Munis open November firmer but October marks another month of losses

Municipals opened the new month on firmer footing Tuesday while U.S. Treasuries ended the session mixed and equities extended losses.

Triple-A yields fell two to six basis points with the larger improvements out long while U.S. Treasuries saw yields rise up to six basis points on the two-year and fall seven out long.

Long ratios dipped back below 100% on the long bond Tuesday. The three-year muni-UST ratio was at 71%, the five-year at 75%, the 10-year at 82% and the 30-year at 98%, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the three at 72%, the five at 75%, the 10 at 85% and the 30 at 99% at a 4 p.m. read.

While munis saw modest improvements to start the month, the asset class closed out October in the red with the Bloomberg Municipal Index showing a loss of 0.83% for the month, bringing total losses to 12.86% in 2022. Munis have posted gains in only two months in 2022 — May and July.

“In October, high grade munis outperformed the U.S. Treasury Index, which returned -1.4% during the month,” according to a Barclays PLC report.

Total return performance “was mostly negative across the curve, with the exception of the short end which eked out a small positive return,” they noted.

The biggest outperformer, Barclays strategists said, was the one-year index, which returned +0.1%. On the opposite side of the ledger, “the +22y muni index performed the worst in relative total return terms (-2.2%), with the 20y (-1.3%) index also underperforming,” Barclays strategists said.

The long index (22+ maturities) is down 21.48% in 2022.

The General Obligation index lost 0.51% in October and 11.91% for 2022 while the Revenue Bond index lost 1.03% in October and 13.85% year to date.

The High-Yield index lost 2.05% in October bringing total 2022 losses to 17.75% while taxable municipals lost 2.49% last month and 21.29% year to date.

The Bloomberg Impact Index lost 1.20% in October and 16.60% in 2022.

All eyes are now on the Federal Open Market Committee rates decision.

“People are waiting on the Fed’s announcement on Wednesday, and the employment number on Friday, so they aren’t doing much in the meantime; that’s why the calendar is so light this week,” a New York underwriter said Monday.

Given that a 75 basis-point hike in rates is all but certain, analysts are looking for signs that indicate what the Fed will do at its December meeting. 

“That will be the most important thing — the market will read their thoughts and try to figure out if they will be pausing for a while or less aggressive in their tightening,” the underwriter said.

“You’ve had a pretty rough go of it — with a lot of outflows and bids wanted,” a New York trader said. Investors, he said, want a clearer picture of where the market is heading before they make any large purchases or commitments at year-end.

Raw yields are cheap for traditional buyers, the trader noted. For instance, he said retail investors can currently buy high-quality bonds with 4.15% yields and 5% coupons at a discount on A-rated health care for “decent yields” on the long end. “There are some things for them to take a swing at and they have been taking a swing,” he said.

But, overall, the main drivers of the market are the constant outflows as funds continue to lose money — and everyone waiting for the Fed to “get a better picture of the short-term horizon.”

After outperforming UST for five straight weeks, tax-exempt munis “starkly underperformed last week, not participating, at all,” in a six to 20 basis point corrective rally in USTs, said Matt Fabian, a partner at Municipal Market Analytics in the firm’s weekly Outlook report.

And at least for a week, munis “have lost their strange 2022 correlation with equities and other risk assets,” he said.

Tax-exempt AAA benchmarks instead saw prices fall, yields rise, the latter by five to eight basis points across a steeper curve, Fabian noted.

This coincided with a heavy trading flow of $87 billion-plus propelled by a larger primary market of over $9 billion and the most secondary bids wanteds/price discovery of more than $11 billion since March 2020, according to Fabian.

“This was a municipal market attempting to regain its footing after having stabilized a bit too soon in prior weeks,” he said. “However, with the customer bid side represented by smaller accounts and purchases, it remains to be seen if price discovery was durable.”

Fabian said this remains the challenge of the remainder of the year: “available levels and supply are highly satisfactory versus historical averages, but buying them is discounting further Fed action, and the Fed is likely not done.”

Secondary trading
Utah 5s of 2023 at 3.08% versus 3.11% Monday. NYC 5s of 2023 at 3.13%-3.12% versus 3.14%-3.15% on Wednesday and 3.18% on 10/25. LA DWP 5s of 2024 at 3.11%-3.07%. Prince George’s County, Maryland, 5s of 2024 at 3.15%.

NYC 5s of 2025 at 3.30%. NYC TFA 5s of 2026 at 3.33% versus 3.34% Thursday and 3.45%-3.32% Wednesday. Virginia 5s of 2027 at 3.21%.

California 5s of 2031 at  3.42%-3.38% versus 3.49% Monday and 3.48% original Thursday. Ohio 5s of 2032 at 3.42%. University of California 5s of 2032 at 3.29%-3.28%.

NYC TFA 5s of 2037 at 4.38%. California 5s of 2037 at 3.84% versus 3.97%-3.95% Thursday. Triborough Bridge and Tunnel Authority 5s of 2040 at 4.48%.

Washington 5s of 2047 at 4.31% versus 4.42% Friday and 4.30%-4.26% on 10/21. NYC Municipal Water Finance Authority 5s of 2052 at 4.68%-4.69% versus 4.67%-4.70% in 10/25 and 4.48% on 10/18. Virginia Public School Authority 5s of 2052 at 4.46%-4.45%.

AAA scales
Refinitiv MMD’s scale was bumped one to six basis points: the one-year at 3.11% (-2, +1bp Nov. roll ) and 3.16% (-2, no roll) in two years. The five-year at 3.20% (-4, no roll), the 10-year at 3.34% (-6, +1bp Nov. roll) and the 30-year at 4.06% (-6).

The ICE AAA yield curve was bumped two to four basis points: 3.14% (-3) in 2023 and 3.18% (-2) in 2024. The five-year at 3.23% (-2), the 10-year was at 3.44% (-3) and the 30-year yield was at 4.19% (-4) at a 4 p.m. read.

The IHS Markit municipal curve was bumped up to two to six basis points: 3.10% (-2) in 2023 and 3.16% (-2) in 2024. The five-year was at 3.21% (-6), the 10-year was at 3.33% (-6) and the 30-year yield was at 4.05% (-6) at a 4 p.m. read.

Bloomberg BVAL was bumped three to five basis points: 3.07% (-3) in 2023 and 3.14% (-3) in 2024. The five-year at 3.20% (-3), the 10-year at 3.34% (-4) and the 30-year at 4.06% (-5) at 4 p.m.

Treasuries were mixed.

The two-year UST was yielding 4.547% (+6), the three-year was at 4.491% (+5), the five-year at 4.262% (+3), the seven-year 4.162% (+1), the 10-year yielding 4.045% (flat), the 20-year at 4.363% (-5) and the 30-year Treasury was yielding 4.104% (-7) at the close.

Primary to come:
The City and County of Denver, Colorado (Aa3/AA-/AA-/), is set to price Thursday for and on behalf of its Department of Aviation $850 million of fixed rate non-AMT, fixed rate AMT and term rate AMT airport system revenue bonds. Barclays Capital.

The Public Finance Authority, Wisconsin, (Baa2/AA//) is set to price Thursday $210 million of project revenue bonds (CFP3 – Eastern Michigan University Student Housing Project), consisting of $209.250 million of exempts, Series A-1, and $750,000 of taxable, Series A-2, insured by Build America Mutual Assurance. Barclays Capital.

Bexar County, Texas, (Aaa/AAA/AAA/) is set to price Thursday $196 million of combination tax and revenue certificates of obligation, consisting of $46 million of Series 2022A, serials 2023-2048, and $150 million of Series 2022B, serials 2023-2048. HilltopSecurities.