Munis weaker following USTs while outflows return

Munis were weaker Thursday, unable to ignore larger losses in U.S. Treasuries, after better-than-expected economic data pointed to a strong U.S. economy. Equities ended mixed.

Economic data released Thursday showed the U.S. economy is strong, said Edward Moya, senior market analyst at The Americas OANDA. The initial reaction saw UST yields surge, “while stocks focused on the robust personal consumption numbers,” Moya noted. 

“The final reading of first-quarter GDP and personal consumption reminded traders that the economy is far from breaking and probably will need to be subject to much more Fed tightening,” he said. “It was a clean sweep of impressive U.S. data as U.S. jobless claims declined the most since 2021 and a holiday-shortened week.”

Good economic news “should mean trouble for stocks, but we might not see that until we get a couple more sticky inflation reports,” he said.

The Fed is nowhere near done hiking rates and until the market prices that in, stock market rallies should be limited, he added.

Triple-A yields up to five basis points, depending on the scale, as secondary trading showed cheaper prints and some new-issues had to be cut to clear the market while USTs saw larger losses by as much as 16 basis points on the three-year and five-year maturities.

The two-year muni-to-Treasury ratio Thursday was at 60%, the three-year at 62%, the five-year at 63%, the 10-year at 66% and the 30-year at 89%, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the two-year at 62%, the three-year at 64%, the five-year at 65%, the 10-year at 70% and the 30-year at 93% at 4 p.m.

Municipal bond mutual fund outflows also returned as Refinitiv Lipper reported investors pulled $25.331 million from the funds for the week ending Wednesday following $672.288 million of inflows the week prior.

The primary market was active Thursday and several new-issues had to cheapen to clear the market.

In the primary market Thursday, Siebert Williams Shank priced and repriced for Houston (A1/AA/A+/AA+/) $756.070 million of Assured Guaranty-insured airport system subordinate lien revenue and refunding bonds, with yields bumped up to five basis points. The first tranche, $649.025 million of AMT bonds, Series 2023A, saw 5s of 7/2026 at 3.50% (-5), 5s of 2028 at 3.58% (unch), 5s of 2033 at 3.63% (unch), 5s of 2038 at 4.01% (-5), 5.25s of 2043 at 4.18% (-1), 5.25s of 2048 at 4.36% (unch), 5.25s of 2053 at 4.40% (-1) and 4.5s of 2053 at 4.61% (unch), callable 7/1/2033. 

The second tranche, $107.045 million of non-AMT bonds, Series 2023B, saw 5s of 7/2026 at 3.00% (unch), 5s of 2028 at 2.93% (unch), 5s of 2033 at 3.00% (unch), 5s of 2038 at 3.58% (unch), 5s of 2043 at 3.79% (unch) and 4.25s of 2053 at 4.35%, callable 7/1/2033.

Morgan Stanley priced for institutions $734.335 million of senior revenue bonds for the Battery Park City Authority, New York (Aaa//AAA/), which saw yields cut throughout most of the curve. The first tranche, $339.845 million of sustainability bonds, Series 2023A, saw 5s of 11/2041 at 3.45% (+4), 5s of 2043 at 3.52% (+6), 5s of 2048 at 3.74% (+8) and 5s of 2053 at 3.81% (+7), callable 11/1/2033.

The second tranche, $384.560 million of bonds, Series 2023B, saw 5s of 11/2023 at 3.04% (+3), 5s of 2028 at 2.66% (unch), 5s of 2033 at 2.72% (+2) and 5s of 2038 at 3.13% (-8), callable 11/1/2033.

The third tranche, $9.205 million of taxable sustainability bonds, Series 2023C, saw 4.8s of 11/2028 price at par.

BofA Securities priced for the California Pollution Control Financing Authority (/BBB+//)  on behalf of the Republic Services project $144.205 million of AMT solid waste disposal refunding revenue bonds, Series 2023, with 4.25s of 7/2043 with a mandatory tender date of 2/15/2024 at par.

In the competitive market, the Clark County Water District, Nevada (Aa1/AAA//), sold $340 million of limited tax GO water reclamation bonds, Series 2023, to BofA Securities, with 5s of 7/2024 at 3.10%, 6s of 2028 at 2.68%, 5s of 2033 at 2.74%, 5s of 2038 at 3.13%, 5s of 2043 at 3.60%, 5s of 2047 at 3.78% and 5s of 2053 at 3.96%, callable 7/1/2033.

Despite the weaker session Thursday, Kim Olsan, senior vice president of municipal bond trading at FHN Financial, noted that Wednesday’s “order flows suggested more buyers than bonds in several instances, leading to Massachusetts upsizing its state GO issue by about 20% to a total of $1.2 billion.”

Heavier demand was confirmed by other issuers, including those that are not specialty states, she said.

Clark, Nevada, “sold $200 million school district bonds with business leaving just nominal balances across a maximum 20-year maturity schedule,” Olsan said.

The active primary market can be felt in secondary flows, she said.

Data from the Municipal Securities Rulemaking Board shows $7 billion was “traded in secondary credits, a decline of 10% from the prior day,” she said. June’s daily average is $10 billion, according to Olsan.

There have been more dealer buys from customers than sells in the seven- to 12-year range, which she said is an “anomaly” from recent weeks.

Outside of 12 years, she said “32% of the volume was inter-dealer trades against the 30-day average of 27% for the category.”

One facilitator “may be swapping as the close of June is a double witching of sorts marking the end of a month and quarter,” she said.

As the first half of the year comes to an end, Olsan said “technicals indicate an inversion is likely to remain entrenched.”

“The short rate rise is abating — the SIFMA 7-day rate fell 17 basis points to 4.01% and weekly floaters dropped 20 basis points from last week,” she said.

Meanwhile, municipal money market demand is easing.

Balances have fallen “from $115 billion in the first week of June to $113 billion in the most recent week,” she said.

A 3% yield “continues to be a minimum short-end driver for general market inquiry,” she said.

For example, AAA-rated new issue Collin County, Texas, priced GOs with 2024s and 2025s at 3.13% and 3.07%, respectively, Olsan noted.

Based on syndicate order flows, she said it seems “a good amount of inquiry has adopted a straddle of short/long intermediate allocations — where mid-3% yield come into play in the 15-year range with more than 80% yield capture of a full 30-year extension.”

Short coupons, FDIC lists
The Federal Deposit Insurance Corp.’s liquidations have been a theme in the market this month, she said.

Several long 2%-range structures “traded from FDIC bid lists with requisite spreads and [tax-equivalent yields],” she said.

Olsan said trade prints at the start of June established a starting point for 2s.

A sale of Washington Suburban Sanitation District, Maryland, (Aaa/AAA/) “2.25% due 2041 was spread +100/MMD with a corresponding TEY (37% bracket) of 6.73%,” she said.

By mid-June, comparable sale spreads widened out over 30 basis points.

Frisco, Texas, “GO 2s of 2041 traded +136/MMD and as of the third week this month spreads were holding in that range,” she said.

Sun Prairie, Wisconsin, “GO 2s due 2041 traded +139/MMD traded” on June 21, Olsan said.

Wider spreads “created higher TEYs that surpassed 7.25% for what are low-default risk credits,” she said.

As the sale volume nears completion, she said “bidding has recovered closer to its June starting range.”

A recent sale of Maui County, Hawaii GOs 2s “due 2041 was spread +105/MMD,” while its TEY was nearly 7.25%.

Data, she said, suggests “the cheapest range may have peaked but secondary floats point to 7% and higher TEYS that remain in play.”

These structures present “more of a total return trade with rates forecasted to fall in the next 12- to 24-month cycle,” according to Olsan.

Limited supply conditions may occur as “it is also unlikely new production bonds will be issued in this coupon range,” she said.
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Secondary trading
California 5s of 2024 at 2.90% versus 2.93% Tuesday. Triborough Bridge and Tunnel Authority 5s of 2024 at 2.99%. Massachusetts 5s of 2025 at 2.86% versus 2.93% Wednesday.

NYC TFA 5s of 2028 at 2.67%-2.66%. California 5s of 2029 at 2.57%-2.60% versus 2.55% Tuesday. NY Dorm PIT 5s of 2030 at 2.70%.

Wake County, North Carolina, 5s of 2033 at 2.62% versus 2.55%-2.54% on 6/15. Washington 5s of 2033 at 2.70% versus 2.66%-2.65% Tuesday and 2.68%-2.69% on 6/23. Maryland 5s of 2034 at 2.69% versus 2.67%-2.66% on 6/23 and 2.71% on 6/12.

Palm Beach County, Florida, 5s of 2047 at 3.65%-3.62%. Indiana Finance Authority 5s of 2053 at 4.09% versus 4.o5%-4.04% Wednesday and 4.05% on 6/21.

AAA scales
Refinitiv MMD’s scale was cut three to four basis points: The one-year was at 3.05% (+4) and 2.93% (+4) in two years. The five-year was at 2.62% (+4), the 10-year at 2.56% (+3) and the 30-year at 3.49% (+3) at 3 p.m.

The ICE AAA yield curve was cut up to five basis points: 3.00% (flat) in 2024 and 2.94% (+3) in 2025. The five-year was at 2.60% (+4), the 10-year was at 2.57% (+4) and the 30-year was at 3.55% (+4) at 4 p.m.

The IHS Markit municipal curve was cut three to four basis points: 3.05% (+4) in 2024 and 2.93% (+4) in 2025. The five-year was at 2.62% (+4), the 10-year was at 2.56% (+3) and the 30-year yield was at 3.49% (+3), according to a 3 p.m. read.

Bloomberg BVAL was cut two to three basis points: 3.00% (+3) in 2024 and 2.90% (+3) in 2025. The five-year at 2.59% (+3), the 10-year at 2.52% (+2) and the 30-year at 3.50% (+2) at 4 p.m.

Treasuries sold off.

The two-year UST was yielding 4.867% (+15), the three-year was at 4.493% (+16), the five-year at 4.134% (+16), the 10-year at 3.845% (+13), the 20-year at 4.113% (+11) and the 30-year Treasury was yielding 3.908% (+10) near the close.

Mutual fund details
Refinitiv Lipper reported $25.331 million of outflows from municipal bond mutual fund for the week that ended Wednesday following $672.288 million of inflows the week prior.

Exchange-traded muni funds reported inflows of $80.804 million after inflows of $513.903 million in the previous week. Ex-ETFs muni funds saw outflows of $106.135 million after inflows of $158.386 million in the prior week.

Long-term muni bond funds had inflows of $417.409 million in the latest week after inflows of $836.698 million in the previous week. Intermediate-term funds had $72.004 million of outflows after inflows of $31.970 million in the prior week.

National funds had inflows of $24.768 million after inflows of $651.919 million the previous week while high-yield muni funds reported inflows of $220.752 million after inflows of $320.780 million the week prior.

Christina Baker contributed to this story.