Munis, UST improve again on weaker economic data

Bonds

Muni yields continued to fall along with U.S. Treasuries Wednesday as weaker-than-expected private payrolls for March led to supportive bond prices and a market rally. Equities ended mixed.

California priced its $2.6 billion general obligation deal for institutions with double-digit bumps from Tuesday’s retail offering.

Municipal to UST ratios on the short end remain rich. The two-year muni-Treasury ratio was at 61%, the three-year at 62%, the five-year at 63%, 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 two-year at 60%, three-year at 60%, the five-year at 60%, the 10-year at 65% and the 30-year at 90% at 4 p.m.

The four to eight basis point bumps to triple-A scales Wednesdaywere reflective of a continued rally in the Treasury market, which has been sparked by economic data points that reflect a slowing economy and a loosening up in labor market conditions, said Jeff Lipton, managing director of credit research at Oppenheimer Inc.

“All eyes will be focused on Friday’s release of the March employment report, including nonfarm payrolls and unemployment,” he said.

Along with the bond market rallying, Lipton said there’s expanding evidence the economy is slowing and that the labor market is loosening up.

“Looking at the futures contracts, it’s not a compelling argument for a 25 basis point rate hike at the May meeting, but the likely expectation is that the Fed is going to raise rates 25 basis points,” he said.

If the Fed raises 25 basis points in May, he said “that should bring the funds rate pretty much on target with the 5.1% funds rate identified in the summary of economic projections for 2023.”

The new-issue calendar remains on the light side, while reinvestment needs are contained for the time being, he said.

“Reinvestment demand will heat up as we move into the summer months; that’s going to happen pretty fast the way things are shaping up,” he said.

He said the muni market is “supported by thin primary and secondary volume, as well as still present demand.”

Lipton expects munis to “remain tethered to the Treasury market, but as we’ve been seeing, the muni market has been able to demonstrate a fair amount of independence away from the Treasury market, given the unique technical conditions that exist within the asset class.”

Issuers remain hesitant to access the capital markets, in part, due to lingering uncertainties in the banking sector, he said.

UST yields fell three to six basis points Wednesday, while triple-A benchmark yields were bumped four to eight basis points, depending on the scale. With tax-exempt yields moving lower, Lipton said this opens up the possibility of refunding opportunities.

“That is something we’re going to be keeping an eye on,” he said. “That is something that the issuer community will be keeping their eyes on for sure.”

Municipal credit continues to be viewed in a favorable light despite the market starting to see some areas of credit pressure. Overall, Lipton said, “muni credit is holding in and we continue to anticipate upgrades to outpace downgrades.”

In March, municipals returned 2.22% and USTs returned 2.89%, meaning munis underperformed the Treasury market.

“That’s not a big surprise given the fact that munis typically underperform a bond market rally,” he said.

In April, he said munis are returning 35 basis points, while munis are returning 3.14% year-to-date. Month-to-date, USTs are returning 80 basis points, outperforming the 35 basis points month-to-date for munis. Year-to-date, USTs are also outperforming munis.

“Given all the volatility that we saw in March, we should be pleasantly surprised that municipals performed as well as they did,” he said.

Lipton said the current performance month-to-date for April has to do with “munis having latched on to Treasuries.”

He said munis are well positioned to continue to see positive performance through April, noting “that performance is expected to be further supported by more active reinvestment demand as we move into the summer months.”

Mutual funds see more outflows
Outflows continued, with the Investment Company Institute reporting investors pulled $128 million from mutual funds in the week ending March 29, after $693 million of outflows the previous week.

Exchange-traded funds saw inflows of $184 million after $115 million of inflows the week prior, per ICI data.

In the primary market Wednesday, Ramirez & Co. priced for institutions $2.551 billion of various purpose GOs from California (Aa2/AA-/AA/) with six to 18 basis point bumps from Tuesday’s retail offering. The first tranche, $1.380 billion of new-money bonds, with 5s of 10/2024 at 2.45% (-6), 5s of 2028 at 2.21% (-7), 5s of 2033 at 2.32% (-12), 5s of 2039 at 3.01% (-18), 5s of 2045 at 3.38% (-14), 5.25s of 2045 at 3.32% (-14), 4s of 2050 at 3.98% (-12) and 5.25s of 2050 at 3.46% (-15), callable 4/1/2033.

The second tranche, $1.171 billion of refunding bonds, with 5s of 2025 at 2.36% (-6), 5s of 2027 at 2.22% (-6), 5s of 2033 at 2.32% (-12), 5s of 2036 at 2.76% (-12), 4s of 2042 at 3.70%, 5s of 2042 at 3.27% (-10) and 5s of 2042 at 3.29% (-11), callable 4/1/2033.

BofA Securities priced for the San Francisco Public Utilities Commission (Aa2/AA/NR/NR/) priced $818.935 million of wastewater revenue bonds. The first tranche, 537.085 million Series 2023A green sewer system improvement program (SSIP) green bonds, Series 2023A, saw 5s of 10/2026 at 2.13%, 5s of 2028 at 2.09%, 5s of 2033 at 2.18%, 5s of 2038 at 2.97% and 5.25s of 2042 at 3.21%, callable 10/1/2032.

The second tranche, $281.850 million of non-SSIP bonds, Series 2023B, saw 5s of 10/2026 at 2.13%, 5s of 2028 at 2.09%, 5s of 2033 at 2.18%, 4s of 2038 at 3.37%, 5s of 2038 at 2.97% and 5s of 2042 at 3.26%, callable 10/1/2032.

Secondary trading
Maryland 5s of 2024 at 2.42%. NYC 5s of 2024 at 2.50%-2.40% versus 2.48% Tuesday and 2.53% on 3/30. North Carolina 5s of 2025 at 2.35%-2.37%.

Washington 5s of 2028 at 2.12%. NYC TFA 5s of 2028 at 2.17%. Connecticut 5s of 2029 at 2.23%-2.22% versus 2.33% on 3/30.

Wake County, North Carolina, 5s of 2032 at 2.12% versus 2.21% Tuesday and 2.26% on 3/30. Maryland 5s of 2034 at 2.18% versus 2.41% on 3/29 and 2.48% original on 3/16.

California 5s of 2052 at 3.45% versus 3.51% Tuesday and 3.68%-3.70% on 3/23. Massachusetts 5s of 2052 at 3.55% versus 3.66% Tuesday and 3.71% Friday. King County, Washington, 5s of 2053 at 3.47%.

AAA scales
Refinitiv MMD’s scale was bumped five to seven basis points. The one-year was at 2.41% (-6) and 2.30% (-6) in two years. The five-year was at 2.12% (-7), the 10-year at 2.14% (-7) and the 30-year at 3.20% (-5) at 3 p.m.

The ICE AAA yield curve was bumped four to eight basis points: 2.46% (-4) in 2024 and 2.34% (-4) in 2025. The five-year was at 2.07% (-8), the 10-year was at 2.15% (-6) and the 30-year was at 3.25% (-5) at 4 p.m.

The IHS Markit municipal curve was bumped five to seven basis points: 2.39% (-6) in 2024 and 2.28% (-6) in 2025. The five-year was at 2.09% (-27), the 10-year was at 2.12% (-7) and the 30-year yield was at 3.19% (-5), according to a 4 p.m. read.

Bloomberg BVAL was bumped up four to seven basis points: 2.38% (-4) in 2024 and 2.30% (-5) in 2025. The five-year at 2.09% (-36), the 10-year at 2.12% (-7) and the 30-year at 3.20% (-6) at 4 p.m.

Treasuries were firmer.

The two-year UST was yielding 3.796% (-5), the three-year was at 3.571% (-4), the five-year at 3.367% (-3), the seven-year at 3.342% (-4), the 10-year at 3.301% (-5), the 20-year at 3.672% (-6) and the 30-year Treasury was yielding 3.560% (-5) at 4 p.m.

Primary on Tuesday
RBC Capital Markets priced for the Pennsylvania Economic Development Financing Authority (A2/A/A/) $445.230 million of University of Pittsburgh Medical Center revenue bonds, Series 2023. The first tranche, $200 million of term rate mode bonds, Subseries 2023A-1, saw 5ss of 5/2031 at 2.91%, callable 2/15/2031.

The second tranche, $245.230 million of fixed rate mode bonds, Subseries 2023A-2, saw 5s of 5/2024 at 2.74%, 5s of 2028 at 2.69%, 5s of 2033 at 3.01%, 5s of 2038 at 3.71%, 4s of 2043 at 4.25%, 4s of 2048 at 4.32% and 4s of 2053 at 4.38%, callable 5/15/2033.

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