Macro environment remains supportive for munis

Municipals were weaker Tuesday as U.S. Treasury yields rose and equities ended down.

The two-year muni-Treasury ratio Tuesday was at 67%, the three-year at 68%, the five-year at 67%, the 10-year at 66% and the 30-year at 87%, 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.

While the tax-exempt long end was unchanged last week, Matt Fabian, partner at Municipal Market Analytics, said, it “is an increasingly attractive alternative allocation following weeks of price/spread capitulation by underwriters trying to keep primary offerings attractive amid falling ratios and inconsistent liquidity.”

Long-end liquidity, he said, “is unlikely to improve by much, absent a more sustainable inflow to the mutual funds and ahead of the start of secondary sales out of the Silicon Valley Bank portfolio; how that sell list performs could be a material determinant of near-term market action.”

“To the extent, the SVB list begins to trade at reasonable spreads — a scenario that itself seems more likely than not after months of related anticipation — it would create price discovery for other long-maturity, low-coupon structures, perhaps leading to long-awaited opportunistic buying of such,” according to Fabian.

He noted a rally in duration would help “the struggling/flattish trend in mutual fund NAVs and help attract fresh capital to a strategy badly in need of such.”

Also providing strength to the market is “seasonal trends that, for May, have been reliably positive in recent years, albeit with gains having tended to come in the part of May already past,” he said.

The market is seeing a supportive environment for munis, said Nisha Patel, managing director of SMA Portfolio Management at Parametric.

However, she noted, richer valuations and ratios are trickier. There are very rich ratios on the short end of the curve, and on top of that, the muni yield curve is inverted.

But “even with ratios as rich as they are, we could be looking at continued richness in ratios and possibly even lower yields, especially as we head into the summer months,” she said.

“Historically, we do see very high reinvestment flows” in the summer, she said. This year, there are fairly high redemptions, but Patel said, they aren’t at record levels.

“What’s a little bit different this time around, is that you have a supportive macro environment for bonds, and secondarily, you have higher absolute yields,” she said.

“This time around, you might likely see a higher percentage of those coupon payments and maturities actually finding their way back for reinvestment into the municipal bond market,” she said. “Whereas in previous years, it may not have been the case because of lower yields, and better opportunities elsewhere.”

Refinitiv Lipper has reported 13 consecutive weeks of outflows, with nearly $5.6 billion of money being pulled from muni mutual funds year-to-date.

However, Patel said, these outflows are nowhere near the record levels seen in 2022.

Inflows, she noted, could return due to “these redemptions funds [where] you’ll likely see inflows coming in for weekly periods as we start entering that June/July period.”

This year has also seen lower issuance, with volume down 24.3% in April.

“And when you look at certain states, it’s pretty staggering to see issuance down about 50% year-over-year,” Patel said.

“So even though we’ve been seeing those outflows, we’ve still been finding some support levels here, just because supply hasn’t been causing any major disruptions,” she said. “The market has been very digestible in terms of what we’re seeing out there.”

In the primary market Tuesday, BofA Securities priced for the Virginia College Building Authority (Aa1/AA+/AA+/) $951.735 million of education facilities revenue bonds. The first tranche, $614.770 million of Series 2023A, saw 5s of 2/2024 at 3.11%, 5s of 2028 at 2.56%, 5s of 2033 at 2.70%, 5s of 2038 at 3.16% and 4s of 2043 at 4.08%, callable 2/1/2033.

The second tranche, $336.965 million of Series 2023B, saw 5s of 2/2029 at 2.56%, 5s of 2033 at 2.70% and 5s of 2035 at 2.82%, callable 2/1/2033.

Citigroup Global Markets priced for the California Housing Finance Agency (/BBB//) $277.326 million of social municipal certificates, Series 2023-1 Class A, with 4.375s of 9/2036 at 4.506%.

Citigroup Global Markets also priced for the agency (/BBB//) $277.326 million of partially tax-exempt social municipal certificates, Series 2023-1 Class X, with 0.366s of 9/2036 at par.

In the competitive, Clark County, Nevada, (Aa3/AA-//) sold $200 million of highway revenue bonds, Series 2023, to J.P. Morgan, with 5s of 7/2031 at 2.56%, 5s of 2033 at 2.65%, 5s of 2038 at 3.32% and 4s of 2043 at 4.07%, callable 7/1/2033.

Loudoun County, Virginia, (Aaa/AAA/AAA/) sold $189.690 million of GO public improvement bonds, to Morgan Stanley, with 5s of 12/2023 at 3.08%, 5s of 2028 at 2.33%, 5s of 2033 at 2.37%, 5s of 2038 at 3.03% and 5s of 2042 at 3.27%, callable 12/1/2032.

The Downey Unified School District, California, (Aa2///) sold $125 million of Election of 2022 GOs, to RBC Capital Markets, with 5s of 8/2024 at 2.95%, 5s of 2026 at 2.45%, 5s of 2033 at 2.21%, 5s of 2038 at 2.90%, 5s of 2043 at 3.40%, 4s of 2048 at 4.10% and 4s of 2052 at 4.17%.

Secondary trading
Connecticut 5s of 2024 at 3.15%. Washington 5s of 2024 at 3.08%-3.07%. NYC 5s of 2024 at 3.06% versus 3.00% Thursday.

DC 5s of 2025 at 2.77%. Maryland 5s of 2025 at 2.81%-2.83% versus 2.61% om 4/27. California 5s of 2026 at 2.57% versus 2.59% on 4/28.

California 5s of 2030 at 2.47%-2.46% versus 2.33% on 5/10 and 2.28%-2.34% on 5/9. Manatee County, Florida, 5s of 2031 at 2.46% versus 2.46% Monday. University of California 5s of 2033 at 2.24%.

Texas Water Development Board 5s of 2047 at 3.67%. Charleston waters, South Carolina, 5s of 2052 at 3.53%-3.52%.

AAA scales
Refinitiv MMD’s scale was cut up to two basis points: The one-year was at 3.03% (+2) and 2.73% (+2) in two years. The five-year was at 2.35% (+2), the 10-year at 2.33% (+2) and the 30-year at 3.36% (unch) at 3 p.m.

The ICE AAA yield curve was cut two to four basis points: 3.07% (+3) in 2024 and 2.79% (+4) in 2025. The five-year was at 2.38% (+3), the 10-year was at 2.33% (+2) and the 30-year was at 3.40% (+4) at 4 p.m.

The IHS Markit municipal curve was cut up to two basis points: 3.02% (+2) in 2024 and 2.73% (+2) in 2025. The five-year was at 2.35% (+2), the 10-year was at 2.32% (+2) and the 30-year yield was at 3.36% (unch), according to a 4 p.m. read.

Bloomberg BVAL was cut one to four basis points: 2.86% (+4) in 2024 and 2.73% (+4) in 2025. The five-year at 2.36% (+2), the 10-year at 2.33% (+2) and the 30-year at 3.41% (+2) at 4 p.m.

Treasuries were weaker.

The two-year UST was yielding 4.069% (+7), the three-year was at 3.728% (+6), the five-year at 3.512% (+5), the 10-year at 3.535% (+4), the 20-year at 3.952% (+3) and the 30-year Treasury was yielding 3.858% (+2) at 4 p.m.

Primary to come:
The Dormitory Authority of the State of New York (Aaa/AAA//) is set to price $275 million of Columbia University revenue bonds on Thursday. Goldman Sachs & Co.

The California Educational Facilities Authority (//AAA/) is set to price $240 million of Stanford University revenue bonds on Wednesday. J.P. Morgan Securities.

The Harris County Industrial Development Corp., Texas, (Baa3/BBB-/BBB-/) is set to price $225 million of marine terminal refunding revenue bonds on Wednesday. Serial 2050. BofA Securities.

The Springfield School District R-XII, Missouri, (/AA+//) is set to price $190 million of general obligation school building bonds insured by the Missouri Director Deposit program. Serials 2024-2043. Stifel, Nicolaus & Co. 

El Paso, Texas, (/AA+/AA+/) is set to price $181.260 million of water and sewer revenue improvement and refunding bonds. Serials 2024-2027 and 2029-2043. Term 2045 and 2049. Stifel, Nicolaus & Co.

The Southwestern Illinois Development Authority is set to price $138.840 million of local government program revenue bonds for the Edwardsville Community Unit School District #7 Project on Wednesday. Serials 2027-2041. Stifel, Nicolas & Co.

Farmington, New Mexico, (Baa2/BBB//) is set to price $130 million of pollution control non-AMT revenue refunding bonds for the Public Service Company of New Mexico San Juan Project on Wednesday. KeyBanc Capital Markets.

The Development Authority of Burke County, Georgia, (Baa1/BBB+/BBB+/) is set to price $115 million of pollution control revenue bonds for the Georgia Power Company Plant Vogtle Project). Serials 2032. Barclays Capital.

The New Jersey Economic Development Authority (A1/A+//) is set to price $110 million of water facilities refunding revenue bonds for the New Jersey American Water project subject to the AMT on Wednesday. J.P. Morgan Securities.

The City and County of Honolulu, Hawaii, (Aaa///) is set to price $105 million of multifamily housing revenue bonds on Wednesday. Serials 2026. Citigroup Global Markets.

Competitive
Fort Worth, Texas, (Aa1/AA//) is set to sell $220.225 million of drainage utility system revenue bonds on Wednesday in two deals.