Bonds

Municipals were mixed Thursday as outflows from muni mutual funds intensified. U.S. Treasuries were firmer, and equities ended up.

The three-year muni-UST ratio was at 63%, the five-year at 64%, the 10-year at 67% and the 30-year at 92%, according to Refinitiv MMD’s 3 p.m. ET read. ICE Data Services had the three at 63%, the five at 63%, the 10 at 66% and the 30 at 91% at 4 p.m.

An improving tone was apparent in the municipal market midweek — after a topsy-turvy ride last week when the market saw a close to 50-basis point adjustment to the front end of the triple-A municipal yield curve.

On Monday, municipals 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 were cut up to 10 basis points, depending on the scale, pushing the five- and 10-year muni above 2.50%. 

“After all the real, technical and perceived drama from last week we are beginning to see a better tone in the market,” said Tom Kozlik, managing director and head of public policy and municipal strategy at HilltopSecurities Inc.

But, he said, the improved tone is relative.

“Don’t call it a comeback yet,” Kozlik said.” It still does not seem as though the market has found an equilibrium.”

Many investors remain skeptical about the rally and levels, Kozlik noted.

“Given the performance in the Treasury market, municipal bond yields finally moved higher in sympathy and begrudgingly joined the bond market sell-off, catalyzed by an unexpected (somewhat) return to higher interest rate anxiety as the Fed professes to more assertively bring down the inflationary growth rate,” said Jeff Lipton, managing director of credit research at Oppenheimer Inc.

New highs are being set year-to-date across UST yields, led by short tenors, and “we are beginning to question our assertion that the 10-year is not likely to breach new highs during the current tightening sequence,” he said.

The “UST curve inversion is now modestly wider versus the beginning of February, yet we have been at wider levels throughout the month and we can certainly expect even wider levels over the near-term,” he noted.

The front-end of the muni curve remains inverted, with Lipton saying, “a rare phenomenon for the asset class that seems to have staying power thanks to the Fed’s tightening gift that keeps on giving.”

Since the beginning of February, AAA benchmark 10- and 30-year yields have increased by 40 and 36 basis points, per MMD, while the one- through five-year tenors saw upward adjustments of between 58 and 78 basis points, “taking the brunt of the sell-off to underperform much of the curve,” he noted.

Although munis outperformed a UST sell-off for much of the month-to-date, as expected, he said, “had it not been for constructive technicals and positive flows into muni mutual funds (conditions that brought relative value ratios to very expensive levels), the outperformance gap would have likely been thinner.”

Given the events of the past week, he said “munis are now reacting more rationally, underperforming in response to the movements made along the Treasury yield curve.”

“The back-up in rates has pushed relative value ratios modestly higher,” he said, with the 10 and 30-year benchmarks standing at 67% and 92% respectively per MMD, versus 63% and 89% about one week ago.

“Richer valuations have been evident for shorter tenors, and despite the yield back-up with short ratios moving disproportionately higher, they remain the most expensive,” he said.

A normalized supply-build “could move ratios to more attractive levels, with the 10-year ratio moving closer to fair value and with the 30-year approaching full value,” Lipton said.

While ratios may be off their lows, he noted “they remain expensive relative to historical averages.”

Ratios can be partly viewed as state-specific, “depending upon unique issuance and overall supply characteristics across the states,” he said.

“There will be those issuers who are likely to remain tentative, for now, given the Fed/interest rate anxiety, and issuance can be expected to be light during the days leading up to the March FOMC meeting,” he said.

Limited primary supply is setting “the stage for a stronger bid, with the larger deals receiving the most aggressive interest with good pre-sale,” he noted.

Adjustments made in the one- to 10-year range have “sparked renewed institutional support as munis are now over 60% of Treasuries,” he said. Against this backdrop, he noted, “supply should still build, with sufficient interest, particularly if ratios hold steady or move higher.”

“Lighter reinvestment needs in February coupled with earlier bumps along the curve, likely kept retail on the sidelines awaiting cheaper opportunities,” he said. “More recent cuts along the curve and improved relative value have created a more attractive backdrop, yet there is evidence suggesting that even cheaper entry points are desired.”

Outflows intensified as Refinitiv Lipper reported $1.660 billion was pulled from municipal bond mutual funds in the week that ended Wednesday after $68.054 million of outflows the week prior.

High-yield saw $869.861 million of outflows after $79.944 million of outflows the week prior, while ETFs saw outflows of $367.788 million after $361.427 million of outflows the previous week.

NYC GOs
New York City said Wednesday it saw good retail demand for its offering of $688 million of GOs.

Proceeds of the sale will be used to refund some outstanding bonds and the city said the refunding will achieve around $37 million in total debt service savings across fiscal years 2024 through 2027.

The city received over $587 million of orders from retail investors on Tuesday, of which nearly $490 million was usable. Final yields ranged from 2.83% to 3.36%.

The deal marked the first transaction since Fitch Ratings raised the city’s GOs to AA from AA-minus.

Secondary trading
DC 5s of 2024 at 3.06%. Maryland 5s of 2024 at 3.05% versus 2.46% on 2/6 and 2.39% on 2/3. Washington 5s of 2025 at 3.03%-3.00% versus 3.00% Wednesday and 2.98% on 2/17.

NYC 5s of 2028 at 2.84%. Maryland 5s of 2029 at 2.60% versus 2.68%-2.67% Wednesday and 2.39%-2.31% on 2/14. Massachusetts 5s of 2030 at 2.64%-2.60%.

Massachusetts Development Finance Agency 5s of 2035 at 3.03%-3.02%. University of California 5s of 2036 at 3.10% versus 3.10% on 2/17 and 3.12% original on 2/16. Virginia College Building Authority 5s of 2037 at 3.36%-3.35%.

Washington 5s of 2047 at 3.87% versus 3.93%-3.94% Wednesday and 3.91% on 2/17. LA DWP 5s of 2047 at 3.81%-3.78%. Illinois Finance Authority 5s of 2052 at 4.35% versus 4.40%-4.35% Wednesday and 4.38% on 2/17.

AAA scales
Refinitiv MMD’s scale was cut up to four basis points. The one-year was at 3.05% (unch) and 2.97% (+4) in two years. The five-year was at 2.61% (+4), the 10-year at 2.59% (+4) and the 30-year at 3.56% (unch) at 3 p.m.

The ICE AAA yield curve was firmer outside five years: 3.12% (flat) in 2024 and 2.98% (+1) in 2025. The five-year was at 2.63% (+1), the 10-year was at 2.57% (-1) and the 30-year yield was at 3.57% (-2) at 4 p.m.

The IHS Markit municipal curve was cut up to five basis points: 3.06% (+2) in 2024 and 2.95% (+5) in 2025. The five-year was at 2.59% (+2), the 10-year was at 2.58% (unch) and the 30-year yield was at 3.58% (unch) at a 4 p.m. read.

Bloomberg BVAL was cut up to two basis points: 3.14% (+1) in 2024 and 2.89% (+2) in 2025. The five-year at 2.60% (+1), the 10-year at 2.61% (+1) and the 30-year at 3.59% (+1).

Treasuries were firmer.

The two-year UST was yielding 4.692% (-1), the three-year was at 4.403% (-3), the five-year at 4.102% (-6), the seven-year at 4.030% (-5), the 10-year at 3.873% (-5), the 20-year at 4.034% (-5) and the 30-year Treasury was yielding 3.872% (-5) at 4 p.m.

Mutual fund details
Refinitiv Lipper reported $1.660 billion of municipal bond mutual fund outflows for the week that ended Wednesday following $68.054 million of outflows the previous week.

Exchange-traded muni funds reported outflows of $367.788 million after outflows of $361.427 million in the previous week. Ex-ETFs, muni funds saw outflows of $1.293 billion after inflows of $293.373 million in the prior week.

Long-term muni bond funds had outflows of $1.119 billion in the latest week after inflows of $158.856 million in the previous week. Intermediate-term funds had inflows of $5.198 million after inflows of $133.362 million in the prior week.

National funds had outflows of $1.526 billion after outflows of $118.343 million the previous week while high-yield muni funds reported outflows of $869.861 million after outflows of $79.944 million the week prior.

Christine Albano contributed to this story.

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