Munis little changed, USTs weaker, outflows continue

Municipals were little changed Thursday, while U.S. Treasuries were weaker and equities sold off.

The three-year muni-UST ratio was at 61%, the five-year at 65%, the 10-year at 69% and the 30-year at 94%, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the three at 63%, the five at 66%, the 10 at 72% and the 30 at 94% at a 4 p.m. read.

“Following another round of economic data, the U.S. economy doesn’t look like it wants to head into a recession anytime soon,” said Edward Moya, senior market analyst at OANDA. “Jobless claims did not rise as much as economists were expecting.”

Initial jobless claims rose slightly to 216,000 in the week ended Dec. 17, short of the 222,000 estimate of economists polled by IFR, while continuing claims remain anchored around 1.67 million. 

“This round of readings have a heavy seasonal impact so post-holidays, claims should start to rise,” he said.

 The final Q3 GDP readings were surprisingly strong, according to Moya.

 “Q3 GDP finished at 3.2%, while personal consumption improved to 2.3%, core PCE ticked higher,” he said.

“The economic data points are reflecting quite a bit of resiliency, and this resiliency is coming about despite the still existing inflationary pressures,” said Jeff Lipton, managing director of credit research at Oppenheimer Inc.

Meanwhile, Moya said, “Wall Street still is pricing in one more rate hike at the February FOMC meeting, but if the data does not break, a March hike should start to get priced in.”

But the rate hikes, he said, are still working their way through the economy and higher interest rates will remain through the first half of 2023 at least.

Outflows continued as Refinitiv Lipper reported $3.094 billion was pulled from municipal bond mutual funds in the week ending Wednesday after $1.217 billion of outflows the week prior.

High-yield led with $749.399 million of outflows after $128.285 million of outflows the week prior while exchange-traded funds saw outflows of $313.254 million after $757.860 million of inflows the previous week.

Lipton said outflows will continue through 2023, but the pace is likely to soften, with a period of intermittent inflows.

“At some point, we’ll see a renewed cycle of positive fund flows in early 2023,” he said.

“Historically, we have a bad bond market,” said Gavin Stephens, director of portfolio management at Goelzer Investment Management, noting investors are taking advantage of municipal markets being down.

He noted 2022 was the worst year for bonds since 1972.

“Investors who are tax-sensitive because they own municipals are looking at big losses in their portfolios, and their managers are likely to try to harvest more of those,” he said. “So I would expect perhaps more outflows through the year-end.”

Supply continues to be challenged and heavy redemptions persist as bond buyers try to find value in the muni market, he said.

Going into 2023, Stephens expects positive returns for bondholders.

“When you look back this year, it has been a miserable year for bond investors across the board,” he said.

The Aggregate Index is down 12.05% and munis are down 8.27% year-to-date.

“What that’s left us with are very appealing starting yields for a low volatility asset class,” he said.

For almost a decade, he said, bonds have been maligned for their low yields and their increasing duration, with investors taking bonds out of their portfolios and substituting them with things like liquid alternatives.

“We think asset allocators are going to take a look back at high-quality fixed-income and put it back into portfolios, and all this should support bond returns going forward, including municipals,” he said.

Ratios will remain tight until the spring of 2023, according to Stephens.

“That’s because of this supply issue that will persist through January and February,” he said. “And at some point, investors will look back and they’ll say, ‘These starting yields are great.'”

Secondary trading
New York City 5s of 2023 at 2.91% versus 2.54% on 12/12 and 2.20% on 12/6. Washington 5s of 2023 at 2.76% versus 2.32% on 12/7. California 5s of 2023 at 2.66% versus 2.67% Wednesday. NYC TFA 5s of 2024 at 2.65% versus 2.68% Wednesday.

Georgia 5s of 2026 at 2.45% versus 2.44% Wednesday. Los Angeles DWP 5s of 2027 at 2.44%-2.40% versus 2.30% on 12/14 and 2.29%-2.30% on 12/12. California 5s of 2027 at 2.61%.

Charlotte, North Carolina, 5s of 2031 at 2.55%. Metropolitan Water District of Southern California 5s of 2033 at 2.54%-2.52%. The Denver Board of Water Commissioners 5s of 2033 at 2.67%.

NYC TFA 5s of 2047 at 4.08% versus 4.05% Wednesday and 3.93% on 12/16. Illinois Finance Authority 5s of 2052 at 4.57% versus 4.55% Wednesday and 4.47%-4.49% on 12/16. Massachusetts 5s of 2052 at 3.88% versus 3.73% on 12/13.

AAA scales
Refinitiv MMD’s scale was unchanged: the one-year at 2.81% (unch) and 2.57% (unch) in two years. The five-year at 2.48% (unch), the 10-year at 2.54% (unch) and the 30-year at 3.49% (unch).

The ICE AAA yield curve was firmer in spots: 2.74% (unch) in 2023 and 2.57% (-1) in 2024. The five-year at 2.53% (-1), the 10-year was at 2.60% (-1) and the 30-year yield was at 3.51% (unch) at 4 p.m.

The IHS Markit municipal curve was unchanged: 2.79% (unch) in 2023 and 2.58% (unch) in 2024. The five-year was at 2.51% (unch), the 10-year was at 2.55% (unch) and the 30-year yield was at 3.47% (unch) at a 4 p.m. read.

Bloomberg BVAL was cut up to one basis point: 2.75% (+1) in 2023 and 2.61% (+1) in 2024. The five-year at 2.49% (unch), the 10-year at 2.57% (unch) and the 30-year at 3.50% (unch) at 4 p.m.

Treasuries were weaker.

The two-year UST was yielding 4.271% (+6), the three-year was at 4.035% (+4), the five-year at 3.799% (+3), the seven-year 3.780% (+3), the 10-year yielding 3.680% (+2), the 20-year at 3.927% (+3) and the 30-year Treasury was yielding 3.735% (+2) at the close.

Mutual fund details
Refinitiv Lipper reported $3.094 billion of outflows for the week ended Wednesday following $1.217 billion of outflows the previous week.

Exchange-traded muni funds reported outflows of $313.254 million after inflows of $757.860 million in the previous week. Ex-ETFs, muni funds saw outflows of $2.781 billion after outflows of $1.974 billion in the prior week.

Long-term muni bond funds had outflows of $1.860 billion in the latest week after outflows of $524.128 million in the previous week. Intermediate-term funds had outflows of $286.018 million after outflows of $524.741 million in the prior week.

National funds had outflows of $2.881 billion after outflows of $943.208 million the previous week while high-yield muni funds reported outflows of $749.399 million after outflows of $128.285 million the week prior.