Munis softer in the belly; short USTs selloff on debt impasse

Municipals were weaker in the belly of the curve Thursday while U.S. Treasury yields sold off on the short end on Fed speak and continued concerns over the debt ceiling impasse. Equities were mixed near the close.

Despite the rally in tech stocks, USTs and munis are reacting to uneven economic data and a potential U.S. default.

“As the risk of default grows, it comes as no surprise that the credit rating agencies are preparing for the worst-case scenarios,” said Edward Moya, senior market analyst for the Americas at OANDA. “The decision by Fitch Ratings to put the U.S. credit rating at risk of downgrade is a necessary step and will likely trigger limited market stress. Markets should be growing more nervous as we get closer the real X-date which is probably in the first week of June. “

Triple-A yields rose one to four basis points while USTs were off by upwards of 17 basis points on the two-year near the close.

The two-year muni-Treasury ratio Thursday was at 70%, the three-year at 72%, the five-year at 73%, the 10-year at 71% and the 30-year at 91%, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the two-year at 72%, the three-year at 75%, the five-year at 73%, the 10-year at 73% and the 30-year at 92% at 3 p.m.

Outflows continue as Refinitiv Lipper reported investors pulled $847.068 million from municipal bond mutual funds for the week ending Wednesday, $420.675 million of which was high-yield.  

While the market saw weakness, there have been some more constructive trades over the past two sessions.

“The fact that better two-way flows have developed speaks to some green shoots forming following what has been quite an uncharacteristic May trading cycle with the broad market down 1.4%,” noted Kim Olsan, senior vice president at FHN Financial. 

Olsan said a generic master muni index over the last 10 years has had only two negative May returns — 2013 with a 1.2% loss on the heels of the Taper Tantrum and in 2015 with a modest 0.3% loss — against what is an average annual gain for the month of 1.2%.  

“Whether the current market has more room to adjust will depend on reception of new issues as June’s estimated $36 billion of maturities or calls are credited, a 56% increase from May’s figures,” she said. “Momentum is still weighted toward bidders having more bargaining power as older new-issue production is cycled out to make way for upcoming supply.” 

Supply scarcity
The potential volume for the holiday-shortened week is estimated at $1.6 billion with $979 million of negotiated deals and $629 million of competitive loans on tap.

The calendar is led by a $750 million taxable corporate CUSIP deal from Sutter Health and $760 million of tax-exempt and taxable GOs from Connecticut.

Bond Buyer 30-day visible supply sits at $8.68 billion.

Supply continues to be down year-over-year and cities and states may start to pause borrowing plans as the nation heads toward a breach of its debt limit as soon as next week, issuers said.

“This year’s gross supply currently stands at over 25% below last year’s levels and nearly 14% beneath the 10-year average,” said Morgan Stanley strategists Matthew Gastall and Daryl Helsing.

It is not surprising that “despite hovering near 30-year averages in the ‘belly’ and long-end of the yield curve, higher interest rates have increased the cost-of-capital for many state and local government borrowings,” they said.

As a result, they said, new-money deals and refinancings have slowed. The demand, though, hasn’t stopped.

They said “many municipal investors have capitalized on higher rates, while redemption-driven reinvestment demand has also remained healthy.”

Morgan Stanley strategists said, “this spring’s pre-summer ‘supply push’ may fail to issue enough debt to surpass the monies being returned to investors.”

As constructive as these developments may appear for current pricing, they noted, the imbalance may actually intensify this summer.

The muni market’s “seasonal transitions are often highly consistent,” they said, for “while the total par-values of monies issued and redeemed change each year … the trends are typically very similar.”

Morgan Stanley strategists noted new-issue supply is often “healthy between late February and the July 4 holiday, as well as during the autumn period from October to mid-December.”

These supply “accelerations often coincide with a reduction in redemption-driven reinvestment demand,” they said.

Therefore, the “bearish” settings for price action can “help to improve entry points for buy-and-hold, household investors,” they said.

The opposite tends to happen in the summer months and during the holidays, the report said.

“Though primary volume is currently running at a notably lower pace, this activity may decline further if supply wanes this summer,” they said. “Such a consideration has encouraged us to question what the condition of our market will be like when investor interest returns this fall.”

Secondary trading
Ohio 5s of 2024 at 3.31%. Washington 5s of 2024 at 3.51%. North Carolina 5s of 2025 at 3.18%.

Maryland 5s of 2026 at 3.06%. California 5s of 2028 at 2.87%. New York City TFA 5s of 2028 at 2.94%. Washington 5s of 2028 at 2.94%.

California 5s of 2030 at 2.85%. Georgia 5s of 2030 at 2.73%.

Frederick, Maryland, 5s of 2034 at 2.89%.

New York City water 5s of 2047 at 3.97%.

AAA scales
Refinitiv MMD’s scale was cut in the belly: The one-year was at 3.31% (unch) and 3.15% (unch) in two years. The five-year was at 2.83% (+3), the 10-year at 2.72% (+2) and the 30-year at 3.62% (unch) at 3 p.m.

The ICE AAA yield curve saw small cuts: 3.35% (unch) in 2024 and 3.19% (+1) in 2025. The five-year was at 2.83% (+3), the 10-year was at 2.73% (+1) and the 30-year was at 3.68% (unch) at 3 p.m.

The IHS Markit municipal curve was cut up to two basis points: 3.30% (unch) in 2024 and 3.15% (unch) in 2025. The five-year was at 2.80% (unch), the 10-year was at 2.71% (+2) and the 30-year yield was at 3.62% (unch), according to a 3 p.m. read.

Bloomberg BVAL was cut up to two basis points: 3.17% (+1) in 2024 and 3.07% (+1) in 2025. The five-year at 2.76% (+2), the 10-year at 2.68% (+2) and the 30-year at 3.72% (+1) at 3 p.m.

Treasuries were weaker.

The two-year UST was yielding 4.53% (+18), the five-year at 3.91% (+11), the 10-year at 3.82% (+9) and the 30-year Treasury was yielding 4.00% (+3) at 3:30 p.m.

Mutual fund details
Refinitiv Lipper reported $847.068 million of outflows from municipal bond mutual fund outflows for the week that ended Wednesday following $187.393 million of outflows the previous week.

Exchange-traded muni funds reported outflows of $587,000 after outflows of $115.279 million in the previous week. Ex-ETFs muni funds saw outflows of $846.49 million after $72.114 million in the prior week.

Long-term muni bond funds had outflows of $ 346.922 million in the latest week after inflows of $94.697 million in the previous week. Intermediate-term funds had outflows of $216.852 million after inflows of $1.469 million in the prior week.

National funds had outflows of $736.341 million after outflows of $164.422 million the previous week while high-yield muni funds reported outflows of $420.675 million after outflows of $73.128 million the week prior.

Primary to come
Sutter Health (A1/A+/A+/) is set to price $750 million of taxable corporate CUSIP bonds Thursday. Serials 2033, 2053. Citigroup Global Markets Inc.

Riverside County, California, is set to price Thursday $360 million of tax and revenue anticipation notes. J.P. Morgan Securities LLC.

Connecticut (Aa3/AA-/AA-/AA+) is set to price $360 million of general obligation bonds Thursday. Morgan Stanley & Co. LLC.

Connecticut is also set to price $350 million of taxable GOs Thursday. Morgan Stanley & Co. LLC.

The Massachusetts Educational Financing Authority (/AA//) is set to price $352.7 million of taxable education loan revenue bonds Thursday. Serials, 2028-2033, term 2044. RBC Capital Markets.
 
The Irvine Facilities Financing Authority (/AA+//) is set to price $325.51 million of Gateway Preserve Land Acquisition Project lease revenue bonds Thursday. Serials, 2027-2038, terms, 2043, 2048, 2053. Stifel, Nicolaus & Company, Inc.

The Maryland Stadium Authority (/AA/AA/) is set to price Thursday $233.98 million of football stadium issue revenue bonds, serials, 2025-2037. Raymond James & Associates, Inc.

The Iowa Finance Authority (Aaa//AAA/) is set to price Thursday $186.215 million of state revolving fund revenue green bonds, serials 2025-2043, terms 2048, 2053. RBC Capital Markets.

The Utah Board of Higher Education (Aa1/AA+//) is set to price Thursday $163.195 million of University of Utah general revenue bonds, serials 2026-2053. Wells Fargo Bank, N.A. Municipal Finance Group.
 
The Indiana Finance Authority (/BBB-//) is set to price Thursday $140.155 million of taxable CHF-Tippecanoe, LLC student housing project revenue bonds. RBC Capital Markets.

The South Carolina State Housing Finance and Development Authority (Aaa///) is set to price $106.19 million of mortgage revenue bonds, serials 2025-2035, terms, 2038, 2043, 2048, 2053, 2054. Citigroup Global Markets Inc.
 
The New Jersey Housing and Mortgage Finance Agency (/AA-//) is set to price Wednesday $104.645 million of multi-family non-AMT social revenue bonds. Barclays Capital Inc.

Competitive:
Elk Grove USD, California, (Aa2///) is set to sell $132.4 million of general obligation bonds at 11:35 a.m. eastern Wednesday.

Putnam County School District, Florida, (A2//A+/) is set to sell $100 million of general obligation bonds at 11 a.m. eastern Wednesday.

Clark County, Nevada, is set to sell $100 million of sales and excise tax revenue streets and highways bonds at 11:30 a.m. eastern Thursday.

Ventura County, California, is set to sell $90. million of tax and revenue anticipation notes at 11:45 a.m. eastern Thursday.

Jessica Lerner contributed to this report.