Municipals improve, returns in the black so far in November

Municipals were firmer again Tuesday along with U.S. Treasuries, while equities made modest gains as voters headed to the polls.

Triple-A yields fell two to five basis points while USTs were lower by six to nine, with the strongest performance in the belly of the curve.

With a more volatile UST market that saw yields seesaw over recent sessions and munis hold steadier, muni to UST ratios have fallen in the past week. The three-year muni-UST ratio was at 69%, the five-year at 74%, the 10-year at 80% and the 30-year at 95%, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the three at 68%, the five at 72%, the 10 at 80% and the 30 at 95% at a 4 p.m. read.

Munis continue to be well bid. Returns so far in November are in the black with the Bloomberg Municipal Index showing positive 0.42%, high-yield at positive 0.18%, and the Impact Index at positive 0.38%. Taxable munis, though, are in the red at 0.89% for November.

Bond Buyer 30-day visible supply sits at $9.59 billion while Bloomberg data pegs net negative supply at $11.584 billion.

The primary picked up Tuesday with a few deals of size pricing.

In the negotiated market, J.P. Morgan Securities priced for the South Carolina Public Service Authority (A3/A-/A-/) $426.785 million of revenue obligations, consisting of $36.785 million of tax-exempt refunding bonds and $390 million of tax-exempt improvement bonds. The refunding series saw 5s of 12/2023 at 3.55%, 5s of 2027 at 3.94%, 5s of 2032 at 4.22% (Assured Guaranty insured), 5.75s of 2037 at 4.61% (AGM) and 5.5s of 2042 at 4.54% (AGM), callable in 12/1/2032.

The $390 million saw 5s of 2023 at 3.55%, 5s of 2027 at 3.94%, 5s of 2032 at 4.22% (AGM), 5.25s of 2037 at 4.61% (AGM), 5.5s of 2042 at 5.09% (non-AGM), 5.5s of 2042 at 4.84% (AGM), 5.75s of 2047 at 5.24% (non-AGM), 5.75s of 2052 at 5.06% (AGM), and 5s of 2052 at 5.18% (AGM), callable 12/1/2032.

Goldman, Sachs & Co. LLC priced for the state of Ohio (Aa2/AA//) $114.995 million of major new state infrastructure project revenue bonds. Bonds in 12/2023 with a 5% coupon yield 3.17%, 5s of 2027 at 3.31%, 5s of 2032 at 3.51% and 5s of 2034 at 3.70%, callable in 12/15/2030.

In the competitive market, the Florida Department of Transportation (Aa2/AA/AA/) sold $191.860 million of turnpike revenue bonds, Series 2022C, to Morgan Stanley & Co., with 5s of 7/2023 at 3.08%, 5s of 2027 at 3.27%, 5s of 2032 at 3.42%, 5s of 2037 at 3.85%, 4.5s of 2042 at 4.58%, 5s of 2047 at 4.57% and 5s of 2052 at 4.64%, callable 7/1/2032.

Shelby County, Tennessee, (Aa1/AA+/AA+/) sold $159.280 million of general obligation public improvement and school bonds, 2022 Series A, to J.P. Morgan Securities, with 5s of 4/2024 at 3.16%, 5s of 2027 at 3.24%, 5s of 2032 at 3.41%, 5s of 2037 at 3.84%, 5s of 2042 at 4.15% and 5s of 2043 at 4.25%, callable 4/1/2032.

Retail returns?
The market has seen outflows for 13 straight weeks, per Refinitiv Lipper, but Nuveen strategists Anders S. Persson and John V. Miller said “selling is due primarily to investors harvesting tax losses.”

Additionally, they noted “much of the redemption proceeds are remaining in the tax-exempt space.”

Last week, ETFs saw $737 million in positive flows, per Refinitiv Lipper, while tax-exempt money market funds also saw $3.4 billion in positive flows, they noted.

“These two data points, plus an outsized amount of individual bonds purchased by individual investors, continue to keep a stable bid in the tax-exempt market,” they said. “Nevertheless, we are optimistic that 2023 will be constructive for tax-exempt bonds.”

“But like all tax-exempt markets, floating rate supply remains scarce, in particular with mutual funds — in better times, frequent users of synthetic floaters to finance new purchases — not interested in potentially amplifying losses at present,” said Matt Fabian, a partner at Municipal Market Analytics.

Into this breach have come the exchanged-traded funds as well, which are “commonly misused as cash alternative products while volatile rates make ‘permanent’ allocations problematic,” he said.

ETFs have added $6.5 billion of assets since the start of 4Q22, “a total that, combined with the 2a7 inflows, offsets all but $2.3 billion of traditional mutual funds’ net outflows of $22.4 billion in that period,” he said.

Fabian said these help explain “how the market at large swept past the Fed’s hike last week, along with a growing sense of temporary value in tax-exempt prices at current levels.”

The rolling five-day customer demand was “the most retail-focused since late November 2021 (seen via the average customer purchase dropping to just $300 million),” he said.

Retail will not “be enough to power any meaningful or sustained rally in municipal prices, and weak reinvestment demand in the next month does not suggest lower yields,” he noted.

If allowed to wait for fund flows to reverse, however, Fabian believes things will richen quickly.

In the high-yield space, that market continues to resist higher yields, outperforming high-grade munis and USTs last week, Nuveen strategists said.

“A meaningful decrease of new issuance is helping the market absorb secondary supply that continues to materialize to meet persistent fund outflows,” they said.

“After mixed performance in October, high-yield municipal bond yields are helping to form some market stability,” they added. “We believe structural features like sinking funds and shorter average lives on deeply discounted bonds are being overlooked and represent significant value.”