Munis weaker, outflows return
7 min read
Municipals were weaker Wednesday, as U.S. Treasury yields rose and equities ended down.
The two-year muni-to-Treasury ratio Wednesday was at 66%, the three-year at 67%, the five-year at 67%, the 10-year at 66% and the 30-year at 83%, according to Refinitiv Municipal Market Data’s 3 p.m. EST read. ICE Data Services had the two-year at 66%, the three-year at 67%, the five-year at 67%, the 10-year at 69% and the 30-year at 84% at 3:30 p.m.
“Led by tech company earnings, stock market losses, and Friday’s softer jobs data, economic releases last week suggested a slowing economy, bonds rallied aggressively [through Monday],” said Matt Fabian, a partner at Municipal Market Analytics.
UST yields ended 35 to 50 basis points lower Friday, falling up to five basis points further on Monday.
Munis rallied as well, with yields falling 13 to 22 basis points on Friday, before being bumped up to 13 basis points, depending on the scale, on Monday.
However, bonds were weaker Tuesday and Wednesday.
USTs rose up to 12 basis points Wednesday, while munis rose one to 13 basis points, depending on the scale.
Recent events have been a “roundtrip” for rates, starting with the sentiment shifting from slowing inflation to a softening labor market, said James Pruskowski, chief investment officer at 16Rock Asset Management.
However, there were other catalysts: Middle East tensions, the U.S. political climate and the “shock and awe event” of downbeat earnings from tech giants, which led to the big sell off, in addition to the Bank of Japan’s backtrack on talk of a rate hike, he said.
The balance of this week’s supply has been “pushed through” in a pretty volatile market at a time when there’s too many things to focus on within the markets, causing some investors to pull back their bids, Pruskowski said.
Retail, though, remains “engaged,” he said, as new issues are clearing, albeit at an adjusted level.
The asset class, both from a yield and ratio perspective, is still quite compelling, he said.
“Other than a few short-term trading days of liquid to illiquid, the market seems to be performing quite nicely,” Pruskowski said.
The Investment Company Institute reported Wednesday $346 million of outflows from municipal bond mutual funds for the week ending July 31 following $794 million of inflows the week prior. This differs from LSEG Lipper, which reported
Exchange-traded funds saw inflows of $950 million, following inflows of $628 million the week prior.
While ICI reported outflows, three of the last four weeks have seen inflows, possibly from reinvestment flows.
The summer months of June, July and August are large redemption months with much of that money being reinvested back into the asset class, while redemptions slow in September and October, said David Grean, vice president, trader and strategist at Payden & Rygel.
Those months will be “sort of your classic muni cheapening of deals getting hung up and scales getting cut,” he said.
However, it remains to be seen if USTs “play ball to get you back to that historical median ratio level” on three, five and 10 years,” Grean said.
September and October will also see greater volatility due to the upcoming election, which has already been a “huge rollercoaster” of events, such as the assassination attempt on former President Donald Trump and the withdrawal of President Joe Biden from the race, though the muni market was little changed in the aftermath, said Joshua Perry, a partner, portfolio manager and municipal credit analyst at Brown Advisory.
As the election gets closer, the supply market will start to “dry up,” he said.
“Even though we’re still going to have redemptions and coupons and calls and refundings, we’re not going to necessarily keep up with that pace of supply as we get closer to the election because it’ll be a lot more volatile,” Perry said. “So what that does to the market dynamic for supply and demand is one more thing to navigate.”
In the primary market Wednesday, BofA Securities preliminarily priced $659.57 million of systemwide revenue bonds for the Trustees of California State University (Aa2/AA-//), with bumps 10 years and in and cuts out long from Tuesday’s retail offering. The first tranche, $648.005 million of tax-exempts, Series 2024A, saw 5s of 11/2025 at 2.45% (-2), 5s of 2029 at 2.35% (-5), 5s of 2034 at 2.52% (-2), 5s of 2039 at 2.85% (unch), 5s of 2044 at 3.25% (+3), 5s of 2049 at 3.50% (+5), 5s of 2055 at 3.60% (+5) and 5.25s of 2055 at 3.55% (+5), callable 11/1/2034.
The second tranche, $11.565 million of taxables, Series 2024B, saw all bonds price at par: 4.505s of 11/2025, 4.422s of 2029, 4.791s of 2034, 5.041s of 2039 and 5.3s of 2043, callable 11/1/2034.
BofA Securities priced for Colorado Springs, Colorado, (Aa2/AA+//) $374.78 million of utilities system revenue bonds. The first tranche, $286.15 million of improvement bonds, Series 2024A, saw 5s of 11/2030 at 2.66%, 5s of 2034 at 2.90%, 5s of 2039 at 3.19%, 5s of 2044 at 3.53%, 5s of 2049 at 3.80% and 5.25s of 2054 at 3.87%, callable 11/15/2034.
The second tranche, $88.63 million of refunding bonds, Series 2024B, saw 5s of 11/2024 at 2.63%, 5s of 2028 at 2.66%, 5s of 2034 at 2.90%, 5s of 2039 at 3.19% and 5s of 2044 at 3.53%, callable 11/15/2034.
Barclays priced for the Los Angeles County Facilities 2 Inc. (/AA+/AA+/) $212.185 million of Vermont Corridor Site 2 lease revenue bonds. The first tranche, $205.91 million of tax-exempts, Series 2024A, saw 5s of 6/2029 at 2.43%, 5s of 2034 at 2.58%, 5s of 2039 at 2.94%, 5s of 2044 at 3.36%, 5.25s of 2049 at 3.65%, 5.25s of 2054 at 3.78% and 5.25s of 2057 at 3.83%, callable 6/1/2034.
The second tranche, $6.275 million of taxables, Series 2024B, saw 4.538s of 6/2029 price at par, noncall.
BofA Securities priced for the Virginia Housing Development Authority (Aaa/AAA//) $160.005 million of taxable commonwealth mortgage bonds, 2024 Series C, saw all bonds price at par: 4.52s of 10/2025, 4.395s of 4/2029, 4.395s of 10/2029, 4.938s of 4/2034, 5.308s of 10/2039, 5.703s of 10/2044, 5/853s of 10/2049 and 5.903s of 10/2054, callable 10/1/2033.
Goldman Sachs priced for the Development Authority of Burke County, Georgia, (Baa1/A/A-/) $100 million of Georgia Power Company Plant Vogtle Project pollution control revenue bonds, Second Series 2012, with 3.3s of 12/2049 with a mandatory tender date of 8/21/2029 at par, noncall.
AAA scales
Refinitiv MMD’s scale was cut seven to 10 basis points: The one-year was at 2.65% (+7) and 2.63% (+7) in two years. The five-year was at 2.54% (+7), the 10-year at 2.64% (+10) and the 30-year at 3.53% (+10) at 3 p.m.
The ICE AAA yield curve was cut one to 11 basis points: 2.70% (+1) in 2025 and 2.64% (+2) in 2026. The five-year was at 2.53% (+6), the 10-year was at 2.67% (+10) and the 30-year was at 3.53% (+8) at 3:30 p.m.
The S&P Global Market Intelligence municipal curve was cut six to 11 basis points: The one-year was at 2.67% (+6) in 2025 and 2.65% (+6) in 2026. The five-year was at 2.52% (+6), the 10-year was at 2.62% (+8) and the 30-year yield was at 3.52% (+11) at 3 p.m.
Bloomberg BVAL was cut four to 13 basis points: 2.67% (+4) in 2025 and 2.64% (+5) in 2026. The five-year at 2.57% (+6), the 10-year at 2.63% (+9) and the 30-year at 3.55% (+10) at 3:30 p.m.
Treasuries were weaker.
The two-year UST was yielding 4.000% (+1), the three-year was at 3.832% (+2), the five-year at 3.784% (+5), the 10-year at 3.955% (+7), the 20-year at 4.338% (+7) and the 30-year at 4.249% (+12) at 3:45 p.m.
S&P correction
“Bias remains this is a correction in an uptrend, but not blown away with the first bounce attempt from S&P [500] on Tuesday as breadth came in a tepid +2.6 to 1 advance/decline,” said Darrell Cronk, CIO for Wealth & Investment Management at Wells Fargo.
“Think back to the authority the market came off October’s low … multiple +5 to 1 days — that’s the threshold to aspire to,” he said.
Futures suggest “we’ll give it another go [Wednesday morning], but S&P left in ‘no-man’s land’ technically above Monday’s low (5,119) and the 200-day (5,016) but below last Thursday’s low (5,410) and the 50-day average (5,447),” Cronk said. “First resistance is at 5,300 followed by more upside resistance at 5,450.”
He noted it’s only early August, and a “bottoming sequence typically takes some time to come together.”
“I can’t think of many correction lows in August historically … September / October is more feasible and likely,” Cronk said.
Recent moves, he said, “have been much more about forced unwinds/technicals than any major shift in sentiment, with little panic seen in institutional or retail flows.”
However, markets are unlikely to “stand still” from here on out, according to Cronk.
“Fragility is still present in the near term as a combination of yen carry trade unwinds and 2024’s crowded carry and momentum trades unwind amplified by historically poor trading liquidity,” he said.
“Corrections are not unusual, as 5%+ pullbacks have been seen 3x per year, on average, since the 1930s,” Cronk said. “Also 10%+ corrections have occurred 1x per year on average, with the last one coming in the fall of 2023.”
So far, this “correction peak to trough for S&P 500 has been spot on 9.7%,” he said.
Primary to come
The Hillsborough County Aviation Authority (Aa3//AA-/AA/) is set to price Thursday $483.875 million of AMT Tampa International Airport revenue bonds, 2024 Series B, serials 2027-2044, terms 2049, 2054. J.P. Morgan.
The Los Angeles Department of Water and Power (Aa2/AA-//AA) is set to price Thursday $355.3 million of power system revenue bonds, 2024 Series D, serials 2029-2032, 2036, 2038, 2041, 2043, 2045, 2047, 2050, 2052, 2054. Barclays.
The Chattanooga Health, Educational and Housing Facility Board (/A/A-/) is set to price Thursday $322.565 million of Erlanger Health health system revenue bonds, Series 2024. Morgan Stanley.
The National Finance Authority, New Hampshire, is set to price Thursday $176.66 million of Tamarron Project special revenue bonds, Series 2024, serial 2035. Wells Fargo.
The Pecos-Barstow-Toyah Independent School District, Texas, (/AAA//) is set to price Thursday $144.28 million of PSF-insured unlimited tax school building bonds, Series 2024, serials 2025-2043. Frost Bank.
The New Braunfels Independent School District, Texas, is set to price Thursday $125 million of unlimited tax school building bonds, Series 2024. Piper Sandler.
The Massachusetts Development Finance Agency (Aa1/AA+/) is set to price Thursday $108 million of Williams College issue revenue bonds, Series 2024V. Goldman Sachs.
Competitive
Oyster Bay, New York, is set to sell $185.24 million of bond anticipation notes, at 10:30 a.m. Eastern Thursday.
