Investor pressure creeps in as supply grows with primary deals seeing higher yields

Municipals were mostly steady in secondary trading Wednesday with the focus on the primary market as New York City saw yields rise significantly on the short end as institutional investors demanded more ahead of a growing New York issuance slate. U.S. Treasuries were firmer and equities ended down.

The Investment Company Institute reported inflows into municipal bond mutual funds for the week ending Feb. 21, with investors adding $530 million to funds following $964 million the week prior.

This marks the seventh straight week of inflows and differs from LSEG Lipper, which has reported three consecutive weeks of outflows.

ICI reports exchange-traded funds saw inflows of $305 million following $515 million of outflows the week prior.

The primary market was robust Wednesday.

BofA Securities priced for institutions $1.509 billion of GOs for New York City, with large cuts on the short-end from Tuesday’s retail offering and the preliminary pricing wire. The Bay Area Toll Authority’s $509.715 million of variable rate bonds San Francisco Bay Area Toll Bridge revenue bonds.

The New Jersey Educational Facilities Authority led the competitive market with $812.175 million of Princeton University revenue bonds in two series won by BofA Securities and J.P. Morgan, followed by the Virginia Transportation Board with $419.855 million of Transportation Capital Projects revenue refunding bonds in two series that went to J.P. Morgan.

BofA and J.P. Morgan are leading the underwriting rankings so far in 2024 with Morgan Stanley, which just hired former Citi bankers, in third.

Issuance is slated to be healthy next week, with some large deals on the calendar, but Bond Buyer 30-day visible supply still sits at $7.08 billion to close out February.

The New York City Municipal Water Finance Authority will issue about $758 million of tax-exempt fixed-rate bonds pricing Tuesday after a retail offering Monday. The Dormitory Authority of the State of New York (Aa1/AA+//) is set to price the week of March 11 $3.5 billion of state personal income tax revenue bonds.

The Metropolitan Transportation Authority, which is facing challenges to its capital plans due to lawsuits filed against congestion pricing, is set to price the week of March 25 $1 billion of revenue refunding bonds.

Despite the expected increase in supply over the next several weeks, demand should exceed supply in 2024, “as proceeds from matured bonds will require investments in new bonds,” said Daniel J. Close, head of municipals at Nuveen.

Declining rates “may result in other bonds being called early, with these additional reinvestment needs further increasing demand,” he said.

This supply/demand disparity “should keep yields and spreads contained, as net negative supply creates scarcity among a shrinking pool of outstanding bonds,” Close said.

Meanwhile, the broad muni market is down 0.52% year-to-date, said Cooper Howard, fixed-income strategist at Charles Schwab.

Within the broad index, “lower-rated bonds are outperforming higher-rated ones,” he said.

Aside from the longest portion of the index, he noted “there isn’t much of a discrepancy for performance between maturities buckets.”

Relative yields continue to trade at “historically rich levels with no signs of letting up,” he said.

The two-year muni-to-Treasury ratio Wednesday was at 59%, the three-year at 58%, the five-year at 57%, the 10-year at 57% and the 30-year at 81%, according to Refinitiv Municipal Market Data’s 3 p.m. EST read. ICE Data Services had the two-year at 59%, the three-year at 58%, the five-year at 57%, the 10-year at 58% and the 30-year at 80% at 3:30 p.m.

Muni-UST ratios 10 years and in are still below 60%, with the low ratios being “primarily a supply and demand issue,” according to Howard.

While the size of the muni market has remained the same over the past decade, demand for tax-exempt interest has increased, he said.

“We would not be surprised if relative yields continue to remain low for the foreseeable future,” he said.

Absolute yields continue to remain “attractive” and are likely to draw demand, he said.

Munis offer an attractive taxable equivalent yield opportunity and for investors residing in high-tax locations — California, New York State and New York City — Howard said taxable equivalent yield will be even more enticing.

“The tax-equivalent yield for the Bloomberg Muni Index is above 6.3% for an investor in the top tax bracket” versus the 4.9% for the US Aggregate Bond Index and 5.4% for the corporate index, Howard said.

Secondary trading
Ohio 5s of 2025 at 3.06%. Minnesota 5s of 2025 at 2.93%. Maryland 5s of 2026 at 2.75%-2.60% versus 2.72% Friday and 2.74% on 2/21.

Maryland 5s of 2028 at 2.52% versus 2.49% Monday and 2,49% on 2/21. NYC 5s of 2029 at 2.57%. Oregon 5s of 2030 at 2.49%.

NY State Urban Development Corp. 5s of 2033 at 2.50%-2.46% versus 2.51% on 2/8. Massachusetts Development Finance Agency 5s of 2034 at 2.68%-2.64% versus 2.67%-2.68% Monday and 2.68%-2.67% on 2/21. Florida BOE 5s of 2034 at 2.52%-2.51% versus 2.48% on 2/20 and 2.49% on 2/15.

Triborough Bridge and Tunnel Authority 5s of 2049 at 3.86% versus 3.84% Monday and 3.87%-3.86% on 2/21. Massachusetts 5s of 2054 at 3.90%-3.89% versus 3.89% on 2/22 and 3.89%-3.83% on 2/15.

AAA scales
Refinitiv MMD’s scale was unchanged: The one-year was at 2.98% and 2.74% in two years. The five-year was at 2.44%, the 10-year at 2.46% and the 30-year at 3.59% at 3 p.m.

The ICE AAA yield curve was little changed: 2.98% (unch) in 2025 and 2.77% (unch) in 2026. The five-year was at 2.46% (+1), the 10-year was at 2.48% (unch) and the 30-year was at 3.56% (unch) at 3:30 p.m.

The S&P Global Market Intelligence municipal curve was bumped one basis point: The one-year was at 2.95% (-1) in 2025 and 2.73% (-1) in 2026. The five-year was at 2.43% (-1), the 10-year was at 2.46% (-1) and the 30-year yield was at 3.56% (-1), according to a 3 p.m. read.

Bloomberg BVAL was unchanged: 2.95% in 2025 and 2.80% in 2026. The five-year at 2.45%, the 10-year at 2.52% and the 30-year at 3.65% at 3:30 p.m.

Treasuries were firmer.

The two-year UST was yielding 4.647% (-6), the three-year was at 4.442% (-5), the five-year at 4.268% (-5), the 10-year at 4.267% (-4), the 20-year at 4.533% (-4) and the 30-year at 4.402% (-4) at 3:30 p.m.

Primary on Wednesday
BofA Securities priced for institutions $1.509 billion of GOs from New York City, with large cuts five years and in.

The first tranche was $1.2 billion of Fiscal Series 2024-C.

The second tranche was $85.030 million of Fiscal 2006 Series J, Subseries J-A.

The third tranche is $36.855 million of Fiscal 2008 Series A, Subseries A-4.

The fourth tranche is $93.625 million of Fiscal 2008 Series C, Subseries C-4.

The fifth tranche is $93.850 million of Fiscal 2009 Series B, Subseries B-3,

BofA Securities priced for the Bay Area Toll Authority (/AA+/AA/) $509.715 million of variable rate bonds San Francisco Bay Area Toll Bridge revenue bonds.

The first tranche is $85 million of 2024 Series A bonds.

The second tranche is $110 million of 2024 Series B bonds.

The third tranche is $102.555 million of 2024 Series C bonds.

The fourth tranche is $97.160 million of 2024 Series E bonds.

The fifth tranche is $115 million of 2024 Series G bonds.

Jefferies priced for the Wylie Independent School District (Aaa///) $269.145 million of unlimited tax school building bonds, Series 2024.

Frost Bank priced for Midland County, Texas, (/AA+/AAA/) $155.715 million of certificates, Series 2024.

Competitive on Wednesday
The New Jersey Education Facilities Authority (Aaa/AAA//) sold $423.125 million of Princeton University revenue bonds, 2024 Series A-1, to BofA Securities.

The authority also sold $389.050 million of Princeton University revenue bonds, 2024 Series A-2, to J.P. Morgan.

The Virginia Transportation Board (Aa1/AA+/AA+/) $205.275 million of Transportation Capital Projects revenue refunding bonds, Series 2024, Bidding Group 1, to J.P. Morgan.

The board also sold $214.580 million of Transportation Capital Projects revenue refunding bonds, Series 2024, Bidding Group 2, to J.P. Morgan.

Chip Barnett contributed to this story.