Munis, USTs move in lockstep; end trading session slightly firmer
6 min read
Municipals and U.S. Treasuries moved in lock step Thursday with both triple-A benchmark yields and UST yields slightly firmer throughout most of the curve. Equities ended up.
The two-year muni-UST ratio was at 58%, the three-year at 59%, the five-year at 61%, the 10-year at 64% and the 30-year at 89%, according to Refinitiv MMD’s 3 p.m. ET read. ICE Data Services had the two-year at 59%, three-year at 58%, the five-year at 59%, the 10-year at 64% and the 30-year at 90% at 3 p.m.
Too much uncertainty — and a lack of stability — is plaguing the municipal market, two active market participants said Thursday.
While demand is thriving and new issues, like this week’s $1 billion sale of New York City general obligation bonds, are seeing strong participation, some investors are still being spooked by the volatility, according to John Farawell, managing director of underwriting at Roosevelt & Cross.
Between the interest rate uncertainty, outflows from mutual funds, the Federal Reserve Board’s hiking cycle taming inflation, talk of a possible recession, and the latest banking collapse, investors are dazed and confused, Farawell said.
“It’s almost like a day-to-day, and week-to-week market here,” he said on Thursday afternoon. “There are a lot of question marks and uncertainty right now – everyone is questioning what’s taking place and they are not quite sure.”
The uncertainty created by the failures of Silicon Valley Bank and Signature Bank leaves a big question in investors’ minds about the future of the regional banking industry, while the market is also watching the Fed’s actions, which Farawell said will be data-driven going forward.
“Today’s jobless claims were down a bit and not up, and that goes against what the Fed is trying to do with raising unemployment to cure inflation,” he said. “Everyone is wondering if there will be a recession or not.”
Meanwhile, there is a lack of supply in the new-issue camp, so the market overall feels “stuck,” according to Farawell.
The secondary market is seeing a strong and competitive bid side, but there is just not enough paper to go around, according to Farawell.
New York City GOs this week were strongly spoken for in the new issue market and should surface tomorrow in the secondary market.
“We don’t have any large pieces in the secondary and supply in New York,” he said.
Making matters worse, the “violent” fluctuations in the Treasury market are not helping the overall uncertainty in the fixed-income market, including municipals, he noted.
“Our percentages are a little bit better again,” as long-term municipals are yielding roughly 60% of their Treasury counterparts, and that is bringing some people off the sidelines, Farawell said.
Retail investors are exhibiting strong demand — but are staying short and conservative due to the uncertainty.
“Retail buying in the short end when they can,” he said. “But, some retail are into Treasuries because they are so attractive and can buy 4% in two years.”
“If it’s the right item, retail will jump on it,” Farawell said of municipal product. “There is a lot of retail interest.”
But, others, he said, are sitting on their money and not making any commitments. “They are not sure yet,” Farawell said, referring to the cloud of uncertainty over the municipal market.
Until the market gets a clear picture from the Fed moving forward, the market will continue to experience queasiness, according to Farawell.
“We need stabilization in the market — it’s going all over the place right now,” he said.
At the same time, others also believe the municipal market needs stability — although it was firmer on Thursday.
“With Central Bank policy and the inflation narrative showing some renewed focus, municipals are demonstrating a firmer tone across much of the yield curve, while Treasury movement has been mixed throughout Thursday’s session,” according to Jeff Lipton, head of municipal credit and market strategy and municipal capital markets at Oppenheimer & Co.
“Both asset classes seem to be range-bound, as we anticipated, awaiting more substantive guidance,” he said Thursday.
“Technicals remain supportive of the muni market with net negative supply projected over the next 30 days,” he said. “Refunding opportunities are seeking lower rates, while many issuers are still looking for some sense of market stability.”
Against the wall of pronounced volatility that has gripped much of March, municipals are enjoying a respectable performance, despite underperforming U.S. Treasuries month to date, according to Lipton.
“We think that munis are in a good place and that positive returns can very well have staying power,” he said.
Seasonal reinvestment needs, stemming from traditionally heavy June 1 and July 1 redemptions, will soon accelerate, according to Lipton.
“If issuance does not advance from current levels, investor appetite may be met with limited product, and so the bid-side could see further support,” he added.
Peter Block, managing director of credit strategy at Ramirez & Co., said he believes “markets are convinced that the Fed’s tightening cycle is nearly done contrary to Fed-speak, although this remains somewhat uncertain.”
He said, “to the extent yields rise, however, there is a risk that this policy exacerbates problems with the banks’ funding costs and fleeing deposits to larger banks.”
Munis, he noted, should continue to “take cues from the Treasury market given the still uncertain backdrop.”
If supply materializes as expected, he said, “demand should remain strong in April despite weak reinvestment and continued tight muni-UST ratios, driven by still good absolute tax-exempt yields and the year-to-date supply shortage.”
Outflows continued as Refinitiv Lipper reported $194.097 million was pulled from municipal bond mutual funds in the week that ended Wednesday after $427.082 million of outflows the week prior.
High-yield saw $148.621 million of inflows after $184.920 million of outflows the week prior, while ETFs saw outflows of $90.242 million after $19.491 million of inflows the previous week.
Secondary trading
Connecticut 5s of 2024 at 2.63%. Maryland 5s of 2024 at 2.51%-2.50% versus 2.54% Tuesday and 2.60% on 3/23. NY Dorm PIT 5s of 2025 at 2.44%-2.39%.
Illinois Finance Authority 5s of 2028 at 2.48% versus 2.50% Wednesday. California 5s of 2029 at 2.21% versus 2.50% on 3/14. NYC 5s of 2030 at 2.36%.
Maryland 5s of 2031 at 2.28% versus 2.29% Tuesday. California 5s of 2033 at 2.34%. DC 5s of 2036 at 2.76%-2.72% versus 3.08% original on 3/10.
San Jose Financing Authority, California, 5s of 2047 at 3.43%-3.42% versus 3.45% Wednesday. Baltimore County, Maryland, 5s of 2053 at 3.51% versus 3.57% on 3/14 and 3.78% original on 3/8.
AAA scales
Refinitiv MMD’s scale was bumped up to two basis points: The one-year was at 2.49% (-2) and 2.38% (-2) in two years. The five-year was at 2.22% (unch), the 10-year at 2.27% (-2) and the 30-year at 3.33% (-2) at 3 p.m.
The ICE AAA yield curve was bumped up to two basis points: 2.54% (flat) in 2024 and 2.43% (flat) in 2025. The five-year was at 2.21% (-1), the 10-year was at 2.28% (-1) and the 30-year was at 3.39% (flat) at 4 p.m.
The IHS Markit municipal curve was bumped up to two basis points: 2.47% (unch) in 2024 and 2.36% (-2) in 2025. The five-year was at 2.19% (-2), the 10-year was at 2.25% (-2) and the 30-year yield was at 3.31% (-2), according to a 4 p.m. read.
Bloomberg BVAL was bumped up to two basis points: 2.46% (-1) in 2024 and 2.40% (-1) in 2025. The five-year at 2.22% (-1), the 10-year at 2.28% (-1) and the 30-year at 3.34% (-1).
Treasuries were firmer outside of two years.
The two-year UST was yielding 4.099% (+1), the three-year was at 3.881% (-1), the five-year at 3.666% (-1), the seven-year at 3.612% (-3), the 10-year at 3.546% (-2), the 20-year at 3.882% (-3) and the 30-year Treasury was yielding 3.745% (-3) at 4 p.m.
Mutual fund details
Refinitiv Lipper reported $194.097 million of municipal bond mutual fund outflows for the week that ended Wednesday following $427.082 million of outflows the previous week.
Exchange-traded muni funds reported outflows of $90.242 million after inflows of $19.491 million in the previous week. Ex-ETFs, muni funds saw outflows of $103.855 million after outflows of $446.574 million in the prior week.
Long-term muni bond funds had inflows of $198.168 million in the latest week after outflows of $104.390 million in the previous week. Intermediate-term funds had outflows of $103.188 million after outflows of $78.792 million in the prior week.
National funds had outflows of $150.414 million after outflows of $365.933 million the previous week while high-yield muni funds reported inflows of $148.621 million after outflows of $184.920 million the week prior.
