July 21, 2024

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Munis back in the black in June amid blockbuster new-issues

9 min read
Munis back in the black in June amid blockbuster new-issues

Municipal investors can expect more than $12 billion of bonds and notes in the week of June 24 as issuers forge ahead with primary offerings amid a steadier market and a higher-for-longer mindset settles in. Recent market moves have led munis to outperform other fixed-income asset classes and position tax-exempt returns to close out June into the black.

The market was quiet Friday as secondary trading was muted and triple-A yield curves held mostly steady. U.S. Treasuries saw some pressure throughout the session, but ended mixed while equities also closed out the week mixed.

While relative value of munis to USTs has fallen after municipal outperformance, market participants say the asset class is more attractive than taxable counterparts, and returns show it.

“It is hard to be overly excited about current valuations of tax-exempts relative to Treasuries; however, at tax-adjusted yields (using individual tax brackets), munis look quite attractive compared with other asset classes,” noted Barclays PLC in a weekly report.

The two-year muni-to-Treasury ratio Friday was at 64%, the three-year at 66%, the five-year at 67%, the 10-year at 66% 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 65%, the three-year at 66%, the five-year at 67%, the 10-year at 67% and the 30-year at 85% at 3:30 p.m.

“Moreover, if rates remain high and individual tax rates adjust to the pre-2017 levels, it would likely be hard to find a more attractive fixed-income investment for retail than tax-exempts — that is why we expect inflows into the asset class will remain strong, and likely increase.”

Indeed, mutual funds saw another week of inflows, albeit a lower figure at $16.4 million, per LSEG Lipper data. The total was led by long-term funds but high-yield continues to be the story. Even at the current higher yield set, investors are reaching for HY paper.

For the week ended June 20, high-yield funds saw $458 million of inflows, following inflows of $795 million the week prior. High-yield funds have faced only one week of outflows in 2024, in April amid the federal tax-filing deadline.

“Due to the current richness of high-quality bonds, investors continue trading down, overweighting lower-rated credits,” Barclays strategists Mikhail Foux and Clare Pickering wrote in a report. “Even the single-A and the triple-B portions of the IG muni index have been en vogue.”

Credit spreads have also further tightened, and are “quite rich at the moment,” but still 10 to 20 basis points from the lows reached in 2021, “leaving some marginal upside from current levels.”

BofA Global Research strategists Ian Rogow and Yingchen Li noted that since the end of May, 10-year AAA MMD rates rallied 32 basis points to 2.79% as of June 18 compared to 10-year Treasuries’ 27 basis points or so rally to 4.22%.

“That slightly stronger rally resulted in exempt [investment-grade munis] modest outperformance versus govies and corporates for the month-to-date,” they said.

As of Friday morning, the Bloomberg Municipal Index shows gains of 1.77% month-to-date and losses of 0.18% year-to-date. USTs are returning 0.55% in June as of Friday but in the red at 4.19% in 2024. Corporate bonds are returning 1.29% and 0.16% year-to-date.

High-yield munis are in the black at 2.87% and 4.57% in 2024.

“Going forward, the macro environment continues to bode well for the muni market rally, especially for high grades,” BofA strategists said. 

They said despite “all of the strong employment reports this year,” first quarter GDP was 1.3% and second quarter economic performance “is also looking quite mixed.”

Li and Rogow noted that April and May saw “slightly negative retail sales growth” and “May’s combination of a very strong nonfarm payroll increase of 272,000, weak retail sales and a clear decline of inflation is particularly puzzling.” 

As such, “investors should watch for any further softening that may develop when we move to 2H24,” they said.

From a muni specific outlook, Barclays strategists said they “remain quite cautious, but we would also admit that aside from the heavy [issuance] pipeline, we don’t see too many clouds on the horizon at the moment, especially if we account for July’s redemptions, which will be even larger than June’s.”

In Barclays’ view, the muni market “will likely continue moving sideways, and we will be waiting for a better entry point down the line.”

The new-issue slate, topping out over $12 billion, is led by another round of billion-dollar-plus deals from bellwether names. The competitive calendar boasts the largest deal of the week with Washington’s $1.37 billion of general obligation bonds selling in several series Tuesday while Los Angeles leads the negotiated calendar with $1.5 billion of bond anticipation notes. The city also has $150 million of taxable social bonds selling competitively Tuesday.

The Massachusetts Bay Transportation Authority will price $1.05 billion of senior sales tax bonds and another deal to watch is the Triborough Bridge and Tunnel Authority, which will bring $800 million of MTA Bridges and Tunnels payroll mobility tax senior lien refunding green bonds, just after the recent move by New York Gov. Kathy Hochul to ax congestion pricing.

“Even though the New York MTA’s congestion pricing plan is on hold, we do not expect a material impact on the pricing of the PMT bonds, even though the prospective loss of revenues for TBTA’s parent would be significant,” according to CreditSights.

However, in-state demand for New York paper will have “received a nice boost from the return of maturing and called bond principal from issuers in New York that now will total $8.6 billion in June with another $2.3 billion to be returned in July and $5 billion in August,” the report noted.

AAA scales
Refinitiv MMD’s scale was unchanged: The one-year was at 3.09% and 3.05% in two years. The five-year was at 2.85%, the 10-year at 2.79% and the 30-year at 3.69% at 3 p.m.

The ICE AAA yield curve was little changed: 3.14% in 2025 and 3.07% in 2026. The five-year was at 2.87%, the 10-year was at 2.82% and the 30-year was at 3.67% at 4 p.m.

The S&P Global Market Intelligence municipal curve was little changed: The one-year was at 3.14% in 2025 and 3.08% in 2026. The five-year was at 2.85%, the 10-year was at 2.82% and the 30-year yield was at 3.68% at 4 p.m.

Bloomberg BVAL was little changed: 3.14% (unch) in 2025 and 3.09% (unch) in 2026. The five-year at 2.88% (unch), the 10-year at 2.80% (unch) and the 30-year at 3.71% (-1) at 4 p.m.

Treasuries were little changed from Thursday’s close to end the week.

The two-year UST was yielding 4.73%, the three-year was at 4.463%, the five-year at 4.271%, the 10-year at 4.254%, the 20-year at 4.499% and the 30-year at 4.393% at the close.

Negotiated calendar
The city of Los Angeles (MIG-1/SP-1+//) is set to price Wednesday $1.5 billion of tax and revenue anticipation notes, serial 2025. Loop Capital Markets.

The Massachusetts Bay Transportation Authority (/AA+/AAA/AAA) is set to price $1.05 billion of senior sales tax bonds, consisting of $951.99 million of Series A and $99.71 million of Series B, senior sales tax sustainability bonds. Morgan Stanley. 

The Triborough Bridge and Tunnel Authority (/AA+/AA+/AA+) is set to price Wednesday $800 million of payroll mobility tax senior lien refunding green bonds, Series 2024C. J.P. Morgan Securities LLC.

The Kansas Department of Transportation (Aa2/AA//) is set to price $699.415 million of highway revenue and refunding bonds, Series 2024A, serial 2025-2043. Wells Fargo.

The Omaha Public Power District (Aa2/AA//) is set to price Wednesday $608.755 million of electric system revenue bonds, consisting of $293.540 million, Series 2024A, serial 2026-2045, term 2049, 2054, and $315.215 million, Series 2024B, serial 2025-2045. BofA Securities. 

The Wisconsin Health and Educational Facilities Authority (/BBB/BBB/) is set to price Wednesday $381.905 million of Marshfield Clinic Health System, Inc. revenue refunding bonds, Series 2024A, serial 2025-2029, 2031-2033, 2035-2036, term 2054. Barclays Capital Inc. 

The Marshfield Clinic Health System (/BBB/BBB/) is set to price Wednesday $176.975 million of corporate CUSIP taxable bonds, Series 2024, term 2034. Barclays Capital Inc. 

The Connecticut Health and Educational Facilities Authority is set to price Thursday $337.000 million of Yale New Haven Health Issue tax-exempt self-liquidity weekly VRDNs revenue bonds, Series 2024C. Barclays Capital Inc.

The Grand River Dam Authority, Oklahoma, (A1/AA-//) is set to price Tuesday $286.820 million of revenue refunding bonds, Series 2024A. Goldman Sach & Co. LLC.

The Ohio Water Development Authority (Aaa/AAA//) is set to price Tuesday $250 million of drinking water assistance fund sustainability revenue bonds, Series 2024A, serial 2033-2037, term 2038, 2039, 2049, 2041, 2041, 2043, 2044, 2045. Stifel, Nicolaus & Company Inc.

The Mansfield Independent School (/AAA/AAA/) is set to price Tuesday $198.365 million of unlimited tax school building bonds for the Permanent School Fund Guarantee Program, serial 2025-2054. Raymond James & Associates Inc. 

The Clear Creek Independent School District, Texas, (Aaa//AAA/) is set to price Wednesday $170.255 million of unlimited tax school building and refunding bonds insured by the Permanent School Fund Guarantee Program, Series 2024, serial 2025-2044. BOK Financial Securities Inc. 

The city of Quincy, Massachusetts, (/AA//) is set to price Tuesday $169.033 million of general obligation bond anticipation notes of 2024 bonds, serial 2025. Ramirez & Co. 

The Texas Department of Housing and Community Affairs (Aaa/AA+//) is set to price Tuesday $150.000 million of residential mortgage Non-AMT revenue bonds, Series 2024C, serial 2025-2035, term 2039, 2044, 2049, 2054, 2054. Ramirez & Co.

The Eagle Mountain-Saginaw Independent School District, Texas, (Aaa//AAA/) is set to price Monday $142.190 million of unlimited tax school building bonds insured by the Permanent School Fund Guarantee Program, Series 2024, serial 2025-2054. Raymond James & Associates, Inc. 

The State Building Authority of Michigan (Aa2//AA/) is set to price $130 million of revenue refunding bonds for the Facilities Program, Series II, serial 2024-2044, term 2049, 2054, 2059. Jefferies LLC.

The Greater Texas Cultural Education Facilities Finance Corp. (Baa2///) is set to price Wednesday $119.485 million of revenue bonds for the Texas Biomedical Research Institute Project, consisting of $99.525 million of tax exempt, Series 2024A, serial 2030-2044, term 2049, 2054, and $19.960 million of taxables, Series 2024B, term 2037. BofA Securities.

The Lewisville Independent School District, Texas, (/AAA//) is set to price Thursday $112.265 million of unlimited tax school building and refunding bonds insured by the Permanent School Fund Guarantee Program, serial 2025-2044. Siebert Williams Shank & Co. LLC.

The Harris County Cultural Education Facilities Finance Corp., Texas, (Aa3/AA-//) is set to price Tuesday $111.015 million of Memorial Hermann Health System tax-exempt self-liquidity weekly VRDNs hospital revenue refunding bonds, Series 2024F, term 2054. Barclays Capital Inc. 

The Canutillo Independent School District, Texas, (Aaa///) is set to price Monday $106.115 million bonds consisting of $98.950 million insured by the Permanent School Fund Guarantee Program, Series 2024A, serial 2025, 2039-2044, term 2049, 2054, and $7.165 million of refunding bonds, Series 2024B, serial 2024-2030. Cabrera Capital Markets LLC.

The Little Elm Independent School District, Texas, (/AAA//) is set to price next week $105.995 million of fixed and variable rate unlimited tax school building bonds insured by the Permanent School Fund Guarantee Program, Series 2024, serial 2025-2044, term 2049, 2054, 2054. Jefferies LLC.

The Hamilton County Public Building Corp., Indiana, (/AAA//) is set to price Tuesday $102.690 million of lease rental revenue bonds, Series 2024, serial 2026-2050. Baird.

The Colorado Health Facilities Authority (Aa1/AA+) is set to price Tuesday $100 million of tax-exempt self-liquidity daily VRDNs revenue bonds, Series 2024D, term 2064. Barclays Capital Inc. 

The Texas Department of Housing and Community Affairs (Aaa/AA+//) is set to price Tuesday $100 million of taxable residential mortgage revenue bonds, Series 2024D, serial 2025-2034, term 2039, 2044, 2048, 2054. Ramirez & Co. 

The Kings Local School District, Ohio, (/AA//) is set to price Thursday $100 million of school improvement unlimited tax general obligation bonds, Series 2024. RBC Capital Markets. 

Competitive calendar
The city of Los Angeles (Aa2//AAA/) is set to sell $150 million of general obligation taxable social bonds, Series 2024-A, at noon eastern Monday.

The St. Louis Community College District is set to sell $213.365 million of certificates of participation bonds, Series 2024, at 11 a.m. Monday. 

The Phoenix Civic Improvement Corp. is set to sell subordinated excise tax revenue bonds, Series 2024, at 11 a.m. Monday.

Texas is set to sell $107.835 of college student loan bonds, Series 2024A, at 11 a.m. eastern Tuesday, and $93.005 million of college student loan refunding bonds, Series 2024B, at noon eastern Tuesday.

Washington is set to sell $386.465 of various purpose general obligation bonds, Series A, 2025A Bid Group 1, at 10:15 a.m. eastern Tuesday, $45.180 million of taxable general obligation bonds, Series 2025T, at 10:30 a.m. eastern Tuesday, $443.470 million of various purpose general obligation bonds, Series A, 2025A Bid Group 2, at 10:45 a.m. eastern Tuesday, $208.390 million of motor vehicle fuel tax and vehicle related fees general obligation bonds, Series 2025B, at 11:15 a.m. eastern Tuesday, $286.580 million of various purpose general obligation refunding bonds, Series R-2025A, at 11:45 a.m. eastern Tuesday.

The Little Rock School District is set to sell $101.885 million of construction bonds for the Arkansas School District Intercept Program, Series B, at 11 a.m. eastern Tuesday.

Collin County, Texas, is set to sell $212.070 million of limited tax permanent improvement and refunding bonds, Series 2024, at 11:30 a.m. eastern Wednesday.