Munis changed a basis point or two in spots, USTs better
6 min read
Municipals were little changed, no more than a basis point or two in spots, while U.S. Treasuries were better and equities ended up.
The three-year muni-UST ratio was at 62%, the five-year at 63%, the 10-year at 66% and the 30-year at 91%, according to Refinitiv MMD’s 3 p.m. ET read. ICE Data Services had the three at 63%, the five at 63%, the 10 at 66% and the 30 at 91% at 4 p.m.
The availability of higher yields has brought some investors into the market — even though volume in the primary and secondary markets are on the thin side and the municipal market is a bit of a mixed bag right now.
“Some people are getting pushed in who have been patiently waiting for yields to go up, but there’s still a lot of money out there,” a New York trader said.
After municipal yields fell almost 30 basis points more than two weeks ago, the market became more attractive, he noted.
“We have seen a decent adjustment in raw yields with 4% munis at 4.50% out long, we have seen a lot of bottom fishers looking for some value,” the trader added.
In addition, he noticed more buyers than sellers in the market recently due to the “cheaper, raw yields.”
“Percentages aren’t that great, but 4s at a 4.50% in raw yields will attract people to come in who haven’t spent money lately,” the trader added, since investors haven’t seen 4.50% available in quite a while.
“The perception is that the Fed will continue to raise rates and keep rates high, but the market continues to ignore that a little and is putting in decent performance,” the trader said.
Supply remains on the lower side, and the Street is fairly thin on supply as well, while the market feels a little firmer from recent sessions, he added.
With only four trading days last week, “secondary trading for the week was only $29.1 billion with 56% of the trades being client buys,” said Jason Wong, vice president of municipals at AmeriVet Securities.
With the limited supply, he said, “investors continue to go to the secondary markets to purchase bonds.” Client bids-wanted was small too, with $4.69 billion put up for the bid, per Bloomberg.
Muni yields continue to climb last week as yields on “10-year notes rose by 7.7 basis points to 2.61%, marking three straight weeks of rising rates,” he said.
While yields rose considerably, Wong said, “the tone of the market has improved from the prior week where we saw an almost 50-basis-point-rise in the front end of the curve.”
“Although muni yields continue to rise, they continue to be rich compared to Treasuries and demand continues to outpace supply,” he said. “With the rise in yields, the muni curve flattened again this past week … by 10 basis points to 71 basis points.”
For the second consecutive week, munis saw investors pull money from mutual funds. Investors pulled about $1.77 billion from mutual funds, per Refinitiv Lipper, the largest year-to-date.
While muni mutual fund flows were negative that does not necessarily mean “a new trend of outflows is beginning, but with the absence of demand from banks and insurance companies, a slowdown of demand from individual investors will exacerbate volatility, potentially furthering concerns among retail investors and leading to higher yields and wider spreads, especially for out-of-favor structures, such as 3- and 4-handle coupon rate bonds,” said CreditSights strategists Pat Luby and Sam Berzok.
“As we enter the final week of February, munis continue to struggle with yields rising an average of 45 basis points this month,” Wong said.
Of the 17 trading days this month, eight have seen a rise in yields, and yields fell on only one of the remaining nine trading days, he said.
“This has pushed rates back to the levels that we started the year with,” Wong said. Munis are down 2.29% on the month and have a year-to-date return of just 0.51%. March’s performance historically has been on the weak side.
“In the past 28 years munis have been down 13 years and positive in 15 years, and of the 15 years of positive returns, only four have had returns of 100 basis points,” Wong said of the Bloomberg municipal bond index.
Issuers will be returning $23 billion of principal in March, “a drop of 17% from February’s total but 37% more than is currently forecast for April,” the CreditSights strategists said.
Over the last 12 years, they said, “March’s average price return has been the worst of the year.” They noted March redemptions will be the heaviest of the year from issuers in New York and South Carolina.
Secondary trading
NYC TFA 5s of 2024 at 3.00% versus 3.04% Thursday. Maryland 5s of 2025 at 2.97% versus 2.45% on 2/13 and 2.38% on 2/7. Texas A&M University System 5s of 2026 at 2.89% versus 2.80% Wednesday.
Maryland 4s of 2028 at 2.74%. Georgia 5s of 2029 at 2.60%-2.61%. California 5s of 2030 at 2.66%-2.63%.
Renton SD #403, Washington, 5s of 2038 at 3.63%. Fort Worth ISD, Texas, 5s of 2039 at 3.45%-3.44% versus 3.04% original on 2/3. Huntsville, Alabama, 5s of 2039 at 3.63%.
Illinois Finance Authority 5s of 2052 at 4.37% versus 4.37%-4.35% Friday and 4.35% on 2/22.
AAA scales
Refinitiv MMD’s scale was cut up to three basis points. The one-year was at 3.03% (unch) and 2.95% (unch) in two years. The five-year was at 2.64% (+3), the 10-year at 2.59% (unch) and the 30-year at 3.56% (unch) at 3 p.m.
The ICE AAA yield curve was bumped up one to two basis points: 3.10% (-2) in 2024 and 3.00% (-2) in 2025. The five-year was at 2.66% (-2), the 10-year was at 2.60% (-1) and the 30-year yield was at 3.58% (-1) at 4 p.m.
The IHS Markit municipal curve was cut up to three basis points: 3.04% (unch) in 2024 and 2.95% (unch) in 2025. The five-year was at 2.62% (+3), the 10-year was at 2.58% (unch) and the 30-year yield was at 3.58% (unch) at a 4 p.m. read.
Bloomberg BVAL was cut up to one basis point: 3.15% (unch) in 2024 and 2.93% (unch) in 2025. The five-year at 2.62% (+1), the 10-year at 2.62% (unch) and the 30-year at 3.60% (unch).
Treasuries were firmer.
The two-year UST was yielding 4.782% (-4), the three-year was at 4.499% (-4), the five-year at 4.165% (-5), the seven-year at 4.071% (-4), the 10-year at 3.921% (-3), the 20-year at 4.108% (-1) and the 30-year Treasury was yielding 3.930% (flat) at 4 p.m.
Primary to come:
The negotiated activity will be highlighted by a $650 million offering of Series 2023 commodity supply revenue bonds from the Southeast Energy Authority, Alabama. The bonds will be senior managed by Goldman, Sachs & Co. and are rated A1 by Moody’s Investors Service.
The Port of Portland, Oregon, is slated to sell $583.1 million of Series 29 Port International airport revenue AMT green bonds on Thursday. Goldman, Sachs is the senior manager of the deal, which is rated AA-minus by both S&P Global Ratings and Fitch Ratings.
A $528.9 million offering of dedicated capital improvement tax bonds is on tap from the Chicago Board of Education on Tuesday. The Series 2023 bonds mature serially from 2033 to 2043, with a term bond in 2048 and are rated A by S&P and BBB-plus by Fitch. BofA Securities is the senior manager.
The Washington Metropolitan Area Transit Authority, District of Columbia, is planning a $392 million sale of Series 2023 dedicated revenue green bonds on Thursday. RBC Capital Markets is the senior bookrunner and the bonds are rated AA by S&P and Fitch and AA-plus by Kroll Bond Rating Agency.
The Texas Department of Housing and Community Affairs is slated to sell a $230 million offering of residential mortgage revenue bonds on Wednesday. The Series 2023 A non-AMT bonds are structured with serial from 2024 to 2035 and terms in 2038, 2043, 2048, and two in 2053. The bonds will be lead managed by RBC and are rated Aaa by Moody’s and AA-plus by S&P.
A $225 million sale of Series 2023 general obligation bonds is planned by Portland Community College. Oregon. Rated AA-plus by S&P. The bonds are being senior managed by Piper Sandler & Co.
The San Jose-Evergreen Community College District in California plans a $200 million sale of Series C GO bonds on Tuesday. The bonds are rated Aa1 by Moody’s and AA-plus by S&P. Piper Sandler will be the book runner.
The Illinois Housing Development Authority, meanwhile, will sell $120 million of Series A non-AMT social bonds on Tuesday. The bonds are rated Aaa by Moody’s and will be senior managed by Morgan Stanley & Co. LLC.
Burbank, California, on Tuesday is slated to sell $120 million of Series 2023 water and power electric revenue bonds. Structured with serial bonds from 2026 to 2043, and term bonds in 2048 and 2053, the bonds will be senior managed by RBC.
Competitive:
The largest competitive deal is a triple-A-rated Cambridge, Massachusetts, sale totaling $93.63 million slated for Wednesday.
