with 5s of 2/2024 at 3.33%, 5s of 2029 at 3.60%, 5s of 2032 at 3.72%, 5s of 2037 at 4.16%, 5s of 2042 at 4.46% and 5s of 2048 at 4.63%, callable 2/15/2032.

J.P. Morgan Securities priced for New Orleans, Louisiana (A2/A+/A/), $106.170 million of general obligation refunding bonds, Series 2022, with 5s of 12/2023 at 3.45%, 5s of 2027 at 3.72%, 5s of 2032 at 4.16%, 5s of 2037 at 4.60% and 5.25s of 2038 at 4.64%, callable 12/1/2032.

In the competitive market, the Tennessee State School Bond Authority (Aa1/AA+/AA+/) sold $278.670 million of higher education facilities second program bonds, 2022 Series A (Tennessee State Aid Intercept Program), to BofA Securities, with 5s of 11/2023 at 3.16%, 5s of 2027 at 3.35%, 5s of 2032 at 3.62%, 5s of 2037 at 3.96%, 5s of 2042 at 4.21%, 5s of 2047 at 4.51% and 5s of 2052 at 4.59%, callable 11/1/2032.

California, coming with $1.2 billion of general obligation bonds in the competitive market, and the New York City Transitional Finance Authority’s $1.3 billion of exempt and taxables, will test the primary Wednesday.

Secondary trading
NYC 5s of 2023 at 3.18%. Texas 5s of 2024 at 3.24%. Triborough Bridge and Tunnel Authority 5s of 2025 at 3.28% versus 3.27% Thursday.

California 5s of 2028 at 3.30% versus 3.07% Thursday. Florida 5s of 2029 at 3.39%. Washington 5s of 2031 at 3.46%

Texas Water Development Board 5s of 2035 at 3.86% versus 3.54%-3.53% on 10/12 and 3.59% on 10/11. Oregon 5s of 2035 at 3.85%-3.84%. Carroll County, Maryland, 5s of 2036 at 3.80%.

Spring Branch ISD, Texas, 5s of 2042 at 4.35% versus 3.92% on 10/12 and 3.98% original on 10/6. Washington 5s of 2044 at 4.32-4.31%.

Illinois Finance Authority 5s of 2051 at 5.21% versus 5.20% Monday and 5.05%-5.15% Friday. University of California 5s of 2052 at 4.57%-4.55% versus 4.25%-4.22% Wednesday.

AAA scales
Refinitiv MMD’s scale was unchanged: the one-year at 3.14% and 3.18% in two years. The five-year at 3.24%, the 10-year at 3.41% and the 30-year at 4.04%.

The ICE AAA yield curve was cut two to four basis points: 3.18% (+3) in 2023 and 3.29% (+4) in 2024. The five-year at 3.27% (+3), the 10-year was at 3.48% (+3) and the 30-year yield was at 4.07% (+2) at a 4 p.m. read.

The IHS Markit municipal curve was unchanged: 3.14% in 2023 and 3.18% in 2024. The five-year was at 3.27%, the 10-year was at 3.41% and the 30-year yield was at 4.03% at a 4 p.m. read.

Bloomberg BVAL was little changed: 3.11% (unch) in 2023 and 3.18% (unch) in 2024. The five-year at 3.24% (unch), the 10-year at 3.39% (unch) and the 30-year at 4.05% (unch) at 4 p.m.

Treasuries rallied.

The two-year UST was yielding 4.472% (-4), the three-year was at 4.448% (-8), the five-year at 4.244% (-12), the seven-year 4.157% (-15), the 10-year yielding 4.087% (-15), the 20-year at 4.452% (-16) and the 30-year Treasury was yielding 4.234% (-15) at the close.

Primary to come:
The New York City Transitional Finance Authority (Aa1/AAA/AAA/) is set to price Wednesday $950 million of tax-exempt future tax secured subordinate bonds, Fiscal 2023 Series D, Subseries D-1, serials 2024-2027 and 2036-2052. Wells Fargo Bank.

The Triborough Bridge and Tunnel Authority is set to price Thursday $690.845 million of climate-certified payroll mobility tax senior lien green bonds, Series 2022E, consisting of $186.515 million of Series E-1, $99.560 million of Series E-2a and $404.770 million of Series E-2b. J.P. Morgan Securities.

The California Statewide Communities Development Authority is set to price next week $378.860 million of bonds (Enloe Medical Center), consisting of $208.955 million (/BBB-//), Series 2022A, serials 2024-2032, terms 2037, 2042, 2047, 2052 and 2057 and $169.865 million (/AA//), Series 2022B, term 2047, insured by Assured Guaranty Municipal Corp. KeyBanc Capital Markets.

The Michigan State Housing Development Authority is set to price Thursday $268.190 million of non-AMT social single-family mortgage revenue bonds, 2022 Series D. Barclays Capital.

Palomar Health, California, is set to price Thursday $215 million of tax-exempt certificates of participation, Series 2022A. Citigroup Global Markets.

The Maryland Economic Development Corporation (/BBB-//) is set to price Wednesday $110.680 million of senior student housing revenue bonds, Series 2022A (Morgan State University Project), serials 2028-2033, terms 2043, 2053 and 2058. RBC Capital Markets.

Pinal County, Arizona, (/AA-/AA/) is set Thursday $109.625 million of pledged revenue obligations, Second Taxable Series 2022. Stifel, Nicolaus & Co.

Competitive:
California (Aa2/AA-/AA/) is set to sell $397.625 million of various purpose general obligation refunding bonds, Bid Group A, at 10:30 a.m. eastern Wednesday; $319.065 million of various purpose general obligation refunding bonds, Bid Group B, at 11:15 a.m. Wednesday and $514.790 of various purpose general obligation refunding bonds, Bid Group C, at 12 p.m. Wednesday.

The New York City Transitional Finance Authority is set to sell $210.440 million of taxable future tax secured taxable subordinate bonds, Fiscal 2023, Subseries D-2, at 10:45 a.m. Wednesday and $139.560 million of taxable future tax secured taxable subordinate bonds, Fiscal 2023, Subseries D-3, at 11:30 a.m. Wednesday.

Spartanburg County School District No. 4, South Carolina, is set to sell $100 million of general obligation bonds, Series 2022A, at 11 a.m. Wednesday.