Bonds

Municipals had another constructive session by holding steady Thursday as inflows returned to municipal bond mutual funds for only the second time since early February. U.S. Treasuries were weaker, and equities ended mixed.

The two-year muni-to-Treasury ratio Thursday was at 61%, the three-year at 63%, the five-year at 65%, the 10-year at 67% and the 30-year at 90%, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the two-year at 62%, the three-year at 65%, the five-year at 65%, the 10-year at 69% and the 30-year at 93% at 4 p.m.

Municipal bond mutual fund inflows returned as Refinitiv Lipper reported investors added $672.288 million for the week ending Wednesday following $256.532 million of outflows the week prior. The market saw $460 million flow in two weeks ago and before that, it was $775 million of inflows for the week ending Feb. 8.

Munis have been little changed throughout most of the week, showing some strength Tuesday but remaining largely unchanged Wednesday and Thursday. The quieter tone relative to what’s been going on with USTs is due to several factors, said Jeff Timlin, a managing partner at Sage Advisory.

There has seasonal effects at play, which happen in June and July in particular, with “the heavy maturities and coupon payments that come due,” he said.

Additionally, Timlin noted there “hasn’t been as much new issuance coming to market to satisfy the demand component that’s out there.”

Demand remains high for retail investors and institutional retail investors, but supply, in general, remains constrained. Bond Buyer 30-day visible supply sits at $9.3 billion while 30-day net negative supply is at negative $25.7 billion, per Bloomberg.

There have been several years of “reduced or below average tax-exempt new-issuance, and that is depressing the market’s ability to go out there,” he said.

“You have this imbalance, which while natural for munis, has been exacerbated with the higher-yield environment,” he said.

Along with the higher rates, Timlin said the lack of issuance stems from “municipalities being more disciplined and frugal in coming to market with new projects.”

Furthermore, as an economic slowdown approaches, he said people lean into fixed-income.

For those that can take advantage of the “tax efficiency will lean into the municipal market, causing a further mismatch between supply and demand.”

But the deals that have come have “been more high-quality, high-grade deals than some of the lower echelon of investment-grade or maybe even the higher end of the high-yield spectrum,” according to Timlin.

This has led to “a large spread compression across the credit curve,” he said.

The large investor base comes in and positions themselves “appropriately prior to June kicking in because we know that there’s going to be a big divergence between supply and demand,” he said.

Currently, he said it’s a seller’s market.

“Those factors have contributed heavily to kind of the stability in yields in the muni market,” Timlin noted.

The June Federal Open Market Committee meeting has come and gone and the Fed provided “a better sense of direction” after the FOMC opted to skip a rate hike in June, he said.

“You’d figured the market would probably sell off a little bit more or rates would go a bit higher but sometimes it’s the unknown risk that people are fearful of, not the known risks,” he said.

Issuers are dipping their toes, though. Issuers are “taking advantage of stable yields to price a range of credits” as the end of June approaches, said Kim Olsan, senior vice president of municipal bond trading at FHN Financial.

Wednesday was syndicate central “with eight $100 million-plus negotiated deals and several regional competitive sales,” she said.

The major themes were “specialty states are hard to source leading to tight spreads and Texas supply is offering yield advantages,” she noted.

“A Boston University pricing drew a 10-year spread of just +11/MMD, Kern CA priced Aa2/NR Community College District bonds with a 10-year spread of just +5/MMD and AAA Fairfield CT sold GO bonds with the 10-year bought as 4s at a spread of -5/MMD,” according to Olsan.

Among select longer structures it was noticeable that the use of 4% coupons, possibly suggesting that “buyers embracing a rates-are-stabilizing theme,” she said.

In AAA- and AA-rated Texas pricings, Olsan said “yield concessions continue to be available for inquiry with allocation flexibility.”

Harris County AAA Flood Control, Texas GO and Corpus Christi GO bonds “all offered intermediate spreads in the +19 to +33/MMD range — where [taxable equivalency yields] hit the mid-4% area and mid-70% relative values,” she said.

Secondary activity points to bid results are “showing more par value posted for sale than items actually sold,” she said.

Multiple structures, including short call 4s and 5s and noncallable 5s, were offered by several block bids wanteds lists, generating only partial sale prints, Olsan noted.

“The inference is that inquiry remains rather fragmented with some buyers placing more value on optionality for concession and others wanting call-protected structures for duration objectives,” she said.

Regardless, that dynamic, along with the daily flow of Federal Deposit Insurance Corp. sale lists, “has added about 20% more bid volume this month than has been the case all year,” she said.

There has been the continuation of the muni reinvestment season without a substantial uptick in supply,” said Cooper Howard, a fixed income specialist at Charles Schwab.

More money is “coming due via maturities, calls, and other factors than there is supply available in the market,” he said.

Yields relative to Treasuries have ground lower due to “stronger demand relative to supply,” he said.

Howard would not be surprised “if relative yields move higher and munis underperform Treasuries as demand begins to abate.”

Credit quality, which remains strong, has not yet peaked, he said.

He does not “have any major concerns about credit quality for most issuers.”

However, Howard said that “tax revenues are beginning to roll over and there are signs that we are likely past the peak in credit quality.”

For most issuers, liquidity levels are sufficient, so he doesn’t think there will be broad ratings downgrades in the near term.

In the primary market Thursday, Wells Fargo priced for the National Finance Authority, Nevada, (/AA/AA/) $148.590 of Build America Mutual-insured lease revenue bonds. The first tranche, $148.100 million of Series 2023A, saw 5s of 12/2023 at 3.50%, 5s of 6/2028 at 3.24%, 5s of 12/2028 at 3.24%, 5s of 6/2033 at 3.32%, 5s of 12/2033 at 3.34%, 5s of 12/2038 at 3.91%, 4.125s of 12/2043 at 4.40%, 5.25s of 6/2051 at 4.30%, and 4.5s of 6/2053 at 4.65%, callable 6/1/2033. 

The second tranche, $490,000 of Series 2023B, saw 5.625s of 12/2024 price at par, noncall.

BofA Securities priced for Forsyth, Montana, (A3//A-//) on behalf of the Northwestern Corp. Colstrip Project $144.660 million of pollution control revenue refunding bonds, Series 2023, with 3.875s of 7/2028 pricing at par, callable 4/2/2028.

In the competitive market, Denton, Texas, (/AA+/AA+/) sold $149.140 million of certificates of obligation, to Mesirow Financial, with 5s of 2/2024 at 3.15%, 5s of 2028 at 2.82%, 5s of 2033 at 2.80%, 5s of 2038 at 3.34%, 5s of 2043 at 4.06%, 4s of 2049 at 4.17% and 4s of 2053 at 4.18%, callable 2/15/2033.

The Swarthmore Borough Authority (Aaa/AAA//) sold $125.850 of Swarthmore College revenue bonds, Series 2023, to Wells Fargo Bank with 5s of 9/2024 at 3.02%, 5s of 2028 at 2.62%, 5s of 2033 at 2.56%, 5s of 2038 at 3.14%, 5s of 2043 at 3.44%, 5s of 2048 at 3.64%, and 5s of 2053 at 3.73%, callable 9/15/2033.

Secondary trading
LA USD 5s of 2024 at 2.85% versus 3.02%-2.97% Wednesday. Utah 5s of 2025 at 2.90%. NYC 5s of 2026 at 2.90%.

NY State Environmental Facilities Corp. 5s of 2028 at 2.56%-2.55%. NYC 5s of 2030 at 2.78% versus 2.81%-2.80% Wednesday and 2.85%-2.84% on 6/15.

Georgia 5s of 2033 at 2.58% versus 2.58%-2.57% Wednesday and 2.63% on 6/15. Washington 5s of 2033 at 2.71%. NYC Municipal Water Finance Authority 5s of 2034 at 2.70% versus 2.73%-2.71% on 6/7.

Dallas waters 5s of 2047 at 3.60% versus 3.67%-3.71% on 6/1. Huntsville, Alabama, 5s of 2053 at 3.75%-3.65%.

AAA scales
Refinitiv MMD’s scale was unchanged: The one-year was at 3.03% and 2.91% in two years. The five-year was at 2.62%, the 10-year at 2.55% and the 30-year at 3.48% at 3 p.m.

The ICE AAA yield curve was changed up to one basis point: 3.05% (+1) in 2024 and 2.95% (-1) in 2025. The five-year was at 2.60% (flat), the 10-year was at 2.55% (-1) and the 30-year was at 3.52% (flat) at 4 p.m.

The IHS Markit municipal curve was unchanged: 3.03% in 2024 and 2.91% in 2025. The five-year was at 2.62%, the 10-year was at 2.55% and the 30-year yield was at 3.48%, according to a 4 p.m. read.

Bloomberg BVAL was cut up to one basis point: 3.00% (+1) in 2024 and 2.90% (unch) in 2025. The five-year at 2.59% (unch), the 10-year at 2.53% (unch) and the 30-year at 3.51% (+1) at 4 p.m.

Treasuries were weaker.

The two-year UST was yielding 4.793% (+8), the three-year was at 4.378% (+8), the five-year at 4.043% (+8), the 10-year at 3.800% (+7), the 20-year at 4.071% (+8) and the 30-year Treasury was yielding 3.877% (+7) at 4 p.m.

Mutual fund details
Refinitiv Lipper reported $672.288 million of inflows from municipal bond mutual fund outflows for the week that ended Wednesday following $256.532 million of outflows the week prior.

Exchange-traded muni funds reported inflows of $513.903 million after outflows of $88.957 million in the previous week. Ex-ETFs muni funds saw inflows of $158.386 million after outflows of $167.575 million in the prior week.

Long-term muni bond funds had inflows of $836.698 million in the latest week after inflows of $258.930 million in the previous week. Intermediate-term funds had $31.970 million of inflows after inflows of $49.945 million in the prior week.

National funds had inflows of $651.919 million after outflows of $213.583 million the previous week while high-yield muni funds reported inflows of $320.780 million after inflows of $80.376 million the week prior.

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