Munis little changed after First Republic sale, May redemptions begin

Municipals were little changed Monday following the news of JPMorgan’s purchase of muni-laden First Republic Bank, while U.S. Treasury yields rose and equities were in the red to close the session.

JPMorgan’s move injected a measure of certainty over the near-term fate of FRB’s $19.4 billion muni portfolio and the market itself. Triple-A yields were mostly steady to a touch weaker out long while USTs saw larger losses on the long end.

Ratios fell Monday as a result of the day’s moves. The two-year muni-Treasury ratio was at 65%, the three-year at 65%, the five-year at 66%, the 10-year at 66% and the 30-year at 89%, according to Refinitiv MMD’s 3 p.m. ET read. ICE Data Services had the two-year at 67%, the three-year at 69%, the five-year at 67%, the 10-year at 69% and the 30-year at 93% at 3:30 p.m.

Municipals were in the red to close out April, down 0.2%, per the Bloomberg Municipal Index.

But munis are still performing well despite those losses, gaining 2.5% year to date, “a return that rivals some full-year outcomes over the last 10 years,” noted Kim Olsan, senior vice president at FHN Financial.

“April marked a more volatile month in terms of yield ranges, unlike January and March (straight rally mode) or February (straight selloff),” Olsan wrote Monday morning. “A late-month fade resulted in a softer finish across most sectors.”   

On a duration-matched basis, “munis underperformed Treasuries, with [Refinitiv] MMD/UST ratios cheaper across the curve, with 5y, 10y, and 30y ratios 6pp, 3pp, and 3pp cheaper, respectively, ending the month at 67%, 68%, and 92%,” Barclays wrote in a Monday report.

High-yield made gains in April, returning 0.5% and 3.3% this year, “erasing some of the 13% loss from 2022,” Olsan said.

Taxable munis “are having a moment in 2023,” with a year-to-date gain of 6.5%, Olsan noted.  

“That result well exceeds 2023 gains for the U.S. Treasury, U.S. Aggregate and Corporate bond indices,” she said. “Two factors are likely reasons: taxable muni supply is down 40% from 2022 and generic yields are materially higher than most taxable equivalent yields out to 10 years or so — creating better net yield alternatives for even the highest bracket buyers.” 

In an “unusual turn,” Olsan said, short-duration bonds “actually lost more share than long-term maturities, if just to a nominal degree.” 

During the first quarter, monthly results in the long index “well exceeded that of the short counterpart (both up and down).” 

“Still, the long-term index has gained nearly 4% this year, which has put a small dent in the 15%-plus loss from 2022,” Olsan said. “For the year, intermediate bonds have earned about 2.5%, besting the annual return for five of the last 10 years.”  

Supply, or the dearth thereof, continues to be the story as municipal volume was down another 24% year-over-year in April.

Total issuance year-to-date is at $107.626 billion, falling 25.2% from $143.872 billion in the same period of 2022. Thirty-day visible supply sits at $9.35 billion, per Bond Buyer data.

And while issuance is lighter than last week, it is not inconsequential for a Federal Open Market Committee meeting week, at about $6 billion, led by Chicago’s more than $1 billion of debt in three long-planned deals.

“This week’s new-issue supply will need to be priced to sell to clear the market,” according to a Nuveen report.

“While the first week of the new month will not be quiet — several large muni issues are scheduled, the Fed meets and payrolls report on Friday — munis should start with a firmer footing based on more favorable reinvestment totals,” Olsan said.

Nuveen’s Dan Close echoed this. “Municipal bonds should remain well bid. We are approaching historically large reinvestment months in May, June and July, with muted new-issue supply,” he said in a report.

Historically, a substantial portion of summer gains are generated in late May-June, Barclays said.

“As we approach the seasonally strong time of the year, the IG-HY yield differential is close to the two-year wides. HY technicals are quite supportive, as issuance has been subdued (less than $3bn in 2023) and HY fund flows have been positive this year,” Barclays strategists Mikhail Foux, Clare Pickering and Mayur Patel said.

The Barclays strategists said they have become “much more positive on the muni market prospects, as technicals will remain supportive.”

“Summer redemptions are looming large and are quite sizable; supply should pick up, but will not overwhelm; and with the Fed inching closer to the end of the tightening cycle, rates are unlikely to come under significant pressure,” they wrote. “We see better value in the asset class and recommend to start slowly adding; however, investors should not over-commit, as munis are not overly cheap by historic metrics, especially 10 years and under.”

AAA scales
Refinitiv MMD’s scale was little changed: The one-year was at 3.00% and 2.69% in two years. The five-year was at 2.38%, the 10-year at 2.35% and the 30-year at 3.39% at 3 p.m.

The ICE AAA yield curve was weaker out long: 3.03% (unch) in 2024 and 2.72% (unch) in 2025. The five-year was at 2.37% (unch), the 10-year was at 2.35% (+1) and the 30-year was at 3.42% (+3) at 4 p.m.

The IHS Markit municipal curve was little changed: 2.99% in 2024 and 2.69% in 2025. The five-year was at 2.38%, the 10-year was at 2.35% and the 30-year yield was at 3.39%, according to a 4 p.m. read.

Bloomberg BVAL was little changed: 2.80% (unch) in 2024 and 2.68% (unch) in 2025. The five-year at 2.34% (unch), the 10-year at 2.34% (unch) and the 30-year at 3.47% (+1) at 4 p.m.

Treasuries were weaker.

The two-year UST was yielding 4.14% (+8), the three-year was at 3.865% (+10), the five-year at 3.641% (+13), the 10-year at 3.582% (+13), the 20-year at 3.939% (+13) and the 30-year Treasury was yielding 3.823% (+15) at 4 p.m.

Primary to come:
Alabama’s Energy Southeast (A1//A+/) is set to price $846.8 million of fixed-rate and secured overnight fixed-rate energy supply revenue bonds Monday. Morgan Stanley & Co.

Washington State’s Energy Northwest (Aa2/AA-/AA/) is set to price $518.1 million of electric revenue and refunding bonds on behalf of Columbia Generating Station on Tuesday. JPMorgan Securities LLC.

Alabama’s Black Belt Energy Gas District (A2///) is set to price $471.3 million of gas project revenue bonds next week. Goldman Sachs & Co. 

Chicago (/AA//AA+) is set to price $449.9 million of second lien water and wastewater revenue and revenue refunding bonds insured by Assured Guaranty Tuesday. Mesirow Financial Inc.

Chicago (/AA//AA+) is also set to price $326.3 million of senior lien wastewater transmission bonds insured by Assured Guaranty Municipal Corp. Tuesday. Serials 2029 to 2043, terms in 2048, 2053, 2058, and 2062. Stifel, Nicolaus & Co.

Minneapolis (A1/AA-/AA-/) is set to price $363 million of healthcare system revenue bonds on behalf of Allina Health System Tuesday. JPMorgan Securities LLC.

The Illinois Sales Tax Securitization Corp. is set to price $218.5 million of sales tax securitization bonds (/AA-/AA/AAA) with a forward delivery and second lien sales tax securitization bonds (/AA-/AA-/AA+) with a forward delivery on Monday. Serial bonds 2024 to 2035. RBC Capital Markets.

Johnson City, Tennessee, Health & Educational Facilities Board (/A-/A/) is set to price $187.5 million of hospital revenue improvement and refunding bonds on behalf of Ballad Health on Thursday. Serial bonds 2024 to 2034, term in 2033. Banc of America Securities.

Oregon (Aa1/AA+/AA+/) is set to price $159 million of GO paper. Serial bonds 2024 to 2043, terms in 2043, 2048, 2053. UBS Financial Services.

The New York Transportation Development Corp. (Baa3///) is set to price $137.5 million of long-term taxable sustainability revenue bonds on Tuesday. Term in 2051 Citigroup Global Markets.

Competitive
The Long Beach, California, Unified School District (Aa2/AA-//) is set to sell $480 million of general obligation bonds Tuesday. Serials 2023 to 2053.

Garland, Texas, (/AA+/AAA/) is set to sell $130.5 million of taxable GO and GO refunding bonds, certificates of obligation, and water and sewer revenue refunding bonds Tuesday. Serials 2024 to 2043. 

Portland, Oregon, (Aa2/AA//) is set to sell $435.4 million of second lien sewer system revenue and refunding bonds on Wednesday. Serials 2023 to 2047.