Small inflows return to mutual funds after weeks of strong performance

Municipals were little changed in secondary trading while the return of mutual fund inflows led by high-yield and a $770 million notes deal from the Triborough Bridge and Tunnel Authority took focus. U.S. Treasuries were weaker and equities ended in the black.

The three-year muni-UST ratio was at 60%, the five-year at 67%, the 10-year at 72% and the 30-year at 100%, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the three at 61%, the five at 67%, the 10 at 76% and the 30 at 101% at a 4 p.m. read. 

Small inflows returned as Refinitiv Lipper reported $46.912 million was added to municipal bond mutual funds for the week ending Wednesday after $1.394 billion of outflows the week prior.

High-yield led with $552.127 million of inflows after $590.461 million of outflows the week prior while exchange-traded funds saw more inflows of $952.134 million after $745.970 million of inflows the previous week.

“Municipals are caught in a play or pray mode — commit at current levels or wait for some pullback after seeing yields rally 60 basis points or more,” said Kim Olsan, senior vice president of municipal bond trading at FHN Financial.

If fundamentals are any indication, Olsan said, “any hopes for a meaningful yield retreat may be several weeks away.”

“Forward supply is holding at a near-neutral $10 billion par value, a level that typically falls short of addressing new commitment and rollover needs,” while “price performance has become consistent across the curve, giving some relief to short-term buyers where ratios are in the low-50% area based on persistent demand,” she said.

She said that sellers “are finding a greater willingness by dealers to increase holdings as inventories grew to more than $10 billion at the end of November, about a 10% increase over the month.”

Bid lists show “some roll off of vintage lower coupon bonds and seasoned calls, with a concentration in blocks below $5 million as tallied by Bloomberg’s bid system,” Olsan said.

High-grade bonds issued between 2015 and 2018 that “carried 20-year maturities with 10-year call options would have had an implied average yield of 2.69%, per MMD data,” she said.

Current 20-year 5s are trading around 3.25%, leading to tax loss themes, she noted. Similarly, “the 2020-2021 period that saw long-dated 2s and 3s prevail in new issue have ceded their full coupon value or more in losses this year, creating another tax loss trade,” she said.

On a broad level, she said “the calendar is giving sellers more advantage as is a constructive outlook for tempered rate hikes in coming months.” Any issuance for the remainder of the year can be expected to have receptive audiences as a result, she said.

The trend of paltry issuance seen in November will continue into December, said Tom Kozlik, managing director head of municipal research & analytics Hilltop Securities. Bond Buyer 30-day visible supply sits at $9.42 billion.

“We’re going to be lucky to get something between $10 billion and $20 billion this month,” he said, noting that December is usually a low issuance month, but this year is “going to be one of the lowest Decembers that we’ve seen in a long time.”

Kozlik said he expects this trend will continue into next year, as lower economic growth, rising interest rates and budget cushions from past federal aid will keep issuers on the sidelines.

“There isn’t much in my mind that’s pushing issuance forward,” he said. HilltopSecurities projects $350 billion of total issuance in 2023.

On the buy-side, he believes there’s money out there that’s ready to be put to work. Investors added money to mutual funds both this week and several weeks ago, and Kozlik noted there’s the potential for more inflows.

In the primary Thursday, Barclays Capital priced for the Los Angeles Department of Water and Power (Aa2/AA+/AA/) $399.780 million of water system revenue bonds, 2022 Series D, with 5s of 7/2023 at 2.26%, 5s of 2027 at 2.28%, 5s of 2032 at 2.36%, 5s of 2037 at 3.10%, 5s of 2042 at 3.48%, 5s of 2047 at 3.67% and 5s of 2052 at 3.76%, callable 7/1/2032.

In the competitive market, the Triborough Bridge and Tunnel Authority, New York, sold a total of $770 million of MTA payroll mobility tax bond anticipation notes, Series 2022B.

The authority sold $370 million to J.P. Morgan Securities, with 5s of 12/2024 at 2.72%.

The authority also sold $100 million to Wells Fargo, with 5s of 12/2024 at 2.69%.

Additionally, the authority sold $50 million to Citigroup Global Markets, with 5s of 12/2024 at 2.69%, and another $50 million to Citigroup Global Markets, with 5s of 12/2024 at 2.72%.

The authority sold $50 million to Goldman Sachs & Co., with 5s of 12/2024 at 2.72%, and another $50 million to Goldman Sachs & Co., with 5s of 12/2024 at 2.68%.

The authority also sold $50 million to Jefferies, with 5s of 12/2024 at 2.70%.

The authority sold $50 million to Morgan Stanley & Co., with 5s of 12/2024 at 2.68%, as well.

The Cherry Hill Township Board of Education, New Jersey, (Aa2///) sold $300 million of school bonds, Series 2022, to J.P. Morgan Securities, with 3s of 2023 at 2.55%, 3s of 2027 at 2.71%, 3s of 2032 at 3.30%, 4s of 2037 at 3.68%, 4s of 2042 at 4.15%, callable 8/1/2029.

Secondary trading
California 5s of 2023 at 2.28% versus 2.33% Tuesday. North Carolina Build NC rev 5s of 2024 at 2.43%-2.42%.

Connecticut 5s of 2025 at 2.47%. Maryland 5s of 2025 at 2.43%. Prince George’s County, Maryland, 5s of 2025 at 2.44%.

California 5s of 2031 at 2.56%. New Mexico severance tax rev 5s of 2031 at 2.58%. Mecklenburg County, Maryland, 5s of 2034 at 2.66% versus 2.72% Monday. New York City 5s of 2034 at 2.97%.

New York City TFA 5s of 2044 at 3.86%-3.84% versus 4.02%-3.95% Wednesday. New York UDC PIT 5s of 2050 at 4.01%. New York City waters 5s of 2052 at 4.12%.

AAA scales
Refinitiv MMD’s scale was unchanged: the one-year at 2.39% and 2.41% in two years. The five-year at 2.47%, the 10-year at 2.53% and the 30-year at 3.46%.

The ICE AAA yield curve was cut on the front end of the curve: 2.41% (+2) in 2023 and 2.42% (+1) in 2024. The five-year at 2.45% (unch), the 10-year was at 2.58% (unch) and the 30-year yield was at 3.47% (unch) at 4 p.m.

The IHS Markit municipal curve was unchanged: 2.37% (unch) in 2023 and 2.41% (unch) in 2024. The five-year was at 2.48% (unch), the 10-year was at 2.54% (unch) and the 30-year yield was at 3.44% (unch) at a 4 p.m. read.

Bloomberg BVAL was little changed: 2.41% (unch) in 2023 and 2.43% (-1) in 2024. The five-year at 2.47% (unch), the 10-year at 2.57% (unch) and the 30-year at 3.44% (unch) at 4 p.m.

Treasuries were off.

The two-year UST was yielding 4.318% (+8), the three-year was at 4.058% (+8), the five-year at 3.713% (+8), the seven-year 3.632% (+9), the 10-year yielding 3.490% (+7), the 20-year at 3.694% (+2) and the 30-year Treasury was yielding 3.439% (+1) at the close.

Mutual fund details
Refinitiv Lipper reported $46.912 million of inflows for the week ending Wednesday following $1.394 billion of outflows the previous week.

Exchange-traded muni funds reported inflows of $952.134 million after inflows of $745.970 million in the previous week. Ex-ETFs, muni funds saw outflows of $905.221 million after outflows of $2.140 billion in the prior week.

Long-term muni bond funds had inflows of $448.245 million in the latest week after outflows of $1.112 billion in the previous week. Intermediate-term funds had outflows of $228.166 million after outflows of $247.709 million in the prior week.

National funds had inflows of $226.343 million after outflows of $1.086 billion the previous week while high-yield muni funds reported inflows of $552.127 million after outflows of $590.461 million the week prior.