Short-end pressure mounts pushing muni-UST ratios higher
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Municipals were mixed Wednesday, but selling pressure was evident on the short end, as few deals of size priced in the primary market and balances from
Despite weakness Wednesday and Tuesday, munis have “held in pretty well,” with yields staying in a tight range, said Steve Shutz, a portfolio manager and director of tax-exempt fixed income at Brown Advisory.
“The muni AAA HG curve has been relatively steady thus far in March, with most spots on the curve at or near year-to-date highs,” said J.P. Morgan strategists. Thus far this month, “the muni HG curve shows significant underperformance across the curve, relative to the broader fixed income market, after sizable muni outperformance in February,” they said.
Absolute yields “remain attractive in the context of the trading range over the past three years and our longer-term projections for lower rates this year,” according to J.P. Morgan strategists.
The two-year muni-to-Treasury ratio Wednesday was at 64%, the three-year at 64%, the five-year at 61%, the 10-year at 60% and the 30-year at 84%, according to Refinitiv Municipal Market Data’s 3 p.m. EST read. ICE Data Services had the two-year at 64%, the three-year at 63%, the five-year at 61%, the 10-year at 61% and the 30-year at 82% at 3:30 p.m.
With this month’s underperformance, J.P. Morgan strategists said “2yr IG municipal ratios versus taxable fixed-income have moved closer to the middle of the range over the past few years.”
Ratios “look progressively richer in this analysis moving out from 5yrs to 10yrs on the curve, with the 10yr spot still far more attractive in taxables versus tax-exempts,” they said.
Value is “most apparent” in the longest portion of the tax-exempt market with ratios of 30yr AA tax-exempts “firmly in the middle of the trailing three-year range,” they said.
“Current valuations and expectations for technicals suggest underperformance in the less favorable technical environment in March and April,” J.P. Morgan said.
Ben Barber, director of the Municipal Bonds Department at Franklin Templeton, still believes that technicals “are very favorable in tax-exempts.”
For one, the “supply and demand picture is quite strong,” he said.
Primary issuance was expected to build this month, and it has, Shutz said. The Bond Buyer 30-day visible supply sits at $7.61 billion.
The new-issue calendar this week was estimated to top $9 billion, led by a slew of billion-plus dollar pricings on Tuesday.
The largest deal on tap, $2.6 billion of GOs from California, saw yields repriced to slightly lower yields out long in the final pricing.
Issuance is also expected to get a bump from
The effects of this have yet to be felt as issuers continue to proceed with refunding BABs through extraordinary trigger provisions.
Wednesday marked the redemption date for the University of California,
Total ERP calls, conditional calls and notices total $9.2 billion year-to-date, they said.
For new issuance, there is an oversubscription of deals across the board, “whether it’s high grade or lower-quality primary market issuance,” Barber said.
That, he said, is happening “pretty consistently” week-over-week.
Demand continues to outstrip supply, especially around the separately managed account buyer base, Shutz said.
“It does seem like deals are getting well subscribed for in the secondary market,” he said.
And while some days are “quiet,” he said it appears as if demand has stayed there.
The Investment Company Institute reported more inflows into municipal bond mutual funds for the week ending March 20, with investors adding $652 million to funds following $815 million the week prior.
This marks 11 straight weeks of inflows.
ICI reported exchange-traded funds saw outflows of $388 million following $102 million of inflows the week prior.
In the competitive market, the Santa Clara Unified School District, California, (Aaa/AAA//) sold $148.360 of 2024 GO refunding bonds, to Morgan Stanley.
AAA scales
Refinitiv MMD’s scale was mixed: The one-year was at 3.19% (+5) and 2.94% (+3) in two years. The five-year was at 2.54% (+3), the 10-year at 2.51% (unch) and the 30-year at 3.68% (-2) at 3 p.m.
The ICE AAA yield curve saw cuts up to two basis points: 3.23% (unch) in 2025 and 2.97% (+2) in 2026. The five-year was at 2.57% (+1), the 10-year was at 2.54% (+1) and the 30-year was at 3.62% (+1) at 3:30 p.m.
The S&P Global Market Intelligence municipal curve was mixed: The one-year was at 3.21% (+6) in 2025 and 2.95% (+2) in 2026. The five-year was at 2.57% (+2), the 10-year was at 2.54% (unch) and the 30-year yield was at 3.66% (-1), according to a 3 p.m. read.
Bloomberg BVAL was unchanged: 3.12% in 2025 and 2.93% in 2026. The five-year at 2.50%, the 10-year at 2.50% and the 30-year at 3.68% at 3:30 p.m.
Treasuries were firmer.
The two-year UST was yielding 4.569% (-2), the three-year was at 4.359% (-3), the five-year at 4.185% (-3), the 10-year at 4.193% (-4), the 20-year at 4.454% (-4) and the 30-year at 4.355% (-3) at 3:30 p.m.
