Munis weaker in spots, face difficult technicals

Municipals were weaker in spots Monday as they face difficult technicals, while U.S. Treasuries were firmer five years and out and equities rallied.

The three-year muni-UST ratio was at 52%, the five-year at 54%, the 10-year at 60% 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 55%, the 10 at 60% and the 30 at 87% at 4 p.m.

Muni yields ended last week higher, said Nuveen strategists Anders S. Persson and John V. Miller.

Short-term muni yields increased 16 bps and long-term rates rose 11 bps, they said.

“Fund flows turned positive again, and this week’s larger new issue supply will need to be priced cheaply to pique investor interest,” they said.

UST rates in general are selling off, “as investors are increasingly questioning the Fed[eral Reserve]’s resolve in conquering inflation,” they said.

The next Fed rate hike will “likely put short-term rates at 5%, and it is hard to see inflation running rampant at that level,” according to the Nuveen strategists.

Some believed the Fed may start lowering rates by the end of 2023, a scenario that now looks unlikely, they added.

“But with rates in general so much cheaper than they were last year at this time, a fair number of investors should be willing to support fixed income at current levels,” they said.

Tax-exempt munis remain well bid. However, the Feb. 1 coupon reinvestment is small and new issue supply is building, they noted.

“Munis may sell off slightly as a result, but we would look at any selloff as potential buying opportunity,” they said.

February municipal bond activity compared to last month is brisk yet more finicky in the face of an ongoing supply shortage, according to Jeff Lipton, head of municipal credit and market strategy and municipal capital markets at Oppenheimer & Co.

Investor interest in new deals is strong, but investors are fussy nonetheless, he noted.

“The retail investor continues to be discerning, awaiting better entry points and valuations, even though there is ample sidelined cash seeking more rewarding deployment,” Lipton said.

Supply is still problematic, according to Lipton, with $7 billion in new volume scheduled this week.

“Although building, the calendar remains smaller than usual,” he said.

“Deals are seeing an aggressive bid, yet pre-sale is experiencing weaker support,” he noted.

The two- to five-year range is showing minimal interest on a pre-sale basis, whereas institutional buyers are showing strong interest out to 15 years — with the long-end revealing a lack of money being put to work, he added.

Comparing February to last month, the investment thesis is very different, Lipton said. 

For instance, “long-dated 4% coupon discounts are not seeing the type of traction visible last month,” he explained.

“Current interest resides with higher coupon structures having shorter calls that offer more palatable dollar prices,” Lipton added.

Overall, investor sentiment continues to improve and fund flows into municipal funds have been positive for four of the six weeks in 2023, noted Tom Kozlik, managing director and head of public policy and municipal strategy at HilltopSecurities Inc.

Although the week is starting off on a relatively slow pace, he expects more reinvestment dollars to be available this week.

“There are reasons in the improved investor sentiment and money flowing into funds to expect more activity,” Kozlik said.

“Perhaps the attitude is only a holdover from recent weeks and the market will come to life in an instant,” Kozlik said.

A bump in demand is expected this week as issuers will be returning $11.1 billion of principal on Wednesday, said CreditSights strategists Pat Luby and Sam Berzok.

“Once those dollars are put back to work, though, technical support of the market from reinvestment demand will be weaker as redemption amounts trend lower in March and April before spiking higher for the annual summer redemption season, starting in May,” they said.

Most tax-exempt yields “are too rich to appeal to banks, insurance companies and other institutional investors subject to the 21% federal income tax rate,” they noted.

That leaves the “market reliant on direct or indirect demand from individual investors and still subject to exaggerated volatility,” the CreditSights strategists said.

Secondary trading
Florida Board of Education 5s of 2024 at 2.65% versus 2.20% on 2/2. Wisconsin 5s of 2024 at 2.69% versus 2.76% Friday. New York City 5s of 2025 at 2.64%-2.63% versus 2.45% Thursday.

California 5s of 2027 at 2.21%. Nevada 5s of 2029 at 2.26%. Minnesota 5s of 2030 at 2.20%.

NYC TFA 5s of 2036 at 3.00% versus 3.00%-2.99% Friday. Washington 5s of 2039 at 3.23% versus 3.11% on 1/31.

Charleston water, South Carolina, 5s of 2052 at 3.54%.

AAA scales
Refinitiv MMD’s scale was cut five basis points at one- and two-years. The one-year was at 2.66% (+5) and 2.40% (+5) in two years. The five-year was at 2.12% (unch), the 10-year at 2.24% (unch) and the 30-year at 3.28% (unch) at 3 p.m.

The ICE AAA yield curve was cut one to three basis points: 2.72% (+3) in 2024 and 2.49% (+3) in 2025. The five-year was at 2.18% (+1), the 10-year was at 2.24% (+1) and the 30-year yield was at 3.33% (+2) at 4 p.m.

Bloomberg BVAL saw cuts on the short end: 2.67% (+3) in 2024 and 2.38% (+2) in 2025. The five-year at 2.17% (unch), the 10-year at 2.29% (unch) and the 30-year at 3.33% (+1).

Treasuries were firmer five years and out.

The two-year UST was yielding 4.524% (flat), the three-year was at 4.206% (flat), the five-year at 3.923% (-1), the seven-year at 3.826% (-2), the 10-year at 3.708% (-3), the 20-year at 3.910% (-4) and the 30-year Treasury was yielding 3.779% (-4) at 4 p.m.

Primary to come:
The Regents of the University of California (Aa2/AA/AA/) is set to price Wednesday $2.128 billion of general revenue bonds, consisting of $1.732 billion of tax-exempt bonds, 2023 Series BN; $52.345 million of taxables, 2023 Series BO; and $344.380 million of variable rate demand notes, 2023 Series BP. Morgan Stanley & Co.

The Salt River Project Agricultural Improvement and Power District, Arizona, (Aa1/AA+//) is set to price Wednesday $500 million of Salt River Project electric system revenue bonds, 2023 Series A, serials 2029-2032 and 2043, terms 2047 and 2050. J.P. Morgan Securities.

The San Francisco City and County Airport Commission (A1//A+/) is set to price Wednesday for the San Francisco International Airport $456.185 million of second series revenue refunding bonds, consisting of $376.490 million of AMT bonds, Series 2023A, serials 2023-2030, 2033 and 2038, and $79.695 million of non-AMT/governmental purpose bonds, Series 2023B, serial 2043. BofA Securities.

The Lower Colorado River Authority (/A/A+/) is set to price Wednesday $433.415 million of transmission contract refunding revenue bonds (LCRA Transmission Services Corporation Project), Series 2023, serials 2024-2043, terms 2048 and 2053. RBC Capital Markets

The Tarrant County Hospital District, Texas, (Aa1//AA/AAA) is set to price Thursday $412.160 million of limited tax bonds, Series 2023, serials 2024-2043, terms 2048 and 2053. Siebert Williams Shank & Co.

Pasco County, Florida, (A1/A//) is set to price Tuesday $344.405 million of capital improvement cigarette tax allocation bonds (H. Lee Moffitt Cancer Center Project), Series 2023A, serials 2025-2054. BofA Securities.

The Prosper Independent School District, Texas, (Aaa//AAA/) is set to price Tuesday $250 million of PSF-insured unlimited tax school building bonds, Series 2023. Piper Sandler & Co.

The Houston Independent School District, Texas, (Aaa/AAA//) is set to price Wednesday $163.250 million of limited tax refunding bonds, consisting of $98.680 million of PSF-insured bonds, serials 2024-2038, and $64.570 million on non-PSF-insured bonds, serials 2027-2032. HilltopSecurities.

Dallas, Texas, (/AAA/AA/) is set to price Tuesday $160.235 million of waterworks and sewer system revenue refunding bonds, Series 2023A, serials 2024-2043, terms 2047 and 2052. Stifel, Nicolaus & Co.

The California Pollution Control Financing Authority (Baa3//BBB/) is set to price Thursday $158.110 million of AMT water furnishing revenue bonds (Poseidon Resources (Channelside) LP Desalination Project), Series 2023. Morgan Stanley & Co.

The Racine Unified School District, Wisconsin, (Aa3///) is set to price Tuesday $122.450 million, consisting of $94.540 million of refunding bonds, Series GORB, serials 2034-2043, and $27.910 million of bonds, Series GOPN, serials 2029-2033. Baird.

Competitive:
The Washington Suburban Sanitary District, Maryland, (Aaa/AAA/AAA/) is set to sell $340 million of consolidated public improvement bonds of 2023, at 10:15 a.m., Eastern, Tuesday.

The Bend-La Pine Administrative School District 1, Oregon, (Aa1///) is set to sell $100 million of GOs, Series 2023, at noon, Eastern, Wednesday.