Municipals steady to start the week, USTs sell off

Municipals were steady to start the week, while U.S. Treasuries sold off and equities ended mixed.

The two-year muni-UST ratio was at 60%, the three-year at 61%, the five-year at 62%, the 10-year at 65% and the 30-year at 89%, according to Refinitiv MMD’s 3 p.m. ET read. ICE Data Services had the two-year at 64%, three-year at 63%, the five-year at 64%, the 10-year at 68% and the 30-year at 93% at 3 p.m.

Average daily trading volume for munis “has slumped since mid-March,” possibly because of “the drama in the regional-banking sector, combined with whipsawing U.S. Treasury pricing over the past several weeks,” said Eric Kazatsky, head of municipal strategy at Bloomberg Intelligence.

Trading for last week was around $37.2 billion with client buys at 56%, said Jason Wong, vice president of municipals at AmeriVet Securities.

“With investor sentiment that the Fed will be done with their rate hikes, many jumped at this opportunity for higher rates,” he said.

Client bids-wanted totaled $5.1 billion last week, according to Bloomberg.

During times of heightened volatility, Kazatsky said, “it’s not unusual for muni returns to suffer as well — something that isn’t happening yet.”

Munis “tend to outperform during Federal Reserve tightening cycles,” which can “most easily seen in week-to-week performance comparisons and ratio direction,” he said.

This isn’t always true, though. For instance, triple-A benchmarks have underperformed USTs in almost all tenors over the past five trading days, Kazatsky said.

“The widest margin was in the two-year portion, where munis lagged behind taxable counterparts by almost half the 20-bp move,” he said. “The five-year portion looked similar, but the gap narrowed at 10 years.”

While it can be argued “whether quantitative tightening is close to done, the Fed’s recent 25-bp hike indicates the data it’s relying on show risks are still present,” he said.

Munis held “their firmer tone as Treasuries continued to rally once more this past week,” Wong said. Yields on 10-year notes “fell by 8.4 basis points to 2.31%,” Wong said.

Munis outperformed USTs “due to the late rally on Friday that lowered yields by 6.8 basis points across the curve,” he noted.

Debt maturing in 10 years is yielding 68.49% compared to 66.73% one month prior, Wong said.

“With the yields on the short end getting the most attention from investors, we did see the muni curve steepen by 4.5 basis points to finish the week at 98 basis points,” he said.

Tax-exempt returns “appear to have turned negative during prior periods of heightened volatility,” Kazatsky said.

However, “30-day volatility for munis had declined at the start of this year from the latest highs” of last year, he noted.

“As volatility has shot up from a combination of macro and domestic issues, municipal returns seem to be bucking prior trends,” Kazatsky said. “While U.S. Treasury rates have seesawed, municipals have steadily crept lower, helping to log the best March returns since 2008.”

Historically, he said, March “has been a weaker month for total returns,” and the strength of munis “speaks to the sector’s current haven appeal.”

Investors continued to pull money from muni bond funds last week, with Refinitiv Lipper reporting $427 million of outflows after outflows of $461 million a week before. So far, investors have added around $1.31 billion to muni funds this year.

With the Federal Open Market Committee “raising rates by 25 basis points to 5% on Wednesday, munis continued to be firmer as they followed the rally in Treasuries,” Wong said.

“Signs are pointing that the Fed is near the end of its work on inflation and we could even see the Fed cut rates later this year,” according to Wong.

He noted this was positive for munis as there had been “record outflows of $152 billion and a loss of over 8.50% in 2022.”

With the Fed seemingly less hawkish, Wong said, “this is positive news for the muni supply as supply continues to be at all-time lows.”

When new-issue volume picks up, he said, expect “to see investor demand grow and expect to see opportunities for investors that we have not seen in years.”

Uncertainty appears to weigh on supply, “but a pickup is possible if lower interest rates stick,” Kazatsky said, noting this week’s sales are “an improvement over the dust bowl that typically accompanies an FOMC meeting week.”

Secondary trading
California 5s of 2024 at 2.48% versus 2.46%-2.44% Friday and 2.47% on 3/13. Triborough Bridge and Tunnel Authority 5s of 2024 at 2.53% versus 2.51% Friday and 2.61% on 3/21. New York State Urban Development Corp. 5s of 2025 at 2.48%-2.45%.

Utah 5s of 2027 at 2.21% versus 2.23% Friday. NYC 5s of 2027 at 2.36%. Charlotte, North Carolina, 5s of 2029 at 2.19%-2.18%.

Connecticut 5s of 2030 at 2.44%. Wisconsin DOT 5s of 2031 at 2.29% versus 2.37%-2.36% Thursday and 2.55% original on 3/15. Triborough Bridge and Tunnel Authority 5s of 2031 at 2.35% versus 2.46%-2.43% on 3/21.

Los Angeles Department of Water and Power 5s of 2043 at 3.36%-3.35% versus 3.38%-3.37% Thursday and 3.45% on 3/20.

AAA scales
Refinitiv MMD’s scale was unchanged. The one-year was at 2.49% and 2.40% in two-years. The five-year was at 2.24%, the 10-year at 2.29% and the 30-year at 3.35% at 3 p.m.

The ICE AAA yield curve was flat: 2.54% in 2024 and 2.45% in 2025. The five-year was at 2.22%, the 10-year was at 2.30% and the 30-year was at 3.39% at 3 p.m.

The IHS Markit municipal curve was unchanged: 2.49% in 2024 and 2.40% in 2025. The five-year was at 2.23%, the 10-year was at 2.29% and the 30-year yield was at 3.33%, according to a 3 p.m. read.

Bloomberg BVAL was little changed: 2.47% (unch) in 2024 and 2.41% (unch) in 2025. The five-year at 2.24% (+1), the 10-year at 2.29% (unch) and the 30-year at 3.35% (+1).

Treasuries sold off.

The two-year UST was yielding 4.011% (+24), the three-year was at 3.792% (+21), the five-year at 3.599% (+19), the seven-year at 3.576% (+17), the 10-year at 3.532% (+15), the 20-year at 3.899% (+13) and the 30-year Treasury was yielding 3.764% (+12) at 4 p.m.

Primary to come:
New York City’s (Aa2/AA/AA/AA+/) $950 million of Fiscal 2023 Series E, Subseries E-1 tax-exempt GOs. RBC Capital. Retail Tuesday, institutional Wednesday.

The Michigan State Housing Development Authority’s (Aa2/AA+/NR/) $398.41 million of single-family mortgage revenue bonds consisting of Series 2023A non-AMT and Series 2023B taxable social bonds. Barclays Capital. Retail Tuesday, institutional Wednesday.

The City of Los Angeles Department of Airports (Aa3/AA-/AA-/NR) Los Angeles International Airport’s $299.93 million of Series 2023A subordinate refunding revenue green private activity AMT bonds and Series 2023B subordinate refunding revenue governmental purpose non-AMT bonds. Ramirez & Co. Pricing on Tuesday.

The City of San Diego Public Facilities Financing Authority’s (Aa2/NR/AA/NR) $226.81 million of Series 2023A senior water revenue bonds. Morgan Stanley. Pricing on Thursday.

The San Mateo-Foster City School District, California’s (Aaa/AA+//) $150 million of Election of 2020 Series B GOs. Stifel Pricing on Tuesday.

The Greater Texoma Utility Authority, Texas’ (///) $138.455 million of Series 2023 contract revenue bonds. Baird. Pricing on Tuesday.

The Tennessee Housing Development Authority’s (Aa1/AA+//) $120 million of Issue 2023-1A residential finance program social bonds. Raymond James. Pricing on Tuesday.

The Republic Services Inc. (NR/BBB+/NR/NR) $115 million of remarketing, refunding of Series CMFA and PEDFA. BofA Securities. Pricing on Thursday.

The City of San Diego Public Facilities Financing Authority’s (/AA-/AA-/) $114.24 million of Series 2023A lease revenue refunding bonds for capital improvement projects. RBC Capital Markets. Pricing on Wednesday.

The Columbia County School District, Georgia’s (Aa1/AA+//) $107.33 million of Series 2023 GOs insured by the Georgia State Aid Intercept Program. Raymond James. Pricing on Tuesday.

The City of Santa Rosa High School District, California’s (Aa2///) $104 million of Series 2023A GOs. Raymond James. Pricing on Wednesday.

The Trustees of Purdue University’s (Aaa/AAA//) $100.835 million of Series 2023A student facilities system revenue refunding bonds. Wells Fargo. Pricing on Tuesday.

Competitive:
The city and county of San Francisco (Aaa/AAA/AA+/) is hitting the market with $236.3232 million of GO bonds in two deals on Tuesday. The sales consist of $207.47 million of Series 2023C taxable affordable housing social bonds and Series 2023B Embarcadero Seawall earthquake safety taxables and $28.85 million of Series 2023A tax-exempt heath and recovery bonds.

Also on Tuesday, Wake County, North Carolina, (Aaa/AAA/AAA/) will sell $384.865 million of GOs in two deals consisting of $309.675 million of Series 2023A public improvement bonds and $75.19 million of Series 2023B refunding bonds.

Oklahoma City (Aaa/AAA//) is selling $117 million of Series 2023 GOs on Tuesday.

New York City (Aa2/AA/AA/) is selling $240 million of taxable GOs, Fiscal 2023 Series E, Subseries E-2 on Wednesday.

In the short-term sector Wednesday, Anchorage, Alaska, (/SP1+//) is selling $125 million of tax anticipation notes.