Munis outperform; new-issue calendar drops to $3.5B

Municipals were little changed Friday ahead of a smaller new-issue calendar, outperforming a weaker U.S. Treasury market for another session. Equities ended up.

Triple-A yields were mostly flat while UST yields rose up to nine basis points on the front end, pushing muni to UST ratios there lower.

The two-year muni-Treasury ratio Friday was at 64%, the three-year at 66%, the five-year at 68%, the 10-year at 69% and the 30-year at 90%, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the two-year at 66%, the three-year at 68%, the five-year at 68%, the 10-year at 70% and the 30-year at 92% at 4 p.m.

The focus is on the Fed’s next moves and its meeting Tuesday and Wednesday. After the debt-limit resolution, there is a growing consensus that the Fed pause in June “is not an indication that the Fed’s tightening cycle is complete,” BofA Securities strategists said in a weekly report. They said current market pricing indicates a “very high probability” of another hike in July.

“This new focus of the bond market will extend through June and July, while economic data and market moves may provide some day-to-day volatility,” BofA strategists Yingchen Li and Ian Rogow wrote. “It is clear by now that the muni market likely will remain within ranges that defined the prior five months of the year, while muni/Treasury ratios remain in low ranges.”

Treasury rates have been “inching higher, with the yield curve inverting further as investors start assigning higher probabilities to a possible hike next week and later this summer,” Barclays strategists said in a weekly report.

Municipals have continued outperforming, “building on the trend that started in late May,” Barclays strategists Mikhail Foux, Clare Pickering and Mayur Patel said.

“Muni ratios have been moving lower, while the IG and HY indices already generated positive returns of 0.5% and 0.6%, respectively,” they said.

They note the belly of the curve (5-10-year) has started to dis-invert, while the long end has continued outperforming, with 10s20s and 10s30s yield differentials falling well below their 12-month averages.

“Investors clearly have cash and are employing it, albeit at a measured pace,” they said. “Supply has picked up, but is still well-below historical averages and is unlikely to be a drag on the market.”

While they are positive on tax-exempts, Barclays strategists said taxable munis are less attractive as they have outperformed in the spring selloff, compared with corporates.

“Even if the latter will likely continue doing well in the near term, taxables simply have less upside, in our view,” they said. “Nevertheless, even here we see some opportunities. Taxable munis in the belly of the curve have underperformed over the past several weeks due to heavy investor selling, which might present a tactical opportunity.”

Barclays also sees lower-rated taxables representing a much smaller portion of the index compared with corporates, but to them that is the part of the taxable muni market on which investors should focus, “and not the rich AA-AAA part of the market.”

“If economic growth remains solid, and the Fed pauses, we should see lower-rated bonds performing well,” they added.

BofA strategists said market levels have hovered near the upper bounds of the multi-month ranges over the past few weeks.

“We recommended that muni investors buy last week in anticipation that muni rates are likely to move toward the lower bounds in June/July,” they said. “For munis to break below this multi-month pattern, perhaps Treasuries need to break below first.”

“Either inflation gauges fall enough to reverse the hawkish Fed posture or some other factors will do it,” they said.

Barclays said after next week’s FOMC meeting, they expect the market to be more stable, “which should benefit the muni asset class, given relatively attractive rates and valuations.”

Calendar stands at $3.5B
For the coming week, investors will be greeted with a new-issue calendar estimated at $3.503 billion.

There are $2.081 billion of negotiated deals on tap and $1.422 billion on the competitive calendar.

The negotiated calendar is led by $550 million of tax-exempt senior revenue bonds from the Louisiana Stadium and Exposition District, followed by $209 million of contract revenue bonds from The Greater Texoma Utility Authority, Texas.

The Johnson County USD, Kansas, leads the competitive calendar with $182.6 million of GOs, followed by $158 million of GOs from Richland County School District #2, South Carolina.

Secondary trading
North Carolina 5s of 2024 at 3.07% versus 3.07%-3.04% original on Tuesday. Washington 5s of 2024 at  3.10%. Florida BOE 5s of 2025 at 3.02%-3.00%.

Ohio 5s of 2028 at 2.75%. Maryland 5s of 2029 at 2.70%-2.71% versus 2.68% Tuesday and 2.70%-2.68% on 6/1. NYC 5s of 2030 at 2.88% versus 2.92% Thursday and 3.21%-3.15% original on 6/2.

Connecticut 5s of 2033 at 2.92% versus 2.89% Wednesday and 3.00%-2.87% original on 6/1. Iowa Finance Authority 5s of 2034 at 2.82% versus 2.81% Thursday and 2.91% original on 6/2. Maryland 5s of 2037 at 3.07%-3.09% versus 3.06% Tuesday and 3.19% on 5/30.

Fort Bend ISD, Texas, 4s of 2048 at 4.17%-4.18% versus 4.17%-4.18% on 5/31 and 4.24% original on 5/26. Metropolitan Water District of Southern California 5s of 2053 at 3.61%-3.60% versus 3.65% original on Wednesday.

AAA scales
Refinitiv MMD’s scale was unchanged: The one-year was at 3.07% and 2.95% in two years. The five-year was at 2.66%, the 10-year at 2.59% and the 30-year at 3.50% at 3 p.m.

The ICE AAA yield curve was changed up to one basis point: 3.09% (-1) in 2024 and 3.00% (flat) in 2025. The five-year was at 2.65% (+1), the 10-year was at 2.60% (flat) and the 30-year was at 3.56% (-1) at 4 p.m.

The IHS Markit municipal curve was unchanged: 3.06% in 2024 and 2.95% in 2025. The five-year was at 2.66%, the 10-year was at 2.58% and the 30-year yield was at 3.49%, according to a 4 p.m. read.

Bloomberg BVAL was little changed: 3.03% (unch) in 2024 and 2.93% (unch) in 2025. The five-year at 2.63% (unch), the 10-year at 2.57% (unch) and the 30-year at 3.54% (unch) at 4 p.m.

Treasuries were weaker.

The two-year UST was yielding 4.609% (+9), the three-year was at 4.254% (+8), the five-year at 3.924% (+6), the 10-year at 3.748% (+3), the 20-year at 4.055% (+1) and the 30-year Treasury was yielding 3.885% (flat) at 4 p.m.

Primary to come:
The Louisiana Stadium and Exposition District (A2//A/) will price $549.5 million of tax-exempt Series 2023A senior revenue bonds Thursday. Serials 2024-2053. BofA Securities.

The Greater Texoma, Texas, Utility Authority (/AA//) is set to price $208.9 million of Series 2023A contract revenue bonds on behalf of the city of Sherman Project on Tuesday. Serials 2027 to 2053 are insured by Build America Mutual Assurance Co. RW Baird

The Colorado Housing & Finance Authority (Aaa/AAA//) is set to price $159.9 million of Class i 2023 Series K-1 single-family mortgage bonds Tuesday. Serials 2024 to 2033; terms 2038, 2041, 2053. RBC Capital Markets.

The Wisconsin Housing & Economic Development Authority (Aa3/AA+//) is set to price $121 million of Series 2023 A and B non-AMT housing revenue bonds Tuesday. Wells Fargo Bank.

The Florida Development Finance Corp. is set to price $120 million of solid waste disposal revenue bonds Thursday behalf of the Waste Pro USA Inc. project. Serials 2032. Citigroup Global Markets.

The Minnesota Housing Finance Agency (Aa1/AA+//) is set to price $150 million of non-AMT tax-exempt and taxable social bonds on Thursday. Serials 2024 to 2035, terms in 2038, 2043, 2048, 2053. RBC Capital Markets.

Competitive:
The Johnson County, Kansas, Unified School District is set to sell $182.62 million of general obligation bonds Monday.

Chesterfield County, Virginia, (Aaa/AAA//) is set to sell $104 million of GO debt Wednesday. 

The Richland County, S.C., School District #2 (Aa2/AA//) is set to sell $158.42 million of GO debt Wednesday.

Christine Albano and Jessica Lerner contributed to this story.