Municipals outperform another UST selloff

Bonds

Municipals were firmer in spots Monday, outperforming U.S. Treasuries, which sold off following higher-than-expected service sector data sparking more Fed rate hike fears. Equities also ended in the red.

Triple-A yields were bumped two to four basis points in the belly of the curve while UST saw yields rise by up to 15 on the short end.

The three-year muni-UST ratio Wednesday was at 60%, the five-year at 66%, the 10-year at 71% and the 30-year at 96%, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the three at 62%, the five at 67%, the 10 at 76% and the 30 at 99% at a 4 p.m. read. 

Municipals stayed in their own lane once again Monday, managing expectations of lighter supply, higher redemptions and the holiday season settling in, following on the better performance of the past several weeks

“Secondary trading was very active last week with over $55.7 billion in trading as new-issue supply continues to be very light, traders have been going to the secondary markets which has brought yields down even further,” said Jason Wong, vice president of municipals at AmeriVet Securities.

Clients’ bids-wanted was very active as well.

“Clients put roughly $8.22 billion up for bid as we are still seeing clients continue to sell despite the muni markets improving over the past few weeks,” he said.

With traders returning from a holiday-shortened week, muni yields kept falling with 10-year yields falling by 18.5 basis points to 2.66% as “Fed Chair Jerome Powell comment on Wednesday signaled a slower pace of interest rate hikes sent yields even lower,” according to Wong.

With yields falling again last week, munis continue to outpace Treasuries as the 10-year ratio now yields 76.27% of USTs compared to the previous week’s ratio of 77.32%. Just one month ago, the 10-year ratio was at 81.21%, he noted.

Although the muni market has improved in November, investors continue to pull cash out of muni bond funds. Investors pulled about $1.4 billion from muni bond funds last week which follows the previous weeks outflow of $438 million, according to Refinitiv Lipper. This withdrawal adds to the yearly loss of over $74.8 billion this year.

Over the past year, the muni market “has been framed by an extended period of outflows with active numbers of secondary bid-wanteds and record-breaking trading activity,” said Jeff Lipton, managing director of credit research at Oppenheimer Inc.

“These patterns caught us by surprise given that at the beginning of the year, we were not anticipating a Fed tightening trajectory of such historic proportion,” he said.

Outflows have receded recently, and there was even a week of inflows.

“Outflows have been visible throughout much of the segments of the muni market, with the one notable exception being record cash poured into muni [exchange-traded funds],” Lipton noted.

The movement into ETFs indicates a “shifting strategic focus that reallocates assets into a less volatile environment while still preserving the asset quality provided by munis,” he said.

Part of the more recent outflow activity, Lipton said, “can be ascribed to year-end tax loss harvesting,” and he expects “that as this activity continues to dissipate, pure market technicals should eventually be a driving force for lighter outflows and even an extended period of positive flows.”

While the November UST market rally “carried munis into positive territory for the month, munis had outperformed by a wide margin with UST posting a 2.68% return versus the previously cited performance of 4.68% for munis,” according to Lipton.

“A combination of supportive technicals, tax-efficiency, above average credit quality and compelling absolute yields and cash-flow income drove the out-performance,” he said.

“With such outperformance, munis have accordingly become more expensive relative to UST leaving any notion of fair value in the rear-view mirror,” Lipton added. “Nevertheless, with rising demand against a backdrop of sparse supply, investors are taking advantage of the yield and income attributes now being offered by the muni asset class.”

Wong said “munis are poised to continue this rally into December as we can end 2022 on a high note and close out the worst-performing year on record for munis.”

With an estimated supply of $9.4 billion remaining for the year, “coupled with investors having a lot of cash available, as well as the possibility of the Fed slowing down their interest rate hikes should continue to bring down yields going into 2023,” he said.

Secondary trading
San Antonio, Texas, waters 5s of 2023 at 2.33% versus 2.42% Thursday. Connecticut 5s of 2023 at 2.50%. Minnesota 5s of 2023 at 2.45%-2.42%.

Maryland 5s of 2024 at 2.46%. North Carolina 5s of 2025 at 2.52%. Maryland 5s of 2025 at 2.47%-2.42%.

Florida 5s of 2028 at 2.52% versus 2.54% Thursday. Delaware 5s of 2032 at 2.58%-2.56%. New York City 5s of 2032 at 2.75%. Alexandria, Virginia, 5s of 2032 at 2.61% versus 2.60% original.

Georgia 5s of 2036 at 2.88% versus 2.81%-2.88% Friday and 2.91% Thursday. Los Angeles Department of Water and Power 5s of 2036 at 3.03%-3.00%.

New York City waters 5s of 2045 at 3.83%, the same as Thursday. Massachusetts 5s of 2046 at 3.13%-3.12%, the same as Wednesday.

Texas waters 5s of 2047 at 3.74%-3.73%.

AAA scales
Refinitiv MMD’s scale was bumped up to four basis points: the one-year at 2.39% (unch) and 2.43% (unch) in two years. The five-year at 2.51% (-2), the 10-year at 2.57% (-4) and the 30-year at 3.48% (unch).

The ICE AAA yield curve was bumped two to four basis points: 2.41% (-2) in 2023 and 2.44% (-3) in 2024. The five-year at 2.50% (-4), the 10-year was at 2.63% (-4) and the 30-year yield was at 3.50% (-2) at 4 p.m.

The IHS Markit municipal curve was bumped in spots: 2.39% (unch) in 2023 and 2.45% (unch) in 2024. The five-year was at 2.52% (unch), the 10-year was at 2.58% (-3) and the 30-year yield was at 3.47% (unch) at a 4 p.m. read.

Bloomberg BVAL was a basis point firmer in spots: 2.45% (unch) in 2023 and 2.48% (-1) in 2024. The five-year at 2.52% (-1), the 10-year at 2.63% (-1) and the 30-year at 3.46% (unch) at 4 p.m.

Treasuries sold off.

The two-year UST was yielding 4.400% (+13), the three-year was at 4.133% (+15), the five-year at 3.798% (+15), the seven-year 3.723% (+13), the 10-year yielding 3.603% (+11), the 20-year at 3.835% (+7) and the 30-year Treasury was yielding 3.621% (+7) just before the close.

Primary to come:
The New York City Housing Development Corporation (Aa2/AA+//) is set to price Tuesday $648.815 million of multi-family housing revenue bonds, consisting of $152.025 million of sustainable development bonds, Series F-1; $337.095 million of sustainable development bonds, Series F-2; $100 million of variable rate sustainable development bonds, Series F-3; and $59.695 million of term rate bonds, Series G, term 2058. Morgan Stanley & Co.

The California Community Choice Financing Authority (A2///) is set to price Tuesday $451.650 million of green Clean Energy Project revenue bonds, consisting of $401.650 million of Series A-1 and $50 million of Series A-2. Goldman Sachs & Co.

The Los Angeles Department of Water and Power (Aa2/AA+/AA/) is set to price Thursday $400.450 million of water system revenue bonds, 2022 Series D, serials 2023-2042, terms 2047 and 2052. Barclays Capital.

The Illinois Finance Authority (/AA-/AA-/) is set to price Tuesday $375 million of UChicago Medicine revenue bonds, consisting of $175 million of Series A, $100 million of Series B-1, and $100 million of Series B-2. Goldman Sachs & Co.

The Adventist Health System/West (/A-/A/) is set to price Thursday $350 million of taxable corporate CUSIPS, Series 2022, serial 2032. RBC Capital Markets.

Ohio (Aa1/AA+/AAA/) is set to price Wednesday $305.795 million, consisting of $180.810 of infrastructure improvement general obligation bonds, Series A, serials 2023-2042; $32.120 million of infrastructure improvement general obligation refunds bonds, Series B, serials 2023, 2025 and 2029-2031; $15.970 million of infrastructure improvement general obligation refunds bonds, Series C, serials 2030-2031; $14.980 million of conservation projects general obligation refunding bonds, Series A, serials 2027-2030; and $62.095 million of common schools general obligation refunding bonds, Series A, serials 2025-2029. Loop Capital Markets.

The Golden State Tobacco Securitization Corporation, California, is set to price Thursday $237.185 million of senior tobacco settlement asset-backed bonds, Series 2022A-1. Jefferies LLC.

The Oregon Department of Transportation (Aa1/AAA/AA+/) is set to price Wednesday $214.035 million of highway user tax revenue senior lien bonds, Series 2022A. Morgan Stanley & Co.

The Louisiana Local Government Environmental Facilities and Community Development Authority (Aa1/AAA//) is set to price Friday $209 million of taxable Louisiana Utilities Restoration Corporation Project/ENO storm recovery bonds, Series 2022. J.P. Morgan Securities.

Bucks County Water and Sewer Authority, Pennsylvania, (/A+//) is set to price Thursday $195.745 million of sewer system revenue bonds, Series A of 2022, serials 2023-2047. PNC Capital Markets.

The Virginia Small Business Financing Authority (Aaa///) is set to price Wednesday $125 million of Pure Salmon Virginia LLC Project environmental facilities revenue bonds, Series 2022, serials 2052. Wells Fargo Bank.

The Colorado School of Mines Board of Trustees (A1/A+//) is set to price Wednesday $118.505 million of institutional enterprise revenue bonds, consisting of $47.820 million of green bonds, Series A; $20.860 million of bonds, Series B; $15.415 million of taxable, Series C; and $34.410 million of fixed-rate notes, Series D. Morgan Stanley & Co

The California Infrastructure and Economic Development Bank (/AAA/AAA/) is set to price Tuesday $106.180 million of Infrastructure State Revolving Fund revenue bonds, Series 2022A. J.P. Morgan Securities.

The Monmouth County Improvement Authority, New Jersey, (Aaa/AAA/AAA/) is set to price Tuesday $104.695 million of governmental pooled loan revenue bonds, consisting of $51.460 million, Series 2022B, serials 2023-2042, and $53.235 million, Series 2022C, serials 2023-2042. Raymond James & Associates.

The California Health Facilities Financing Authority (/A-/A/) is set to price Thursday $100 million of Adventist Health System/West revenue bonds, Series 2022A, serial 2028. RBC Capital Markets.

Competitive:
DeKalb County, Georgia, (//AA-/) is set to sell $551.710 million of Second Resolution water and sewerage revenue bonds, Series 2022, at 10 a.m. eastern Tuesday.

The Cherry Hill Township Board of Education, New Jersey, (Aa2///) is set to sell $300 million of school bonds, Series 2022, at 11 a.m. Thursday.

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