Economic data-led UST rally brings along munis

Municipals improved again Thursday as U.S. Treasuries extended their rally on more disinflationary economic data while equities were in the black as well.

Triple-A yields were bumped two to five basis points, depending on the scale, while UST yields fell as much as 15 basis points at three years.

The moves once again led to higher municipal-to-UST ratios. The two-year muni-to-Treasury ratio Thursday was at 63%, the three-year at 65%, the five-year at 66%, 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 62%, the three-year at 63%, the five-year at 63%, the 10-year at 67% and the 30-year at 90% at 4 p.m.

Municipal bond mutual fund outflows continued, but were less significant than a week prior, as Refinitiv Lipper reported investors pulled $136.174 million from the funds for the week ending Wednesday following $855.719 million of outflows the previous week. Both long-term and high-yield funds reported inflows after posting larger outflows the week prior while national, intermediate and exchange-traded funds saw outflows.

The U.S. producer price index increased 0.1% in June from a year earlier, lower than the 0.2% expected. This came a day after the consumer price index print for June came in at 0.2% month-over-month, below expectations.

An active new-issue calendar “on the heels of key economic data is combining to create multiple reference points,” said Kim Olsan, senior vice president of municipal bond trading at FHN Financial.

USTs had a more pronounced reaction to Wednesday’s consumer price index print, which “interpreted the results as setting up a less hawkish Fed at least in the near-term,” she said.

However, munis are in the middle of “a primary market push that is keeping any meaningful price improvement at bay,” she said.

Following several large-scale pricings, Olsan said certain themes in the market may “become more prominent as the back half of the month begins.”

The impact of floater rates “falling on strong money market demand will likely drift into the short end of the curve,” she said.

Daily and weekly floater rates have plunged 70 basis points 100 basis points since the start of this month “as a portion of the July 1 redemptions appear to be finding their way into cash products,” she said.

The 7-day SIFMA rate “dropped 103 basis points in the latest week and is 215 basis points off its 2023 from late March,” Olsan noted.

Options outside of the money market range “include 2024-2025 fixed maturities where a 3% or higher yield is still available, including in high-quality structures like pre-refunded bonds,” she said.

Even wider spreads “are in place for short-dated calls with intermediate final maturities,” she said.

A sale of Florida Board of Education (Aaa/AAA/) GO 4s 2032/callable 2024 at 3.59% “represents the ongoing disparity in seasoned optionality and the inverted curve,” she said.

Olsan said that July’s activity is 20% below the 2023 daily figure, “a function of supply being well absorbed by redemption cash but not fully meeting needs.”

The composition of bid lists “leans more toward seasoned calls/short effective maturities or spread-related credits” call-protected structures,” she said.

Sourcing comparable new-issue credits has led to tighter bidding spreads, she said.

In the AA-rated space “where more than 50% of the market trades on any given day the yield compression is noticeable,” according to Olsan.

A negotiated sale of University of Arkansas bonds “drew a 5% in 2034 at +23/MMD, more than 10 basis points through comparable secondary trades from earlier this year,” she said.

Wider state names, such as Illinois and New Jersey GOs, may be impacted by reduced bid volume, she said.

“Trading in New Jersey GO 5s due 2039 at +25/MMD is around 10 basis points tighter from a month ago and off the 2023 high from May of +46/MMD,” Olsan said.

She said both states’ index returns outperform the broad market by 100 basis points to 120 basis points this year.

Yield movement “has been mostly consistent between muni and UST rates since January,” she noted.

Both muni and UST yields across five-, 10- and 30-year tenors “have trended higher by comparable amounts to their current ranges,” she said.

The largest muni yield move off the average “is the five-year spot and the smallest is the 30-year yield, up 16 basis points from the 2023 average,” she said.

The one-year AAA yield has outperformed the one-year UST by around 13 basis points.

“Across all tenors inside 15 years, stubbornly low ratios prevail — a function of overall muni issuance being down and the absolute yield draw in tax-exempts on a TEY basis (more for individuals than for corporate 21% buyers,” she said.

In the primary market Thursday, J.P. Morgan priced for the Grant County Public Utility District, Washington (/AA/AA/), $145.525 million of Priest Rapids Hydroelectric Project revenue and refunding bonds, 2023 Series A, with 5s of 1/2024 at 3.11%, 5s of 2028 at 2.76%, 5s of 2033 at 2.86%, 5s of 2038 at 3.31% and 5s of 2043 at 3.67%, callable 1/1/2033.

BofA Securities priced for Detroit (Ba1/BB+//) $100 million of unlimited tax GOs. The first tranche, $52.500 million of social tax-exempt bonds, saw 5.25s of 5/2024 at 4.45%, 5.25s of 2028 at 4.38%, 5.25s of 2033 at 4.42% and 6s of 2039 at 4.83%, callable 5/1/2033.

The second tranche, $22.500 million of social taxable, saw 6.844s of 5/2028 price at par, make whole call at T+40bp.

The third tranche, $25 million of tax-exempts, saw 6s of 5/2043 at 5.04%, callable 5/1/2033.

Muni CUSIP requests rise
Municipal CUSIP request volume increased in June on a year-over-year basis, following an increase in May, according to CUSIP Global Services. This is mainly due to the seasonal peak in municipal notes issuance tied to municipal fiscal year budgeting.

For muni bonds specifically, there was an increase of 11.7% month-over-month and a 20.1% decrease year-over-year.

The aggregate total of identifier requests for new municipal securities, including municipal bonds, long-term and short-term notes, and commercial paper, rose 26.7% versus May totals. On a year-over-year basis, overall municipal volumes were down 15.4%. CUSIP requests are an indicator of future issuance.

Secondary trading
NYC TFA 5s of 2024 at 3.02%-3.01%. Connecticut 5s of 2024 at 3.07%. Austin waters 5s of 2025 at 2.96%.

Maryland 5s of 2028 at 2.66%-2.65%. California 5s of 2028 at 2.58%. Florida 5s of 2029 at 2.60%-2.58%.

Maryland 5s of 2031 at 2.61%. Washington 5s of 2032 at 2.70% versus 2.74% Wednesday and 2.77%-2.75% Tuesday. Georgia 5s of 2033 at 2.61%.

Seattle waters 5s of 2048 at 3.75%-3.76%. Massachusetts 5s of 2053 at 3.86%-3.84% versus 3.90% Wednesday and 3.95% Tuesday. Indiana Finance Authority 5s of 2053 at 4.13%-4.10% versus 4.19% Monday and 4.20%-4.19% on 7/7.

AAA scales
Refinitiv MMD’s scale was bumped four to five basis points: The one-year was at 3.03% (-4) and 2.90% (-5) in two years. The five-year was at 2.60% (-5), the 10-year at 2.59% (-5) and the 30-year at 3.51% (-5) at 3 p.m.

The ICE AAA yield curve was bumped two to five basis points: 3.04% (-2) in 2024 and 2.95% (-3) in 2025. The five-year was at 2.59% (-5), the 10-year was at 2.57% (-4) and the 30-year was at 3.55% (-4) at 4 p.m.

The IHS Markit municipal curve was bumped four to five basis points: 3.03% (-4) in 2024 and 2.91% (-5) in 2025. The five-year was at 2.60% (-5), the 10-year was at 2.59% (-5) and the 30-year yield was at 3.51% (-5), according to a 3 p.m. read.

Bloomberg BVAL was bumped three to four basis points: 2.99% (-3) in 2024 and 2.89% (-3) in 2025. The five-year at 2.59% (-3), the 10-year at 2.54% (-4) and the 30-year at 3.53% (-3) at 4 p.m.

Treasuries rallied.

The two-year UST was yielding 4.620% (-12), the three-year was at 4.235% (-15), the five-year at 3.939% (-14), the 10-year at 3.765% (-10), the 20-year at 4.078% (-6) and the 30-year Treasury was yielding 3.906% (-4) near the close.

Mutual fund details
Refinitiv Lipper reported $136.174 million of outflows from municipal bond mutual funds for the week ending Wednesday following $855.719 million of outflows the week prior.

Exchange-traded muni funds reported outflows of $131.522 million after outflows of $200.867 million in the previous week. Ex-ETFs muni funds saw outflows of $4.652 million after outflows of $654.852 million in the prior week.

Long-term muni bond funds had inflows of $38.354 million in the latest week after outflows of $602.577 million in the previous week. Intermediate-term funds had $16.159 million of outflows after outflows of $53.963 million in the prior week.

National funds had outflows of $71.419 million after outflows of $720.647 million the previous week while high-yield muni funds reported inflows of $83.798 million after outflows of $306.587 million the week prior.