Munis hold steady while UST improve, SVB list hits the Street

Municipals remained little changed as fund outflows receded, the last of large deals of the week priced and Silicon Valley Bank muni holdings lists began circulating the Street for liquidation. U.S. Treasuries were firmer out long and equities ended mixed.

Triple-A yields were little changed while UST yields fell on economic data.

Lists of the tax-exempt portions of the Silicon Valley Bank and Signature Bank portfolios were being circulated and Chris Brigati, senior vice president and managing director of municipals at Valley National Bank, said he expects a good reception to the bid lists.

“It remains to be seen whether or not this additional supply will be well received, but I personally expect that it will be fine,” he said.

“You can make an argument that if they do trade cheap, that doesn’t necessarily mean that the new-issue benchmark curves would be changed,” Pat Luby, a CreditSights strategist, said.

“The market has been very volatile,” Luby continued and “that makes it more difficult to hedge fixed income inventories generally, and munis in particular.”

He said dealers need to be judicious about how they deploy their inventory lines and that’s felt in the secondary market.

“We could continue to see a little bit of a divergence between secondary market trading and primary market demand,” Luby said.

Outflows were seen again from municipal bond mutual funds, though they lessened this week as Refinitiv Lipper said $101.664 million was pulled as of Wednesday after $846.116 million of outflows the week prior. 

A firmer Treasury market gave some strength to the overall fixed-income arena on Thursday, according to a New York trader.

“Investors still feel like they’re maybe putting a toe in the water but not fully in,” Luby said of the muni market.

From a macro-perspective, data is still leading UST and muni performance.

“We are still following the data, and municipal percentages are attractive,” the New York trader said. “Right now, we do see a firmer Treasury market, and munis are not tracing Treasuries as much, but they still feel strong.”

“There’s definitely strength and good flows, and the numbers released today were bond-friendly,” the trader said, pointing to the Producer Price Index and jobless claims data both released Thursday.

Producer prices “are falling as supply chains normalize and that should continue as energy prices will likely remain heavy,” said Edward Moya, senior market analyst at The Americas OANDA.

U.S. supplier prices increase 2.3%, which is “lower than both the consensus estimate of 2.5% and the prior 2.7% reading,” he said.

U.S. jobless claims continued to climb higher, “reaching the highest levels since October 2021,” Moya said.

Initial jobless claims increased to 264,000, more than the consensus estimate of 245,000, and continuing claims rose from 1.801 million to 1.813 million, “a tad lower than forecasts,” Moya said.

The labor market, he said, “is weakening and that will continue as we finally start to see employers deliver on their previously announced job cut announcements.”

Investors are trying to work with an “inflation-recession tug of war,” said Matthew Gastall, investment strategist at Morgan Stanley.

Some of that can be seen in the price action “where a good portion of a lot of the trading in the 10-year UST over the past couple of weeks has been range bound within a little bit of a set range,” he said.

Gastall noted that type of trading hasn’t been seen since before 2022 and all the volatility associated with monetary policy.

“What explains that is we’re standing a little bit of a fork in the road right now,” he said.

“The Fed has made progress on the inflationary front, for the most part. But the second half of the Fed’s mandate as far as price control, and of course, trying to control inflation, that might be a bit more difficult, as far as making progress is concerned versus the first half as far as what they’ve done so far,” according to Gastall.

The market is “at this period now where we had a respectable consumer price index print this week; it seems like what the Fed’s doing is working, but we’re still not out of the woods yet,” he said.

The next thing is the economy.

“From a monetary policy perspective, if the Fed keeps rates elevated on the short end, for the most part, does that eventually put us into some type of a recession,” Gastall said.

Many investors are also considering this supply-demand imbalance in the marketplace, according to Gastall.

“If we continue throughout May and June to exhibit the same new-issue supply trends that we’ve seen throughout the course of the first four months of the year, then it appears redemptions might potentially outpace the amount of new-issue supply,” he said.

However, it still looks technicals are very constructive from muni pricing.

“But to be fair, technicals might become even more constructive for pricing once we get into the summer,” he said.

The market is in “the middle of lower supply because of higher rates, and that supply could go even lower,” he said.

However, “once we get into July and August redemption-driven reinvestment demand can be even healthier,” Gastall noted.

Luby said May redemptions were up from April, and June looks to be the biggest month for redemptions this year. July and August will also see big redemptions, with the latter set to be the second largest month this year.

“There’s tailwinds from investors who will need to reinvest the principal and that doesn’t even touch on the interest that gets paid out,” he said.

“There could be additional demand from interest that gets reinvested in, so for the near-term, I’m constructive on the market,” Luby said, adding that for investors who have money on the sidelines, “they should seek out pockets of opportunity to take advantage of them.”

He doesn’t see any major factors impacting munis in the near-term.

But as “political rhetoric ratchets up between now and next November, it’s going to impact the emotional state of individual investors,” Luby said. “And the muni market relies on demand from individual investors.”

Brigati said municipal ratios have remained in a narrow, and not particularly attractive, range for putting cash to work in recent weeks. 

The two-year muni-Treasury ratio Thursday was at 68%, the three-year at 69%, the five-year at 69%, the 10-year at 68% and the 30-year at 90%, according to Refinitiv MMD’s 3 p.m. ET read. ICE Data Services had the two-year at 70%, the three-year at 71%, the five-year at 68%, the 10-year at 67% and the 30-year at 88% at 4 p.m.

“Market participants seem rather apathetic, with limited customer and dealer engagement, particularly on the long-end of the curve,” Brigati said.

In the primary market Thursday, BofA Securities priced for the Arkansas Development Finance Authority (/BB-/BB/) $240 million of green AMT United States Steel Corp. Project environmental improvement revenue bonds, with all bond pricing at par: 5.7s of 5/2053, callable in 5/1/2026.

Stifel, Nicolaus & Co. priced for the Liberty School District #53, Missouri (/AA//), $120 million of GO school bonds on Thursday with 5s of 3/2024 at 3.12%, 5s of 2028 at 2.55%, 5s of 2032 at 2.63%, 5s of 2038 at 3.29% and 4s of 2043 at 4.06%, callable 3/1/2032.

Secondary trading
NYC 5s of 2024 at 3.00%. Ohio 5s of 2025 at 2.95%. Fairfax County, Virginia, 4s of 2026 at 2.53% versus 2.28%-2.48% on 5/4 and 2.54%-2.53% on 5/2.

Georgia 5s of 2028 at 2.34% versus 2.33% on 5/5. Minnesota 5s of 2029 at 2.33%-2.30%. Oregon 5s of 2030 at 2.40%.

Maryland 5s of 2031 at 2.31%. Washington 5s of 2032 at 2.39% versus 2.44% Wednesday. Iowa Finance Authority 5s of 2036 at 2.76% versus 2.82% Wednesday.

NYC TFA 5s of 2045 at 3.63%-3.62%. Washington 5s of 2047 at 3.58%-3.57% versus 3.57% Tuesday.

AAA scales
Refinitiv MMD’s scale was unchanged: The one-year was at 2.97% and 2.66% in two years. The five-year was at 2.31%, the 10-year at 2.31% and the 30-year at 3.36% at 3 p.m.

The ICE AAA yield curve was changed up to two basis points: 3.06% (+1) in 2024 and 2.75% (+2) in 2025. The five-year was at 2.33% (flat), the 10-year was at 2.29% (-1) and the 30-year was at 3.35% (-1) at 4 p.m.

The IHS Markit municipal curve was unchanged: 2.96% in 2024 and 2.66% in 2025. The five-year was at 2.31%, the 10-year was at 2.30% and the 30-year yield was at 3.36%, according to a 4 p.m. read.

Bloomberg BVAL was little changed: 2.79% (unch) in 2024 and 2.66% (unch) in 2025. The five-year at 2.31% (unch), the 10-year at 2.30% (+1) and the 30-year at 3.38% (unch) at 4 p.m.

Treasuries were firmer.

The two-year UST was yielding 3.901% (-1), the three-year was at 3.563% (-1), the five-year at 3.358% (-3), the 10-year at 3.389% (-5), the 20-year at 3.816% (-6) and the 30-year Treasury was yielding 3.741% (-5) at 4 p.m.

Mutual fund details
Refinitiv Lipper reported $101.644 million of municipal bond mutual fund outflows for the week that ended Wednesday following $846.116 million of outflows the previous week.

Exchange-traded muni funds reported inflows of $147.576 million after outflows of $81.864 million in the previous week. Ex-ETFs muni funds saw outflows of $249.240 million after outflows of $764.253 million in the prior week.

Long-term muni bond funds had inflows of $341.009 million in the latest week after outflows of $442.708 million in the previous week. Intermediate-term funds had outflows of $175.330 million after outflows of $149.306 million in the prior week.

National funds had inflows of $75.550 million after outflows of $697.743 million the previous week while high-yield muni funds reported inflows of $91.201 million after outflows of $343.820 million the week prior.