November 8, 2024

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Munis outperform UST sell-off ahead of holiday weekend

7 min read

Municipals were steady to weaker in spots before the holiday weekend, outperforming a U.S. Treasury sell-off with a double-digit rise in yields as traders continued to weigh the impact of inflation. Equities ended in the red.

Triple-A muni yields were cut a basis point, depending on the scale, while UST yields rose 11 to 14 basis points. Muni-UST ratios rose a result and were at 81% in five years, 87% in 10 years and 96% in 30, according to Refinitiv MMD’s 1 p.m. read. ICE Data Services had the five at 80%, the 10 at 89% and the 30 at 97% at a 2 p.m. read.

Like last week, supply for the new-calendar issuance is light at $4.804 billion with $3.182 billion of negotiated deals and $1.622 billion of competitive loans. Thirty-day visible supply sits at little more than $13 billion.

The primary calendar is led by $854 million of tax-exempt midwestern disaster area revenue refunding bonds from the Iowa Finance Authority. Other notable deals include $272 million of general obligation bonds from Texas, $266 million of student loan revenue and refunding bonds from the New Jersey Higher Education Student Assistance Authority and $205 million of unlimited tax school building bonds from the Frisco Independent School District, Texas.

The City and County of Denver, Colorado, is expected to come with $366 million in three deals and the Virginia Public School Authority with $216.460 million in the competitive calendar.

Outsized volatility continued to lead to large-scale mutual fund outflows and intense bids-wanted activity, and this volatility is pushing the limits of liquidity and price discovery, as well as the muni asset class’s overall sturdiness, according to Jeff Lipton, managing director of credit research at Oppenheimer Inc.

To reverse the trend and restart a cycle of positive muni flows, he said a protracted period of stability and market conviction is required. When this happens, the municipal bond market’s more idiosyncratic nature will resurface, with demand for product signifying a degree of compromise in terms of structure and credit spreads.

“For now, however, we can expect to see continued outflows, yet we do think that a cyclical change will likely begin with a visibly slowing pace of negative flows,” he said.

Lipton said a perfect storm had created a forgettable rate-driven first quarter for munis, with bad credit events and circumstances strikingly missing.

“Various tax receipts are growing stronger, reserves and rainy-day funds have been strengthened, debt-management practices have become more conservative, and disclosure standards have made significant strides,” Lipton said.

He said rating upgrades are outpacing downgrades, and the extraordinary amounts of Federal stimulus made available to state and local governments and revenue-generating firms is a key part of the muni credit story. These funds have not yet been completely distributed, and the infrastructure package’s funding has a multi-year implementation horizon.

Munis were hit by a broader sell-off in the UST market as the Fed reacted to rising inflationary pressure by pledging to raise interest rates as needed to ensure price stability. While Lipton believes munis will follow UST’s lead, the disproportionate underperformance looked counter-intuitive given that munis normally outperform a run-up in bond yields. He said it’s possible cheaper valuations and hopefully some UST stability can set munis on a path to improved quarterly performance, according to Lipton.

Compared to the lower-rate and richer-valuation environment that defined the municipal bond market in 2021, Lipton said better entry possibilities now exist.

While spreads may have been wider earlier in the year, thanks to an unforgiving first quarter, he said there is still value to be found, and given the current dynamics, cross-asset class evaluation makes sense given cheaper muni levels.

“While it is difficult to predict how much additional pain may lie ahead for munis, we believe that the heavy bloodletting is behind us and that observant investors can capture the market accretion when technicals guide us away from the cliff,” he said.

Secondary trading
Georgia 5s of 2022 at 1.69%-1.68%. NY Dorm PIT 5s of 2024 at 2.13%-2.10%. Maryland 5s of 2025 at 2.27%-2.23% versus 2.30% Tuesday and 1.93%-1.97% on 4/1. California 5s of 2025 at 2.28%-2.36% versus 2.36% Wednesday. Georgia 5s of 2025 at 2.17% versus 2.20%-2.17% Wednesday.

Maryland 5s of 2028 at 2.30%-2.36% versus 2.32% Wednesday. District of Columbia 5s of 2029 at 2.44%. North Carolina 5s of 2030 at 2.60%-2.56%. Charleston, South Carolina 5s of 2031 at 2.66%-2.64%

Washington 5s of 2037 at 2.89% versus 2.87% Wednesday and 2.87%-2.86% original (Tuesday). California 5s of 2037 at 2.88%-2.87% versus 2.87% Monday and 2.77%-2.80% on 4/6.

NYC TFA 5s of 2040 at 3.27%-3.30% versus 2.91%-2.92% on 4/4, 2.95% on 4/1 and 3.10% original (3/31). California 5s of 2041 at 2.94% versus 3.00% Tuesday and 2.66% on 4/5.

LA DWP 5s of 2047 at 3.10% versus 3.08% Wednesday. LA DWP 5s of 2051 at 3.23% versus 3.09% Monday. LA DWP 5s of 2052 at 3.20% versus 3.05% on 4/6 and 3.04%-3.06% original (3/30).

AAA scales
Refinitiv MMD’s scale was unchanged at 1 p.m. read: the one-year at 1.77% and 2.03% in two years. The five-year at 2.22%, the 10-year at 2.46% and the 30-year at 2.81%.

The ICE municipal yield curve was cut one to two basis points: 1.78% (+1) in 2023 and 2.07% (+2) in 2024. The five-year at 2.23% (+1), the 10-year was at 2.47% (+1) and the 30-year yield was at 2.85% (+1) at the close.

The IHS Markit municipal curve was not available as of publication.

Bloomberg BVAL was cut a basis point in spots: 1.76% (+1) in 2023 and 2.00% (+1) in 2024. The five-year at 2.24% (unch), the 10-year at 2.47% (unch) and the 30-year at 2.79% (unch) at a 1 p.m. read.

Treasury yields rose.

The two-year UST was yielding 2.449% (+11), the three-year was at 2.684% (+11), five-year at 2.790% (+14), the seven-year 2.845% (+14), the 10-year yielding 2.830% (+13), the 20-year at 3.099% (+11) and the 30-year Treasury was yielding 2.923% (+11) at a 2 p.m. read.

Economy
More voices from the Federal Reserve endorse a 50-basis-point rate hike at next month’s meeting.

Fed Gov. Chris Waller said the economy can handle a half-point rate hike, while Federal Reserve Bank of New York President John Williams called such an increase “reasonable.”

In data, the University of Michigan consumer sentiment index unexpectedly rose to 65.7 in the preliminary April read from 59.4 in March, while inflation expectations held steady.

The “index surprisingly rebounded as the consumer became optimistic as gas prices have declined from the March peak and the labor market remains hot,” said Edward Moya, senior market analyst at OANDA. “Inflation expectations were expected to increase over the next 12 months, so the staying steady at 5.4% was somewhat positive and suggests that peak inflation could be in place.”

But elevated gas and food prices will erode the savings consumers amassed during the pandemic, he said. Still, “they should be able to handle these price increases going into the summer.”

“Amid all the hand-wringing recently concerning the possibility of recession, somebody forgot to tell the consumer,” said Wells Fargo Securities Senior Economist Tim Quinlan and Economic Analyst Sara Cotsakis. “Inflation remains the top threat to consumer spending, but the higher interest rates needed to fix it will be a bitter pill to swallow.”

While inflation will continue, Quinlan said, “it will likely stop getting worse and that means less of a headwind for spending.”

Retail sales data were also released, showing a 0.5% gain in March after a 0.8% climb in February, suggesting “consumers powered through the first quarter and kept spending despite the surge in inflation,” said Grant Thornton Chief Economist Diane Swonk. “Cracks in the foundation of spending are beginning to show with some rationing of gas and the pivot back to discount stores.”

Also, she noted, a decline in savings as a result of the higher costs from elevated inflation.

But, Berenberg Capital Markets Chief Economist for the U.S. Americas and Asia Mickey Levy said, “broadening inflationary pressures and the recent surge in prices at the pump weighed on real retail sales, which declined 0.7% month-over-month in March.”

“Accelerating headline inflation has eroded real purchasing power, and real disposable income has declined for seven consecutive months,” he said. Households have managed by using savings and credit when needed, but “data suggest that consumption growth in both real and nominal terms is moderating.”

Also released Thursday, initial jobless claims grew to 185,000 in the week ended April 9 from 167,000, a week earlier, while continuing claims fell to 1.475 million in the week ended April 2 from 1.523 million a week earlier. Despite the gain, claims are near lows not seen in decades, indicating a strong labor market.

Primary to come:
Iowa Finance Authority (Ba1/BBB-/BB+/) is set to price Thursday $854.325 million of tax-exempt, non-alternative minimum tax Iowa Fertilizer Company Project midwestern disaster area revenue refunding bonds, Series 2022, serial 2050, terms 2050 and 2050. Citigroup Global Markets.

Texas (Aaa/AAA/AAA/) is set to price Wednesday $272.170 million of general obligation bonds, consisting of $100.325 million of water financial assistance bonds, Series 2022A, serials 2023-2046; $140.615 million of water financial assistance refunding bonds, Series 2022B, serials 2023-2041; $13.210 million of water financial assistance refunding bonds, Series 2022C, serials 2023-2032; and $18.020 million of taxable water financial assistance refunding bonds, Series 2022D, serials 2023-2035. Ramirez & Co.

The New Jersey Higher Education Student Assistance Authority is set to price Thursday $266.345 million of student loan revenue and refunding bonds, Series 2022, consisting of: $22.245 million of senior bonds (Aa1///), Series A, serials 2024-2030; $202.420 million of senior bonds (Aa1///), Series B, serials 2024-2030, term 2041; and $41.500 million of subordinate bonds (A2///), Series C, serial 2052. RBC Capital Markets.

Frisco Independent School District, Texas, (Aaa/AAA//) is set to price Wednesday $205.115 million of unlimited tax school building bonds, Series 2022, serials 2023-2052, insured by Permanent School Fund Guarantee Program. RBC Capital Markets.

The Unified Government of Wyandotte County and Kansas City, Kansas, (///) is set to price Wednesday $153.960 million of Village East Project Areas 2B, 3 And 5 of sales tax special obligation revenue bonds, Series 2022, terms 2033, 2038 and 2041. Stifel, Nicolaus & Co.

San Juan Unified School District, California, (Aa2///) is set to price Thursday $150 million of Election of 2016 general obligation bonds, Series 2022, consisting of $139.180 million of bonds, Series 2022, serials 2023-2024 and 2026-2046 and $10.820 million of taxable bonds, Series 2022, serial 2022. Raymond James & Associates.

Jersey City Municipal Utilities Authority (///) is set to price Tuesday a $130 million note deal, consisting of $80 million of Series A, serial 2023 and $50 million of Series B, serial 2023. Stifel, Nicolaus & Co.

Competitive:
The City and County of Denver, Colorado, is set to sell $246.080 million of general obligation Elevate Denver bonds, Series Interest 2022A, at 10:30 a.m. eastern Tuesday; $81.710 million of general obligation RISE Denver bonds, Series 2022B, at 11 a.m. Tuesday; and $38.600 million of taxable general obligation RISE Denver bonds, Series 2022C at 11:30 a.m. Tuesday.

Virginia Public School Authority (Aa1/AA+/AA+/) is set to sell $216.460 million of school financing bonds (1997 Resolution), Series 2022A, at 10:30 a.m. eastern Wednesday.