Munis weaker ahead of smaller holiday week new-issue calendar
7 min read
Municipals were weaker Friday ahead of a holiday-shortened week with a smaller new-issue calendar. U.S. Treasuries were firmer, and equities ended mixed.
Triple-A benchmarks were cut three to 11 basis points, depending on the scale, pushing the one-year muni above 3% and the 30-year to 3.50%. UST yields fell two to five basis points.
Muni-UST ratios rose. The three-year muni-UST ratio was at 60%, the five-year at 61%, the 10-year at 65% and the 30-year at 90%, according to Refinitiv MMD’s 3 p.m. ET read. ICE Data Services had the three at 62%, the five at 61%, the 10 at 66% and the 30 at 90% at 4 p.m.
“Through the first five weeks of the year, the muni market has been richening versus Treasuries, and has finally reached valuations that are not attractive anymore,” according to Barclays PLC strategists.
As USTs yields kept backing up, Barclays strategists Mikhail Foux, Clare Pickering and Mayur Patel “knew at some point munis would snap, and it finally happened this week.”
After this week’s economic releases, which included the consumer price index, the producer price index and retail sales “that surpassed expectations by a wide margin, the market mood has quickly changed, and investors ratcheted up their rate hike expectations,” they said.
Currently, “three 25bp hikes have been largely priced in, and market participants see the Fed staying on hold until the end of the year, similar to what Barclays’ economists expect,” they noted.
In muniland, the Barclays strategists said, things unraveled rather fast this week.
“Although initially tax-exempts outperformed in the rate selloff, their yields finally started adjusting mid-week, increasing 30-40bp,” they said.
The yield curve “has continued to invert, and not only in the front end, but also in the belly of the curve,” they said.
The 3s5s slope has now “moved deeper into negative territory while the 5s10s portion has become extremely flat,” according to Barclays strategists.
Meanwhile, “the front end (1-2y munis) has experienced additional pressure from the surging SIFMA rates,” they said.
While munis have cheapened meaningfully this week, “they are still rather rich versus Treasuries,” they said.
The Barclays strategists noted, “it helps that issuance during the short week will be light, but supply is likely to be heavier in March and, coupled with poor seasonals, might cause another leg down for the market.”
They “don’t view this as a repeat of Q1 2022, but still see better opportunities ahead for investors.”
The recent supply increase in new issuance coupled with some market weakness has contributed to yields moving slightly higher on the week, with the short end seeing the most pressure following Tuesday’s consumer price index data, according to Shaun Burgess, portfolio manager and fixed income analyst at Cumberland Advisors.
“The municipal market feels somewhat softer as scales continue to see cuts,” Burgess said Thursday. “The economic data we have seen this week points to an economy which remains robust and Fed policy which will clearly remain hawkish as they try to bring inflation to their 2% target,” he continued.
Burgess said deals are getting done when attractively priced, but he noticed balances on new issue transactions.
Overall, February has seen the municipal market selling off mainly due to fears of inflation and a more hawkish Federal Reserve Board, compared with January’s lower supply, lower yields and lower expectations for the fed funds rate for 2023, noted Steve Majoris, vice president, and portfolio manager at Advisors Asset Management.
The broad municipal market was up 1.23% year-to-date, but down 1.59% month-to-date.
“Treasury market volatility, recent outflows, and a repricing of Fed funds expectations seem to be causing some pain for municipals,” Majoris said, noting Treasury volatility and outflows look to be “pushing muni yields higher for the week.”
While significant moves in the Treasury market have been a large factor driving activity, the year has also started off with a healthy technical backdrop for municipals, according to Majoris.
“Demand in January was strong while supply was extremely light, down 10% relative to January 2022 and down 7% versus the five-year average for the month,” he explained. “February could be a different story, with a potential uptick in supply and inflows starting to slow,” he added.
Investors, Majoris said, are currently conflicted between fear of missing out on absolute yields not seen since 2013, and what appears to be a higher-for-longer interest rate environment. “Fund flows into municipal bond funds were strong in January, but have since become mixed, with outflows becoming more frequent,” he said.
“Now more than ever, investors need help understanding what they own and how the most aggressive Fed policy in 40 years will affect their portfolios,” Majoris said
The economy has become a mixed bag and slightly bifurcated, unemployment is at a record low, while housing and manufacturing are experiencing a downturn, he said.
“Although the municipal market is starved for an uptick in new issuance, valuations appear stretched when looking at muni-to-Treasury ratios,” he continued.
That may be keeping buyers a little hesitant to jump in, Majoris suggested.
Besides ratios, the economic climate will impact the municipal market as well.
“A red-hot labor market, hotter-than-expected year-over-year CPI and recent hawkish Fed comments are all headwinds for bonds moving forward,” he added.
Calendar stands at $3.6B
Investors will be greeted Monday with a new-issue calendar estimated at $3.603 billion.
There are $2.485 billion of negotiated deals on tap and $1.119 billion on the competitive calendar.
The negotiated calendar is led by $677.5 million of GOs from New York City, followed by $428 million of limited tax bonds from the Tarrant County Hospital District, Texas.
The Texas A&M University System Board of Regents leads the competitive calendar with the sale of $261.8 million of permanent university fund bonds.
Secondary trading
Washington 5s of 2024 at 3.20% versus 2.63% original on 2/7. NYC 5s of 2024 at 3.10% versus 2.65%-2.63% on 2/7. Maryland 5s of 2024 at 3.10%-3.05% versus 2.69%-2.70% on 2/10.
California 5s of 2028 at 2.55%. NYC TFA 5s of 2029 at 2.72% versus 2.43% Tuesday and 2.43% original on 2/9. NYC Municipal Water Finance Authority 5s of 2030 at 2.56%-2.55%.
Washington Suburban Sanitary Commission 5s of 2033 at 2.60% versus 2.25% original on Tuesday. LA DWP 5s of 2036 at 2.95%-2.90%.
LA DWP 5s of 2047 at 3.72%-3.70%. NY State Urban Development Corp. 5s of 2049 at 4.01% versus 3.72% Wednesday and 3.87% Tuesday. Illinois Finance Authority 5s of 2052 at 4.38% versus 4.15%-4.17% Tuesday and 4.00% on 2/2.
AAA scales
Refinitiv MMD’s scale was cut four to 10 basis points. The one-year was at 3.05% (+5) and 2.79% (+10) in two years. The five-year was at 2.47% (+8), the 10-year at 2.49% (+5) and the 30-year at 3.50% (+4) at 3 p.m.
The ICE AAA yield curve was cut three to 11 basis points: 3.11% (+3) in 2024 and 2.89% (+11) in 2025. The five-year was at 2.53% (+11), the 10-year was at 2.52% (+10) and the 30-year yield was at 3.53% (+5) at 4 p.m.
The IHS Markit municipal curve was cut five to 10 basis points: 3.04% (+5) in 2024 and 2.76% (+10) in 2025. The five-year was at 2.43% (+8), the 10-year was at 2.52% (+5) and the 30-year yield was at 3.52% (+5) at a 4 p.m. read.
Bloomberg BVAL was cut three to nine basis points: 3.06% (+7) in 2024 and 2.77% (+9) in 2025. The five-year at 2.51% (+7), the 10-year at 2.54% (+5) and the 30-year at 3.53% (+5).
Treasuries were firmer.
The two-year UST was yielding 4.620% (-2), the three-year was at 4.317% (-5), the five-year at 4.029% (-4), the seven-year at 3.941% (-4), the 10-year at 3.817% (-4), the 20-year at 4.012% (-4) and the 30-year Treasury was yielding 3.868% (-5) at 4 p.m.
Primary to come:
Negotiated offerings are dominated by a $677.5 million New York City general obligation offering slated for Wednesday. The fiscal 2023 refunding consists of $559.7 million of Series C serial bonds maturing from 2024 to 2034, and $117.8 million Series D serial bonds maturing from 2023 to 2027. Siebert Williams Shank & Co. will senior manage the deal, which is rated Aa2 by Moody’s Investors Service, AA-minus by Standard & Poor’s and AA-plus by Fitch.
The Tarrant County, Texas, Hospital District is scheduled to sell $428.2 million in a financing structured with serial bonds maturing from 2024 to 2043, and term bonds in 2048 and 2053. Siebert Williams Shank & Co. will senior-manage. The bonds are rated Aa1 by Moody’s, AA by S&P and AAA by Fitch.
Washington state’s Renton School District, meanwhile, is planning a $272.6 million offering of unlimited tax GO bonds on Wednesday. Insured by the Washington State School District Credit Enhancement Program, the triple-A rated deal will be senior-managed by Piper Sandler & Co.
The Worthington City School District in Franklin County, Ohio, will sell $233.9 million of school facilities unlimited tax GO bonds in a Thursday offering. The bonds, rated Aa1 by Moody’s and AA-plus by S&P, will be senior-managed by RBC Capital Markets.
A $140 million sale of Series 2023 GO bonds will be sold by David Douglas, Ore., School District No. 40 on Thursday. Insured by the Oregon School Bond Guaranty Act, the financing is rated AA-plus by S&P and consists of $89.3 million of Series A 2023 bonds and $50.9 million of Series 2023B. Piper Sandler & Co.
The Racine Unified School District in Wisconsin will sell $122.45 million of refunding debt consisting of $94.5 million of serial bonds maturing from 2034 to 2043, and $27.9 million of serial bonds maturing from 2029 to 2033. Baird is the book running senior manager.
Competitive:
The competitive calendar, meanwhile, is led by a $261.8 million Texas A&M University Board of Regents offering of unlimited tax Series 2023 GO bonds planned for Wednesday. The bonds mature serially from 2023 to 2042.
Waco, Texas, will sell two series of combination tax and revenue certificates of obligation bonds on Thursday. The Series 2023 A bonds consist of $146.8 million of tax-exempt bonds and $36.5 million of Series 2023 B taxable bonds, both series are rated Aa1 by Moody’s, A by S&P, and A-plus by Fitch.
Huntsville, Alabama, meanwhile will price a four-pronged offering of GO warrants also on Thursday. The largest series is $66.3 million of Series 2023 A bonds, followed by $44.9 million Series 2023 D school warrants, $44.2 million Series 2023 C sewer warrants, and $26.5 million Series 2023 B warrants. All of the bonds mature serially from 2024 to 2043 and are rated Aaa by Moody’s, A by S&P and AA by Fitch.
