Large competitive market takes focus while outflows grow

Municipals were steady Thursday in secondary trading as investors turned their attention to a sizable new-issue slate distracting from a weaker U.S. Treasury market. Equities rallied.

Outflows from municipal bond mutual funds intensified as Refinitiv Lipper reported $255.794 million was pulled from them as of Wednesday after $91.713 million of outflows the week prior.

With little changed municipals and weaker UST, ratios were lower still. The two-year muni-Treasury ratio was at 55%, the three-year at 56%, the five-year at 58%, the 10-year at 60% and the 30-year at 86%, according to Refinitiv MMD’s 3 p.m. ET read. ICE Data Services had the two-year at 57%, three-year at 56%, the five-year at 57%, the 10-year at 61% and the 30-year at 88% at 4 p.m.

In the primary market Thursday, Goldman Sachs priced for the Modesto Irrigation District Financing Authority, California (/A+/AA-/) $174.575 million of electric system revenue bonds. The first tranche, $126.575 million of new-issue bonds, Series 2023A, saw 5s of 10/2026 at 2.12%, 5s of 2028 at 2.07%, 5s of 2033 at 2.16%, 5s of 2038 at 2.89%, 5.25s of 2043 at 3.30% and 5.25s of 2048 at 3.45%, callable 10/1/2033.

The second tranche, $48 million of refunding bonds, Series 2023B, saw 5s of 10/2023 at 2.36%, 5s of 2028 at 2.07% and 5s of 2032 at 2.14%, noncall.

In the competitive market, Louisiana (Aa2/AA-/NR/) sold $238.325 million of GOs, Series 2023-A, to J.P. Morgan, with 5s of 4/2024 at 2.31%, 5s of 2028 at 2.03%, 5s of 2033 at 2.14%, 5s of 2038 at 2.84% and 4s of 2043 at 3.64%,

New Mexico (Aa2/AA//) sold $233.710 million of capital projects GOs, Series 2023, to BofA Securities, with 5s of 3/2024 at 2.30%, 5s of 2028 at 2.00% and 5s of 2033 at 2.11%, noncall.

Portland Public Schools, Oregon (Aa1/AA+//), is set to sell $230.775 million of GOs, Series 2023, Bidding Group 1, to BofA Securities, with 5s of 6/2024 at 2.34%, 5s of 2028 at 2.00% and 5s of 2033 at 2.09%, noncall.

The school system sold $189.225  million of GOs, Series 2023, Bidding Group 2, to Citigroup Global Markets, with 5s of 6/2034 at 2.20%, 5s of 2038 at 2.83%, 5s of 2045 at 3.70% and 4s of 2049 at 3.82%, callable 6/15/2033.

“Amidst a cycle of directional inflation data, municipals are balancing a deal deluge and challenging relative values against what is solid demand along most of the curve,” said Kim Olsan, senior vice president of municipal bond trading at FHN Financial.

Following the release of the consumer price index report, generic yields “found support to post two to five basis point gains,” Olsan said. April’s broad index returns 1.16% month-to-date.

Across several new issue sales, she said “results pointed to 1) flat or negative spreads to AAA spot levels and 2) the acceptance of sub-2% yields inside 10 years.”

A multi-series sale of Anne Arundel County, Maryland, (Aaa/AAA/) GOs drew one to two “basis point spreads through respective AAA benchmarks” and a sale from Roseland, New Jersey, (NR/AA+/) GOs “came with 4% couponing out to 10 years also with negative spreads,” according to Olsan.

The Anne Arundel sale also “drew 1.97%-1.99% yields in 2029-2030 maturities of one series, signifying a yield barrier that hasn’t been in play since early 2022,” she said.

“The availability of a larger high-grade name (Maryland) and local issuance in a specialty state with limited volume (New Jersey) is encouraging bidders,” she said. 

On a broader level, Olsan noted munis “appear to be buying (literally) into the recession theme.”

In particular, she said “long-dated 4% coupons are responding to the idea that the tightening cycle may be reaching an end with spread compression in play.”

Trades in Pennsylvania Turnpike (A2/NR/) “4s due 2053 (callable 3031) around 4.10% were spread in the +90/MMD range, or about 10 basis points tighter than levels from February,” she said.

Upcoming supply “includes more of the same in terms of scale and quality — Illinois will price $2 billion stage GOs, Boston will sell $350 million AAA GOs and several local authorities will sell utility-based issues that should settle in May and line up with an expected $23 billion in redemptions,” Olsan noted.

“A schedule of state GO sales cycling through brings attention to some of the most liquid and highly rated credits available to buyers,” she said. “Part of the focus on state credits is tax revenue flows and how that impacts particular credit quality as a potential recession looms.”

State sales tax revenues increased 4.5% in January year-over-year, according to Bloomberg. 

The largest gains were seen in Iowa (up 30%), Wyoming (up 18%) and North Carolina (up 10%), she said.  

States that rely more “heavily on sales tax collections saw those revenues increase 2% (Washington State) to 6% (Texas),” she noted. 

Oregon, Delaware, Georgia and Connecticut, among others, were states that saw sales tax revenue decrease, she said.

“A breakdown with the sales tax category lends insight into where buyers are spending more dollars,” per Olsan. 

“General sales and gross tax revenues were $25.5 billion for 27 states, for an 85.9% share of all sales tax receipts,” she said, while “gas tax collections fell 9% (for 25 states) and tobacco tax collections dropped 5.6% (across 27 states).”

“Spenders appeared more willing to part with cash for alcohol (tax receipts up 4.9% for 26 states) and lodging (collections rose 14.4% across 16 states),” she said.

In the past fiscal year, states had a record $134.5 billion in rainy-day funds, according to the National Association of State Budget Officers. “States held 42.5 days’ worth of general fund expenditures at the end of 2022, the highest level of budgetary cushion this century,” according to Wells Fargo Investment Institute strategists.

They note that “elevated reserve funds should leave state and local governments equipped to weather our forecasted economic downturn.”

Muni “defaults remain a low probability, in our view, but trading volatility could increase for some lower-quality municipal issuers,” the strategists said.

There is a favorable rating on munis “due to a positive supply-demand backdrop, federal infrastructure spending, and lingering support from pandemic relief packages.” They view muni absolute yields as attractive versus pre-pandemic levels.

Wells Fargo Investment Institute strategists said most munis can provide higher-income investors will a tax advantage benefit.

“The period leading up to the April 18 tax-filing deadline could potentially constitute an attractive entry point, as some investors tend to sell municipal bonds this time of year to fund tax liabilities,” they said.

Muni CUSIP requests rise
Municipal CUSIP request volume increased in March on a year-over-year basis, following a decrease in February, according to CUSIP Global Services.

For muni bonds specifically, there was an increase of 30.1% month-over-month and a 28.5% decrease year-over-year.

The aggregate total of identifier requests for new municipal securities, including municipal bonds, long-term and short-term notes, and commercial paper, rose 32.2% versus February totals. On a year-over-year basis, overall municipal volumes were down 22.8%. CUSIP requests are an indicator of future issuance.

Secondary trading
Louisiana 5s of 2024 at 2.40% versus 2.45% original on Monday. Harris County, Texas, 5s of 2024 at 2.27%-2.24% versus 2.42% Wednesday. Mecklenburg County, North Carolina, 5s of 2025 at 2.22%.

Washington 4s of 2029 at 2.11%. Connecticut 5s of 2030 at 2.14%-2.11%. NYC 5s of 2030 at 2.12%-2.10% versus 2.34% on 4/3 and 2.35% on 3/30.

University of California 5s of 2037 at 2.57%-2.54% versus 2.91%-2.90% on 3/28. California 5s of 2039 at 2.88% versus 2.89%-2.88% Wednesday and 3.01% original on 4/6.

AAA scales
Refinitiv MMD’s scale was unchanged: The one-year was at 2.31% and 2.18% in two years. The five-year was at 2.03%, the 10-year at 2.08% and the 30-year at 3.16% at 3 p.m.

The ICE AAA yield curve was flat: 2.40% in 2024 and 2.29% in 2025. The five-year was at 2.00%, the 10-year was at 2.05% and the 30-year was at 3.19% at 4 p.m.

The IHS Markit municipal curve was unchanged: 2.32% in 2024 and 2.19% in 2025. The five-year was at 2.02%, the 10-year was at 2.03% and the 30-year yield was at 3.14%, according to a 4 p.m. read.

Bloomberg BVAL was bumped up to one basis point: 2.29% (-1) in 2024 and 2.22% (unch) in 2025. The five-year at 2.01% (-1), the 10-year at 2.06% (unch) and the 30-year at 3.15% (unch) at 4 p.m.

Treasuries were weaker.

The two-year UST was yielding 3.970% (flat), the three-year was at 3.712% (+1), the five-year at 3.502% (+3), the seven-year at 3.473% (+3), the 10-year at 3.447% (+4), the 20-year at 3.786% (+4) and the 30-year Treasury was yielding 3.683% (+5) at 4 p.m.

Mutual fund details
Refinitiv Lipper reported $255.794 million of municipal bond mutual fund outflows for the week that ended Wednesday following $91.713 million of outflows the previous week.

Exchange-traded muni funds reported outflows of $136.145 million after inflows of $305.465 million in the previous week. Ex-ETFs, muni funds saw outflows of $119.649 million after outflows of $397.177 million in the prior week.

Long-term muni bond funds had inflows of $223.768 million in the latest week after inflows of $398.555 million in the previous week. Intermediate-term funds had outflows of $24.005 million after outflows of $200.169 million in the prior week.

National funds had outflows of $187.385 million after outflows of $89.062 million the previous week while high-yield muni funds reported inflows of $197.574 million after inflows of $147.958 million the week prior.

Primary on Wednesday
RBC Capital Markets priced for the California State Public Works Board (Aa3/A+/AA-/NR/) $462.230 million of various capital projects lease revenue bonds. The first tranche, $50.535 million of new-issue bonds, 2023 Series A, saw 5s of 12/2023 at 2.50%, 5s of 2028 at 2.18%, 5s of 2033 at 2.32%, 5s of 2038 at 3.02%, 5s of 2043 at 3.36% and 5s of 2047 at 3.50%, callable 12/1/2032.

The second tranche, $411.695 million of refunding bonds, 2023 Series B, saw 5s of 12/2023 at 2.50%, 5s of 2028 at 2.18%, 5s of 2033 at 2.32% and 5s of 2037 at 2.81%, callable 12/1/2032.

Stifel Nicolaus priced for the Irvine Facilities Financing Authority, California (/AA//), $446.707 million of Build America Mutual-insured Irvine Great Park Infrastructure Project current interest special tax revenue bonds, Series 2023A, with 5s of 9/2026 at 2.17%, 5s of 2028 at 2.13%, 5s of 2033 at 2.24%, 5s of 2038 at 2.95%, 5s of 2043 at 3.38%, 5s of 2048 at 3.63%, 5.25s of 2053 at 3.63% and 4s of 2058 at 4.15%, callable 9/1/2033.