Munis weaker in spots, outperform USTs
6 min read
Municipals were weaker in spots Friday, outperforming a U.S. Treasury selloff, while equities ended up.
The three-year muni-UST ratio was at 55%, the five-year at 58%, the 10-year at 64% and the 30-year at 87%, according to Refinitiv MMD’s 3 p.m. ET read. ICE Data Services had the three at 55%, the five at 59%, the 10 at 65% and the 30 at 89% at 4 p.m.
Despite triple-A benchmark yields falling in spots Friday, Barclays strategists Mikhail Foux, Clare Pickering and Mayur Patel said, “muni performance in the first several weeks of the year has been strong, powered by long-dated, high-beta and low-coupon bonds.”
So far, high-yield munis have been handily beating their investment-grade counterparts, “propelled by liquid benchmarks in the MSA Tobacco and Puerto Rico sectors, which in total comprise about 30% of the index,” they said. In the IG universe, they said, “some of the beaten down sectors, like hospitals and housing, have been some of the best performers.”
Muni-UST “ratios are looking quite rich, though we do not see technically where the muni rally might stall,” said BofA strategists.
The AAA curve, they said, “essentially went through a parallel shift, with little ease in the steepness of the 10/30 part of the curve,” while “credit spreads also narrowed a few basis points across the credit spectrum as easing financial conditions in the general market improved credit sentiment.”
“It is hardly surprising that low-coupon debt has been also doing very well as 2s and 3s were the first instruments to feel the brunt of the rate sell-off in early 2022, but they were also some of the first movers in the current rally when the yield differential between low- and high-coupon bonds compressed,” the Barclays strategists said.
Given a somewhat cautious outlook on rates and muni credit for the rest of year, they said, “it is probably a good time to start reallocating out of low-coupon debt into higher-coupon debt, as we like to remain defensive.”
The Barclays strategists noted it’s “curious how the muni market in 2023 is following the same pattern as last year, when it started at rather rich levels, and traded sideways for a period of time before rates started moving higher, and tax-exempts not only followed, but actually underperformed.”
BofA strategists said “supply/demand imbalances in the muni market are little changed.” Issuance of long-term munis year-to-date is only $6.9 billion, and they said “few investors are inclined to sell despite a 120bps rally since peak muni rates in late October 2022.”
“The muni market has switched from ‘no bids’ in October 2022 to ‘no bonds’ thus far in 2023,” BofA strategists said. “We believe such conditions are likely to persist through the end of February.”
Over the coming weeks, they said, “it is worth watching whether low AAA rates can meaningfully increase issuance volumes, especially refunding deals since current AAA rates are lower than many months in 2013-2014.” Bonds issued in those years are eligible for current and forward refunding, they said.
While many investors think “heavier supply will likely be the trigger that would reprice munis,” the Barclays strategists are not so sure.
“Indeed, issuance will likely increase in February and March, but could it be enough to weaken the muni market?” they ask. “Maybe, but only to a degree, as mutual funds have enough cash due to slow issuance, coupled with the likely end of outflows, at least for now,” the Barclays strategists said.
However, it all starts and ends with UST rates, they said. “If there is a rate sell-off later this year as we expect, munis will not be spared regardless of market technicals, and if rates remain range-bound or continue grinding lower, tax-exempts will remain rich, although possibly not as rich as they are at the moment,” they noted.
Calendar stands at $5.5B
Investors will be greeted Monday with a new-issue calendar estimated at $5.520 billion.
There are $4.348 billion of negotiated deals on tap and $1.172 billion on the competitive calendar.
The negotiated calendar is led by $1 billion of general revenue refunding bonds from the Triborough Bridge and Tunnel Authority, followed by $383 million of taxable general fund annual appropriation refunding bonds from the state of Wisconsin.
The Kansas Development Finance Authority leads the competitive calendar with the sale of $157.540 million of revenue bonds, followed by the Spartanburg County School District 5, South Carolina’s sale of $100 million of GOs.
Muni CUSIP requests decrease
Municipal CUSIP request volume decreased in December, following an increase in November, according to CUSIP Global Services.
For muni bonds specifically, there was a decrease of 31.2% month-over-month and 24.7% decrease year-over-year.
The aggregate total of identifier requests for new municipal securities, including municipal bonds, long-term and short-term notes, and commercial paper, fell 29.3% versus November totals. On a year-over-year basis, overall municipal volumes were down 20.3%.
Secondary trading
DC 5s of 2024 at 2.36%. Boston 5s of 2024 at 2.21%-2.20%. Texas 5s of 2025 at 2.20%. NYC TFA 5s of 2026 at 2.13%-2.12%.
Georgia 5s of 2030 at 2.14%-2.15%. California 5s of 2030 at 2.11%. Triborough Bridge and Tunnel Authority 5s of 2031 at 2.18%-2.17% versus 2.30% Tuesday and 2.84%-2.76% original on 1/6.
Massachusetts 5s of 2035 at 2.52%. LA DWP 5s of 2036 at 2.56%-2.52%. California 5s of 2037 at 2.73% versus 2.81% Tuesday.
Washington 5s of 2047 at 3.23%-3.31% versus 3.53% on 1/12 and 3.64% on 1/10. Massachusetts 5s of 2048 at 3.37% versus 3.41%-3.40% Thursday and 3.51% on 1/12.
AAA scales
Refinitiv MMD’s scale saw cuts out long. The one-year was at 2.33% (unch) and 2.17% (unch) in two years. The five-year was at 2.07% (unch), the 10-year at 2.21% (unch) and the 30-year at 3.18% (+4) at 3 p.m.
The ICE AAA yield curve was cut up to five basis points: at 2.37% (+5) in 2024 and 2.23% (+2) in 2025. The five-year was at 2.07% (flat), the 10-year was at 2.18% (+1) and the 30-year yield was at 3.19% (+2) at 4 p.m.
The IHS Markit municipal curve was cut out long: 2.32% (unch) in 2024 and 2.15% (unch) in 2025. The five-year was at 2.08% (unch), the 10-year was at 2.20% (unch) and the 30-year yield was at 3.18% (+4) at a 4 p.m. read.
Bloomberg BVAL was cut up to three basis points: 2.32% (unch) in 2024 and 2.15% (unch) in 2025. The five-year at 2.10% (+1), the 10-year at 2.22% (+1) and the 30-year at 3.19% (+3).
Treasuries were weaker.
The two-year UST was yielding 4.172% (+6), the three-year was at 3.831% (+7), the five-year at 3.564% (+8), the seven-year at 3.522% (+9), the 10-year at 3.484% (+9), the 20-year at 3.781% (+9) and the 30-year Treasury was yielding 3.564% (+10) at 4 p.m.
Primary to come:
The Triborough Bridge and Tunnel Authority is set to price $1 billion of general revenue refunding bonds, Series 2023A. Jefferies.
Wisconsin (Aa2//AA/) is set to price Tuesday $383.645 million of taxable general fund annual appropriation refunding bonds of 2023, Series A, serials 2024-2036. Jefferies.
The Lake Travis Independent School District, Texas, (/AA+/AA+/) is set to price Thursday $300 million of unlimited tax school building bonds, Series 2023, serials 2024-2053. BOK Financial Securities.
The Spring Independent School District, Texas, (Aa2/AA-//) is set to price Thursday $297.945 million of unlimited tax school building bonds, Series 2023, serials 2024-2052. Siebert Williams Shank.
The Pflugerville Independent School District, Texas, (/AA+//AA+/) is set to price Tuesday $292.235 million of unlimited tax school building bonds, Series 2023A, serials 2024-2043, term 2048. Siebert Williams Shank.
The Weld RE-4 School District, Colorado, (Aa2/AA//) is set to price Tuesday $271 million of general obligation bonds, Series 2023, insured by the Colorado State Intercept Program. RBC Capital Markets.
The Waller Independent School District, Texas, (A1/A+//) is set to price Tuesday $159.055 million of unlimited tax school building bonds, Series 2023, serials 2027-2043, terms 2048 and 2053. Jefferies.
The Oklahoma Water Resources Board (/AAA/AAA/) is set to price Monday $150 million of Clean Water Program Revolving Fund revenue bonds, Series 2023 (2019 Master Trust), serials 2025-2043. BofA Securities.
The Texarkana Independent School District, Texas, (Aaa///) is set to price Tuesday $144 million of PSF-insured unlimited tax school building bonds, Series 2023, serials 2026-2053. Stephens.
The Nebraska Investment Finance Authority (/AA+//) is set to price Wednesday $114.850 million of single family housing revenue bonds, consisting of $85 million of non-AMT social bonds, Series 2023A, and $29.850 million of taxable bonds, Series 2023B. J.P. Morgan.
Competitive:
The Independent School District No. 89 of Oklahoma County (/AA//) is set to sell $126 million of combined purpose GOs, Series 2023A, at 1:30 p.m. eastern Monday.
The Kansas Development Finance Authority (//AAA/) is set to sell $157.540 million of revolving runds revenue bonds, Series 2023SRF (Kansas Department of Health and Environment), at 11:15 a.m. Eastern Wednesday.
The Spartanburg County School District 5, South Carolina, (Aa1/AA//) is set to sell $100 million of GOs, Series 2023 (South Carolina School District Credit Enhancement Program) at 11 a.m. Eastern Thursday.
