Bonds

Munis were weaker to kick off a holiday-shortened week as the front end and belly of the curve continue to feel pressure. Triple-A benchmarks outperformed a U.S. Treasury sell-off, and equities ended down.

Markets continue to react to tight labor markets and still-high inflation that will likely lead to Federal Reserve rate hikes continuing into the summer.

Triple-A benchmarks were cut up to 10 basis points, depending on the scale, pushing the five- and 10-year muni above 2.50%. UST yields rose 11 to 15 basis points.

Muni-UST ratios rose. The three-year muni-UST ratio was at 61%, the five-year at 62%, the 10-year at 65% and the 30-year at 90%, according to Refinitiv MMD’s 3 p.m. ET read. ICE Data Services had the three at 64%, the five at 64%, the 10 at 68% and the 30 at 93% at 4 p.m.

“The close to 50 bp adjustment to the front end of the AAA municipal curve, taken at face value, appears to be a huge step toward pricing normalization for tax-exempts,” said Eric Kazatsky, head of municipal strategy at Bloomberg Intelligence. “However, the move in muni-UST ratios to 60% from 49%, though welcome, is a far cry from the range of market pricing seen in the decade preceding the pandemic.”

At the start of February, “muni valuations appeared to be wound like a spring,” he said.

“Sure enough, at the first sign of potential economic data that would suggest longer Federal Reserve involvement, U.S. Treasuries — and to a much larger degree, munis — sold off,” he said.

“The magnitude of how dislocated muni ratios has become is apparent,” Kazatsky said.

At the front end of the curve, AAA two-year munis rose 40 bps, while two-year USTs gained just 4.4 bps.

“Underperformance remained quite large in the five-year portion of the curve, at 28 bps, tapering to 14.5 bps in 10 years and just 10 bps at the long end,” Kazatsky said.

“A perfect storm of sagging primary issuance and continued buying from shorter-duration mandates contributed to short muni-UST ratios touching a 2023 low of 49% at the start of February,” he said.

“The ratio, though extremely rich, still can’t compare with the pandemic low of 26% in August 2021,” he said.

Though muni-UST ratios have cheapened, “they mainly remain muted and more in favor of corporates,” Kazatsky said.

“Another way to look at alternatives for flexible managers is the tradeoff between exempts and taxable munis,” he said. “Ratios between the two rose sharply over the past two weeks, with notable moves in the five- and 10-year tenors, where ratios are similar — in the low 60s — but still below average.”

“The long end of the yield curve tells a different story, with the ratio at 89%, up from 81% at the end of January,” he noted. More importantly, Kazatsky said, “the current ratio is close to one standard deviation above the longer-term average of 80%, which could signal future mean reversion.”

Issuers seeking lower rates may be waiting a while, he said.

“The one silver lining is that for the year, much of the curve has risen only 5 bps,” he said. However, Kazatsky added, “uncertainty in markets continues to weigh on 2023 sales, which are down 23% from 2022.”

Coming out of the holiday weekend, just $3.9 billion of sales are on tap, and the 30-day outlook isn’t much better, he said.

Secondary trading last week totaled about $36.85 billion with around “60% of secondary trading being clients buys as many took advantage of the rise in yields,” said Jason Wong, vice president of municipals at AmeriVet Securities.

With supply still low, he said, investors have continued to go to the secondary markets.

Clients put roughly $6.08 billion up for the bid last week, an increase from the prior week’s bids-wanted of $5.79 billion, per Bloomberg.

After having a strong January with munis returning about 2.87%, “February has been a complete reverse of the previous month” with munis being down 1.86% month-to-date, he said. This past week, “the short end was hit the hardest” with yields on bonds maturing in one-year climbing”17 basis points on Wednesday alone as one-year munis crossed 3% for the first time since November,” Wong said.

With the selloff in munis, muni-UST ratios rose, “something we have been looking for since munis have become extremely expensive,” Wong noted. Muni-UST ratios rose across the curve “with the short end rising by about 5% while the long end only rose by just 2%,” he said.

“This is something many have been waiting for since Treasuries have backed up in recent weeks while munis still held strong,” he said. “It was just a matter of time for this to happen.”

Secondary trading
New York State Dormitory Authority PIT 5s of 2024 at 3.07% versus 3.10%-3.01% Friday. North Carolina 5s of 2024 at 3.05% versus 2.50% on 2/7 and 3.41%-2.40% on 2/6. Maryland 5s of 2024 at 3.08%.

California 5s of 2028 at 2.58% versus 2.27% on 2/15 and 1.98% on 2/2. NYC TFA 5s of 2028 at 2.78%. Charlotte, North Carolina, 5s of 2029 at 2.54%.

Maryland 5s of 2034 at 2.70%. University of California 5s of 2035 at 2.89%-2.90% versus 2.91% original on Thursday. Gilbert Water Resource Municipal Property Corp., Arizona, 5s of 2036 at 3.09%.

University of California 5s of 2041 at 3.60% versus 3.56% original on Thursday. Washington 5s of 2044 at 3.73%.

AAA scales
Refinitiv MMD’s scale was cut up to 10 basis points. The one-year was at 3.05% (unch) and 2.89% (+10) in two years. The five-year was at 2.57% (+10), the 10-year at 2.55% (+6) and the 30-year at 3.56% (+6) at 3 p.m.

The ICE AAA yield curve was cut five to 10 basis points: 3.16% (+5) in 2024 and 2.96% (+8) in 2025. The five-year was at 2.61% (+8), the 10-year was at 2.58% (+7) and the 30-year yield was at 3.59% (+7) at 4 p.m.

The IHS Markit municipal curve was cut up to 10 basis points: 3.04% (unch) in 2024 and 2.86% (+10) in 2025. The five-year was at 2.53% (+10), the 10-year was at 2.58% (+6) and the 30-year yield was at 3.58% (+6) at a 4 p.m. read.

Bloomberg BVAL was cut five to six basis points: 3.11% (+5) in 2024 and 2.82% (+5) in 2025. The five-year at 2.57% (+6), the 10-year at 2.60% (+6) and the 30-year at 3.58% (+5).

Treasuries sold off.

The two-year UST was yielding 4.730% (+11), the three-year was at 4.442% (+13), the five-year at 4.174% (+15), the seven-year at 4.093% (+15), the 10-year at 3.955% (+14), the 20-year at 4.132% (+12) and the 30-year Treasury was yielding 3.976% (+11) at 4 p.m.

Primary to come:
Negotiated offerings are dominated by a $677.5 million New York City general obligation offering slated for Wednesday. The fiscal 2023 refunding consists of $559.7 million of Series C serial bonds maturing from 2024 to 2034, and $117.8 million Series D serial bonds maturing from 2023 to 2027. Siebert Williams Shank & Co. will senior manage the deal, which is rated Aa2 by Moody’s Investors Service, AA-minus by Standard & Poor’s and AA-plus by Fitch.

The Tarrant County, Texas, Hospital District is scheduled to sell $428.2 million in a financing structured with serial bonds maturing from 2024 to 2043, and term bonds in 2048 and 2053. Siebert Williams Shank & Co. will senior-manage. The bonds are rated Aa1 by Moody’s, AA by S&P and AAA by Fitch.

Washington state’s Renton School District, meanwhile, is planning a $272.6 million offering of unlimited tax GO bonds on Wednesday. Insured by the Washington State School District Credit Enhancement Program, the triple-A rated deal will be senior-managed by Piper Sandler & Co.

The Worthington City School District in Franklin County, Ohio, will sell $233.9 million of school facilities unlimited tax GO bonds in a Thursday offering. The bonds, rated Aa1 by Moody’s and AA-plus by S&P, will be senior-managed by RBC Capital Markets.

A $140 million sale of Series 2023 GO bonds will be sold by David Douglas, Ore., School District No. 40 on Thursday. Insured by the Oregon School Bond Guaranty Act, the financing is rated AA-plus by S&P and consists of $89.3 million of Series A 2023 bonds and $50.9 million of Series 2023B. Piper Sandler & Co. 

The Racine Unified School District in Wisconsin will sell $122.45 million of refunding debt consisting of $94.5 million of serial bonds maturing from 2034 to 2043, and $27.9 million of serial bonds maturing from 2029 to 2033. Baird is the book running senior manager.

Competitive:
The competitive calendar, meanwhile, is led by a $261.8 million Texas A&M University Board of Regents offering of unlimited tax Series 2023 GO bonds planned for Wednesday. The bonds mature serially from 2023 to 2042.

Waco, Texas, will sell two series of combination tax and revenue certificates of obligation bonds on Thursday. The Series 2023 A bonds consist of $146.8 million of tax-exempt bonds and $36.5 million of Series 2023 B taxable bonds, both series are rated Aa1 by Moody’s, A by S&P, and A-plus by Fitch.

Huntsville, Alabama, meanwhile will price a four-pronged offering of GO warrants also on Thursday. The largest series is $66.3 million of Series 2023 A bonds, followed by $44.9 million Series 2023 D school warrants, $44.2 million Series 2023 C sewer warrants, and $26.5 million Series 2023 B warrants. All of the bonds mature serially from 2024 to 2043 and are rated Aaa by Moody’s, A by S&P and AA by Fitch.

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