Munis ignore UST rally ahead of the Fed

Municipals stayed in their own lane Tuesday, holding mostly steady, while U.S. Treasuries rallied in a flight-to-safety bid as equities sold off on concerns over the banking sector and the threat of a U.S. default over the debt limit.

“Wall Street is quickly hitting the sell button as banking turmoil appears it is not going away anytime soon and was ready to focus on the next weakest link, potentially distressed lenders with tremendous exposure to commercial real estate,” said Edward Moya, senior market analyst at OANDA. “Risk appetite did not stand a chance as traders focused on lingering doubts over the regional banks, rising recession odds, and growing risks that the U.S. could default on its debt next month.”

Triple-A yields were steady to a basis point or two better, depending on the curve while USTs saw a reversal from Monday with yields falling up to 19 basis points.

Ratios rose as a result. The two-year muni-Treasury ratio was at 68%, the three-year at 68%, the five-year at 69%, the 10-year at 69% and the 30-year at 91%, according to Refinitiv MMD’s 3 p.m. ET read. ICE Data Services had the two-year at 65%, the three-year at 66%, the five-year at 64%, the 10-year at 66% and the 30-year at 89% at 4 p.m.

The municipal market was steady to firmer Tuesday on the back of a Treasury rally, as participants seemed to be taking a wait-and-see approach to the FOMC decision, according to Roberto Roffo, managing director and portfolio manager at SWBC Investment Company.

“The market is expecting a 25 basis point rise in the Fed funds rate, but more importantly, investors are waiting for the comments for a better idea of what to expect going forward,” Roffo said Tuesday afternoon.

“A hawkish tone could mean further interest rate increases in the future, while a dovish tone could mean the Fed is done, which would bode well for municipal investors going forward,” he added.

Despite substantial day-to-day volatility in USTs last week, “tax-exempt benchmarks were only slightly adjusted through Friday, curves bear flattening into entirely oversold valuations amid investor and dealer uncertainty,” said Matt Fabian, a partner at Municipal Market Analytics.

“This was a highly reasonable move,” he said. “Not only were traders still recovering from volatility and supply the week before, but deepening trauma at First Republic Bank and a worsening picture for debt limit negotiations in DC has blurred near-term outlooks.”

With First Republic Bank, “the bank’s accelerating depositor flight after earnings last week” led to the Federal Deposit Insurance Corp. seizure and sale to J.P. Morgan “of all or most of First Republic Bank’s around $20 billion in municipal securities holdings,” he said. First Republic Bank also has $3 billion in direct loans to local governments, he said.

J.P. Morgan’s “securities purchase, which is a rarity among FDIC bank seizures, moots, at least for now, concerns that First Republic Bank’s bond book, which comprises many high-grade, low-coupon structures, would add (a lot) more pressure to municipal prices and liquidity,” he said.

But First Republic Bank’s “collapse could still set off a new wave of depositor withdrawals elsewhere, and thus bank investment liquidations, including municipals,” according to Fabian. MMA expects “that bank selling (either outright or via portfolio runoff) will mitigate at least some sector outperformance from scarcity of new-issue tax-exempts,” he said.

CreditSights strategists Pat Luby and Sam Berzok expect “last week?s positive tone to carry over into this week, which starts out with $21 billion of principal and interest getting paid out to investors — $14 billion of principal and $7 billion of interest.”

During the rest of the month, they said investors will receive an additional $13 billion of principal and $5 billion more of interest.

For May, they noted, “total principal and interest payments will total $38 billion, up 54% from April, which totaled $25 billion (the lowest monthly total of the year).”

May kicks off the annual “‘Summer Redemption Season’ … an annual four-month phenomenon in the municipal market, during which it is not unusual for redemptions to exceed new issue supply, CreditSights strategists said.

While “active managers may be inclined to provide for reinvestment of maturing or called bond principal in advance of the actual call or maturity date, individual investors and [separately managed account managers are often reluctant to sell bonds prior to maturity (to avoid realizing taxable capital gains in a portfolio of tax-exempt bonds) and will wait until bonds are redeemed before putting the principal back to work,” they said.

Due to this, they “expect that the summer surge in redemption flows will mean a near-simultaneous surge of reinvestment demand from retail investors (both directly and indirectly) and that reinvestment demand will be strongest in the front half of the curve, especially for bonds due in 10-years or less.”

In the primary market Tuesday, J.P. Morgan priced for Energy Northwest, Washington, (Aa2/AA-/AA/) $508.670 million of electric revenue refunding bonds, Series 2023A. The first tranche, $16.475 million of Project 1 bonds, saw 5s of 7/2034 at 2.65%, callable 7/1/2033.

The second tranche, $417.995 million of Columbia Generating Station bonds, saw 4s of 7/2029 at 2.51%, 5s of 2033 at 2.59%, 5s of 2038 at 3.23% and 5s of 2039 at 3.30%, callable 7/1/2033.

The third tranche, $74.200 million of Project 3 bonds, saw 5s of 7/2033 at 2.59%, noncall.

BofA Securities priced for Columbus, Ohio, (Aaa/AAA/AAA/) $367.120 million of tax-exempt various purpose GOs. The first tranche, $320.215 million of unlimited tax bonds, Series 2023A, saw 5s of 8/2024 at 3.03%, 5s of 2028 at 2.45%, 5s of 2033 at 2.51%, 5s of 2038 at 3.10% and 5s of 2043 at 3.44%, callable 8/15/2033.

The second tranche, $25.125 million of limited tax bonds, Series 2023B, saw 5s of 8/2024 at 3.03%, 5s of 2028 at 2.45%, 5s of 2033 at 2.51% and 5s of 2038 at 3.10%, callable 8/15/2033.

The third tranche, $5.915 million of unlimited tax refunding bonds, Series 2023-1, saw 5s of 8/2025 at 2.77% and 5s of 2029 at 2.43%, noncall.

The fourth tranche, $15.865 million of limited tax refunding bonds, Series 2023-B, saw 5s of 8/2024 at 3.03% and 5s of 2029 at 2.43%, noncall.

J.P. Morgan priced for Minneapolis (A1/AA-/AA-/) $363 million of Alline Health System health care system revenue bonds. The first tranche, $181.500 million of tax-exempt fixed rate put bonds (premium hard put), Series 2023A, saw 5s of 11/2052 with a mandatory put date of 11/15/2028 at 3.15%, callable 5/15/2028.

The second tranche, $181.500 million of tax-exempt fixed rate put bonds (premium hard put), Series 2023B, saw 5s of 11/2053 with a mandatory put date of 11/15/2030 at 3.21%, callable 11/15/2029.

Goldman Sachs priced for the Connecticut Health and Educational Facilities Authority (A3//A+/) $112.385 million of Connecticut Children’s Medical Center Issue revenue bonds, Series E, with 5s of 7/2033 at 3.26%, 5s of 2038 at 3.98%, 4s of 2043 at 4.30%, 5.25s of 2048 at 4.34% and 4.25s of 2053 at 4.50%, callable 1/1/2033.

In the competitive market, Long Beach USD, California, (Aa2/AA-//) sold $300 million of Election of 2016 GOs, Series C, to Jefferies, with 5s of 8/2023 at 2.95%, 5s of 2025 at 2.50%, 5s of 2034 at 2.40%, 5s of 2038 at 2.95%, 5s of 2043 at 3.25%, 4s of 2048 at 4.09% and 4s of 2053 at 4.13%, callable 8/1/2033.

The school district also sold $100 million of Election of 2022 GOs, Series A, to Jefferies, with 5s of 8/2024 at 2.80% and 5s of 2026 at 2.35%, noncall.

Secondary trading
Georgia 5s of 2024 at 3.13%-3.05%. Connecticut 5s of 2024 at 3.19%. Washington 5s of 2025 at 2.77% versus 2.79% Thursday and 2.75%-2.79% on 4/26.

NYC TFA 5s of 2027 at 2.52%. Ohio 5s of 2028 at 2.44%. California 5s of 2029 at 2.43%-2.44% versus 2.42% Thursday and 2.38% on 4/19.

NYC Municipal Water Finance Authority 5s of 2033 at 2.34%. Wisconsin 5s of 2034 at 2.51%-2.50% versus 2.52% Monday and 2.63%-2.54% original on Friday. Washington 5s of 2034 at 2.59% versus 2.63% Monday.

Illinois Finance Authority 5s of 2047 at 4.15%. Austin waters, Texas, 5s of 2052 at 3.87%.

AAA scales
Refinitiv MMD’s scale was unchanged: The one-year was at 3.00% and 2.69% in two years. The five-year was at 2.38%, the 10-year at 2.36% and the 30-year at 3.39% at 3 p.m.

The ICE AAA yield curve is firmer: 3.03% (+1) in 2024 and 2.72% (-1) in 2025. The five-year was at 2.36% (-1), the 10-year was at 2.33% (-2) and the 30-year was at 3.40% (-2) at 4 p.m.

The IHS Markit municipal curve was unchanged: 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: 2.81% (unch) in 2024 and 2.68% (unch) in 2025. The five-year at 2.35% (unch), the 10-year at 2.34% (unch) and the 30-year at 3.41% (-1) at 4 p.m.

Treasuries rallied.

The two-year UST was yielding 3.977% (-17), the three-year was at 3.689% (-17), the five-year at 3.456% (-19), the 10-year at 3.425% (-16), the 20-year at 3.810% (-13) and the 30-year Treasury was yielding 3.704% (-12) 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.

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. 

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.

Competitive
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. 

Christine Albano contributed to this story.