UST weakness, more selling pressure pushes muni yields higher
6 min readA reversal of U.S. Treasuries added more selling pressure on municipals Friday with another day of cheaper trading in the secondary leading to cuts in triple-A scales after a week of underperformance to taxables that pushed ratios firmly above 100% out long.
Municipal triple-A benchmark yields rose up to five basis points in another rough day in the market, that pushed municipal one-year triple-A yields above 2% on certain scales, the 10-year closer to 3% following Treasuries to higher yields across the curve, with particular pressure out longer. Equities reversed course to end in the black.
Municipal to UST ratios were at 89% in five years, 103% in 10 years and 108% in 30, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the five at 89%, the 10 at 99% and the 30 at 108% at a 4 p.m. read.
Supply is estimated at $6.467 billion next week, down from this week’s $9.237 billion, led by several large general obligation bond deals.
Fresh off a trifecta of ratings upgrades, Illinois leads the calendar with $1.7 billion of GOs while New York City is next in line with $1.08 billion of tax-exempt and taxable GOs on Wednesday with a retail offering Tuesday.
Triple-A Princeton University will come with $600 million on Tuesday, split between $300 million of corporate CUSIPs and $300 million of exempts.
Gilt-edged Prince George’s County, Maryland, comes with $273.61 million of GOs competitively Tuesday.
While many participants from various seats in the market have said that compelling yields and ratios should bring buyers back into the fold, the volatility of broader markets continues to lead to trepidation from investors in the municipal market.
“One would think that lower rates and stronger technicals would provide great support for our market, but muni struggles have continued, and tax-exempt yields simply refused to follow Treasuries lower,” Barclays PLC strategists wrote in a weekly report.
Ratios have reached their multi-year highs “to the levels that in the past attracted non-traditional investors,” noted Barclays strategists Mikhail Foux, Clare Pickering and Mayur Patel. But this time around, even with abundant opportunities available across the fixed-income spectrum, “we have not seen much interest in tax-exempts levels that are attractive both outright and versus USTs.”
Meanwhile, market technicals will remain challenging, with tax-exempt supply likely to start to pick up, with the 30-day visible pipeline currently at the highest level since last fall, Barclays noted. Bond Buyer 30-day visible supply sits at $16.7 billion.
“Mutual funds have still been struggling with outflows, forced to raise cash; hence, the amount of bonds out for the bid has reached its highest level since March 2020,” the strategists wrote.
Mutual fund outflows hit 13 weeks straight, per Refinitiv Lipper, bringing the total outflows for the year-to-date to $30.5 billion. Only once during the past 10 years has Lipper recorded a longer streak of outflows, noted Refinitiv MMD. That was from May 2013 until January 2014 when there were 33 weeks of outflows totaling $42.3 billion, during the Taper Tantrum.
And although investors will receive large redemptions in several weeks, “it is hard to see the muni market turning around on a dime,” Barclays said. “Even if rates stabilize, municipal investors will likely be cautious for some time, waiting for fund outflows to abate.”
Barclays said it is “extremely hard to pick a bottom,” and they think market participants should continue to “cautiously add exposure,” with the belly being their favorite part of the muni yield curve.
“The long end might remain under pressure for now, and the front end is definitely more defensive, but the yield curve has steepened and the 10-year portion is providing a good yield pickup, especially when one trades down in coupon,” they said.
BofA Global Research strategists said if the Treasury market can hold its gains — though UST saw more losses Friday — munis should follow given some time.
At this point, investors’ new purchase activity continues to be focused in short duration bonds, they said, adding that for longer-duration bonds, “there’s been quite a bit of tax loss swapping trades.”
While the sell-off has been fierce — yields are more than 180 basis points higher on the 10- and 30-year since the start of 2022 — performance improves after 100 basis point sell-offs, ”at least historically,” BofA noted.
The magnitude of this sell-off has happened in as many days only six other times since 1993, BofA noted.
They are not sanguine about a turnaround that was been witnessed in the past.
“While returns over these periods were negative, returns were strongly positive over the ensuing 12 months,” the strategists wrote. “With further losses to-date, it may prove difficult to repeat history this time around.”
Secondary trading
Washington 5s of 2023 at 2.07%-2.04%. New York City TFA future tax 5s of 2023 at 2.26%. Mecklenburg County, North Carolina, 5s of 2023 at 1.98%.
Minnesota 5s of 2025 at 2.55%-2.54%. Harford County, Maryland, 5s of 2026 at 2.58%-2.57%. Hennepin County, Minnesota, 5s of 2026 at 2.60%.
California 5s of 2027 at 2.70%. Los Angeles DWP 5s of 2028 at 2.82%-2.80%. King County School District #403, Washington, 5s of 2029 at 2.92% versus 2.94% Thursday.
New York City water 5s of 2031 at 3.09% versus 3.11% Monday. Harvard 5s of 2032 at 2.96%-2.95% versus 2.86%-2.85% Thursday and 2.84%-2.82% Monday. Baltimore County, Maryland, 5s of 2035 at 3.32%.
Boston 5s of 2039 at 3.10%, the same as Thursday. Triborough Bridge and Tunnel 5s of 2051 at 4.15%-4.16% versus 4.01%-4.00% Tuesday.
AAA scales
Refinitiv MMD’s scale was cut two to five points at the 3 p.m. read: the one-year at 1.99% (+2) and 2.31% (+2) in two years. The five-year at 2.58% (+2), the 10-year at 2.99% (+5) and the 30-year at 3.32% (+5).
The ICE municipal yield curve saw two to four basis point cuts: 2.02% (+2) in 2023 and 2.37% (+2) in 2024. The five-year at 2.58% (+2), the 10-year was at 2.90% (+4) and the 30-year yield was at 3.35% (+4) at a 4 p.m. read.
The IHS Markit municipal curve was cut: 2.02% (+3) in 2023 and 2.32% (+3) in 2024. The five-year at 2.63% (+3), the 10-year was at 2.98% (+5) and the 30-year yield was at 3.32% (+5) at 4 p.m.
Bloomberg BVAL was cut one to five basis points: 2.01% (+1) in 2023 and 2.29% (+1) in 2024. The five-year at 2.63% (+3), the 10-year at 2.91% (+4) and the 30-year at 3.23% (+5) at a 4 p.m. read.
Treasuries were better across the curve.
The two-year UST was yielding 2.594% (+3), the three-year was at 2.792% (+4), five-year at 2.887% (+7), the seven-year 2.951% (+7), the 10-year yielding 2.963% (+9), the 20-year at 3.333% (+10) and the 30-year Treasury was yielding 3.096% (+8) at the close.
Primary to come:
Illinois (Baa1/BBB+/BBB+/) is set to price on Wednesday $1.7 billion of general obligation bonds consisting of $925 million of Series 2022A, serials 2023-2042; term 2047; and $775.125 million of refunding bonds, Series 2022B, serials 2023-2037. Citigroup Global Markets Inc.
New York City (Aa2/AA/AA-/AA+) is set to price $1.08 billion of general obligation bonds on Wednesday (retail Tuesday) with $950 million of exempts and $130 million of taxables. BofA Securities.
Gilbert, Arizona, (/AAA/AAA/) is set to price on Tuesday $467.81 million of Water Resources Municipal Property Corp. senior lien utility system revenue green bonds, Series 2022. J.P. Morgan Securities LLC.
The Trustees of Princeton University (Aaa/AAA//) is set to price on Tuesday $300 million of taxable corporate CUSIP bonds, Series 2022, term 2052. Loop Capital Markets.
The New Jersey Educational Facilities Authority (Aaa/AAA//) is set to price on Tuesday $300 million of Princeton University revenue bonds, Series A, serials 2027, 2032. Ramirez & Co., Inc.
The Ohio Air Quality Development Authority (Baa2/BBB//) is set to price on Tuesday $234 million of Duke Energy Corp. Project air quality development refunding bonds. Morgan Stanley & Co. LLC.
The Ohio Air Quality Development Authority (Baa2/BBB//) is set to price on Tuesday $168 million of Duke Energy Corp. Project air quality development refunding bonds, non-AMT, Series 2022B, serial 2030. KeyBanc Capital Markets.
Memphis, Tennessee, (Aa2/AA//) is on the day-to-day calendar with $229.605 million of taxable general improvement refunding bonds, Series 2022B. J.P. Morgan Securities LLC.
The Vista Unified School District, San Diego County, California, (/AA//) is set to price on Tuesday $150 million of general obligation bonds, serials 2023-2024, 2030-2042; terms 2046, 2051, insured by Build America Mutual. Stifel, Nicolaus & Company, Inc.
The Florida Housing Finance Corp. (Aaa///) is set to price on Wednesday $135 million of homeowner mortgage revenue social bonds, 2022 Series 2. Morgan Stanley & Co. LLC.
The Indiana Finance Authority (Aa3/AA//) Is set to price on Thursday $134.355 million of CWA Authority Project first lien wastewater utility refunding revenue forward delivery bonds, Series 2022A, serials 2022-2042. Citigroup Global Markets Inc.
The Ohio Housing Finance Agency (Aaa///) is set to price on Thursday $130 million of mortgage-backed securities program residential mortgage revenue social bonds, 2022 Series B. J.P. Morgan Securities LLC.
The Maryland Department of Housing and Community Development residential revenue social bonds, Series 2022A, serials 2030, terms 2037, 2042, 2047, 2052. RBC Capital Markets.
The West Virginia Economic Development Authority (Baa1/A-/A-/) is set to price on Wednesday $104.375 million of Appalachian Power Company — Amos Project solid waste disposal facilities revenue bonds, remarketing, consisting of $45.375 million of Series 2009A, serial 2042, and $50 million of Series 2009B, serial 2042. KeyBanc Capital Markets.
Competitive:
Prince George’s County, Maryland, (Aaa/AAA/AAA/) is set to sell $273.610 million of general obligation bonds at 10:45 a.m. eastern Tuesday. Serials 2023-2042.
St. Louis, Missouri, (/AA//) is set to sell $114.475million of convention center revenue bonds at 11 a.m. eastern Wednesday. Serials 2034-2047.
