Raw yields, relative value should entice investors

Municipals took a breather Friday ahead of the long weekend and a much smaller calendar after seeing yields rise and underperform U.S. Treasuries, pushing ratios to levels last seen in November 2023.

In addition to “more attractive raw yields, municipal underperformance has allowed relative values to improve as well,” noted Kim Olsan, senior vice president of trading at FHN Financial. “The correction has returned ratios to 70% or greater across a wide swath of credits.”

The two-year muni-to-Treasury ratio Friday was at 67%, the three-year at 67%, the five-year at 67%, the 10-year at 67% and the 30-year at 84%, according to Refinitiv Municipal Market Data’s 1 p.m. EST read. ICE Data Services had the two-year at 67%, the three-year at 66%, the five-year at 67%, the 10-year at 68% and the 30-year at 84% at 1:30 p.m.

May has been a volatile month in the past few years, Olsan said, noting that with just one week left in the month, “buyers will take stock of what has shifted in just three weeks’ time.”

Intermediate yields are setting up to finish at the high end of a 2.69%-3.01% range, she said.  

“To put that in context, the range in May 2021 was 0.97%-1.02%, a year later the 10-year Refinitiv MMD traded between 2.47% and 3.02% (which a month later had rallied about 10 basis points) and last May’s range was 2.31% to 2.72%,” she said.

At the long end of the curve, the 30-year MMD spot range this month is 3.76% to 3.96%.  

“For each May dating to 2021, the average 30-year MMD was 2.74% — or 122 basis points below the current yield,” she said. “The recent adjustment offers better investor value.”

An “evolving Federal Open Market Committee rate cycle (cuts? no cuts? hikes?) appears to have brought more municipal issuers to the table,” she said. 

In the first three weeks of the month, 187 unique tax-exempt $25 million or greater par value issues priced.  

“While the upward yield trend has accelerated in recent sessions, the moves can be taken in the context of a longer time horizon,” she said, noting that over the last decade, the 10-year AAA MMD has traded to an average yield of 1.96%. 

Over a broader timeframe, she said, the 10-year spot average yield is 2.80% “so that current levels are within 10% of a long-run median value.”  

“The 30-year MMD yield has traded to an average yield of 3.74% dating back to 2000, or just through its present level,” she said. “Issuers’ financing levels are commensurate to historical averages.”

Muni yields rose quite a bit this week as investors focused on primary market issuance, and “AAA curve normalization is in high gear, with the 1s10s steepening 7 basis points and the 10s30s flattening 9 basis points this week, noted a BofA Global Research report.

However, muni curve normalization should be compared to “a deteriorating inversion in the Treasury curve,” the report said.

“While the muni curve is convinced of upcoming Fed rate cuts, a deteriorating Treasury curve inversion indicates the Fed’s ‘higher for longer’ posture is causing weakening in the economy and pressuring inflation,” the report said. “The long end muni outperformance against the rest of the curve should accelerate in a rally.”

AAA scales
Refinitiv MMD’s scale was left unchanged: The one-year was at 3.36% and 3.30% in two years. The five-year was at 3.03%, the 10-year at 3.01% and the 30-year at 3.87% at 1 p.m.

The ICE AAA yield curve was cut a basis point or two: 3.35% (+1) in 2025 and 3.29% (+1) in 2026. The five-year was at 3.05% (+2), the 10-year was at 3.02% (+2) and the 30-year was at 3.85% (unch) at 1:30 p.m.

Bloomberg BVAL was little changed: 3.39% (+1) in 2025 and 3.26% (unch) in 2026. The five-year at 2.99% (unch), the 10-year at 2.98% (unch) and the 30-year at 3.82% (unch) at 3:30 p.m.

Treasuries were little changed throughout most of the curve.

The two-year UST was yielding 4.948% (+2), the three-year was at 4.718% (+1), the five-year at 4.528% (flat), the 10-year at 4.467% (-1), the 20-year at 4.667% (-1) and the 30-year at 4.573% (-1) near the close.

Negotiated calendar
The Massachusetts Educational Financing Authority is set to price Thursday $473.985 million of education loan revenue bonds, Issue N, Series 2024, consisting of $369.4 million of taxables (/AA//), Senior Series 2024A, serial 2049, term 2033; $53.79 million of AMT bonds (/AA//), Senior Series 2024B, serials 2028-2030, 2032; $10 million of AMT bonds (/A//), Senior Subordinate Series 2024C, term 2032; and $40.795 million of AMT bonds (/BBB//), Subordinate Series 2024D, serial 2054. RBC Capital Markets.

The University of Cincinnati (Aa3/AA-//) is set to price Wednesday $374.01 million of general receipts bonds, Series 2024, consisting of: $173.265 million of new-issue bonds, Series 2024A, serials 2041-2044, terms 2049, 2054; $60.185 million of taxables, Series 2024B, serials 2035-2041; $100.375 million of refunding bonds, Series 2024C, serials 2025-2044, term 2049; and $40.185 million of refunding forward-delivery bonds, Series 2024D, serials 2025-2041. RBC Capital Markets.

St. Louis (A1/AA/NR/) is set to price Wednesday $286.645 million of Assured Guaranty-insured St. Louis Lambert International Airport revenue bonds, consisting of $278.805 million of Series 2024A and $7.84 million of Series 2024B. Goldman Sachs.

The San Francisco Community College District (/AA//) is set to price Wednesday $270 million of BAM-insured Election of 2020 GOs, Series B. Morgan Stanley.

Miami (Aa2/AA//) is set to price Wednesday $251.16 million of Miami Forever Infrastructure Programs limited ad valorem tax bonds, consisting of $207.105 million of tax-exempts, Series 2024A, serials 2034-2044, terms 2049, 2054, and $44.055 million of taxables, Series 2024B, serials 2025-2034. Siebert Williams Shank.

The Fort Bend Independent School District, Texas, (/AAA/AAA/) is set to price Thursday $200 million of PSF-insured variable rate unlimited tax school building and refunding bonds, Series 2024B. Raymond James.

The Homewood Educational Building Authority, Alabama, (Baa2///) is set to price Thursday $188.8 million of CHF – Horizons II Student Housing and Parking Project at Samford University revenue bonds, consisting of $122.195 million of tax-exempts, Series C, serials 2043-2044, terms 2049, 2054, 2056, and $66.605 million of taxables, Series D, serials 2027-2039, term 2043. RBC Capital Markets.

The Irvine Ranch Water District, California, (/AAA/AAA/) is set to price Thursday $166.61 million of refunding bonds, Series 2024A. Goldman Sachs.

The Duncanville Independent School District, Texas, (Aaa/AAA//) is set to price Wednesday $164.55 million of PSF-insured unlimited tax school building bonds, Series 2024, serials 2027-2044, terms 2049, 2054. Siebert Williams Shank.

The Knox County Health, Educational and Housing Facility Board (/AA//) is set to price Wednesday $136.265 million of BAM-insured Provident Group, UTK Properties, University of Tennessee Project student housing revenue bonds, consisting of $131.73 million of tax-exempts, Series 2024B-1, serials 2031-2039, terms 2044, 2049, 2054, 2059, 2064; $1.13 million of taxables, Series B-2, term 2031; and $3.405 million of tax-exempt subordinate bonds, Series 2024C, serial 2064. RBC Capital Markets.

The Connecticut Housing Finance Authority (Aaa/AAA//) is set to price Wednesday $122.915 million of sustainability Housing Mortgage Finance Program bonds, 2024 Series D, consisting of $57.625 million of Subseries D-1 and $65.29 million of Series D-2. Morgan Stanley.

The Colorado Springs School District 11 is set to price Thursday $120 million of certificates of participation, Series 2024, serials 2024-2043, term 2048. RBC Capital Markets.

Greensboro, North Carolina, (Aa1/AAA//) is set to price Thursday $116.325 million of combined enterprise system revenue bonds, consisting of $21.155 million of taxables, Series 2024A, serials 2025-2036, and $91.17 million of tax-exempts, Series 2024B, serials 2036-2044, term 2049, 2054. BofA Securities.

The Utah Board of Higher Education (Aa1/AA+//) is set to price Thursday $108.765 million of University of Utah general revenue bonds, consisting of $92.995 million of tax-exempts, Series 2024A-1; $10 million of tax-exempts, Series 2024A-2; and $5.77 million of taxables, Series 2024B. Morgan Stanley.

Tempe, Arizona, (/AAA//) is set to price Wednesday $107.16 million of GO and GO refunding bonds, Series 2024, serials 2025-2044. RBC Capital Markets.

The Oklahoma Water Resources Board (/AAA//) is set to price Wednesday $102.405 million of State Loan Program revenue bonds, Series 2024B, serials 2024-2039, terms 2044, 2050, 2054. BOK Financial Securities.

Competitive
Nassau County, New York, (Aa2/AA-/AA/) is set to sell $242.475 million of general improvement bonds, 2024 Series A, at 10 a.m. Wednesday.

Jessica Lerner contributed to this report.