Attractive yields, more normalized yield curve benefit buyers

Bonds

Municipal bonds were little changed and lightly traded along with U.S. Treasuries as participants prepare for a lighter muni new-issue week amid the Federal Open Market Committee meetings. Equities were mixed.

“Investor confidence has been boosted by outsized yields not seen for more than a decade,” Nuveen Head of Municipals Daniel Close and Chief Investment Officer Anders S. Persson said in a Monday report. “At its meeting this week, the Fed must renew its unequivocal commitment to fighting inflation, raising rates to whatever yields necessary. Should the Fed fail to do this, the market will have to reassess what constitutes fair value.”

For the municipal market, it “remains orderly” and “institutions continue to rearrange portfolios and retail buyers are active,” they said.

With a light new-issue calendar ahead of the FOMC, “secondary flows may benefit from greater attention,” said Kim Olsan, senior vice president at FHN Financial.

Olsan said that midway through the month “there is no discernable standout sector and by duration only the ultra-short range leans ever so positive,” she said. “On a rolled up basis, the broad market is off about 25 basis points after the first nine sessions but GOs and most revenue categories are down 0.20%-0.40%.”

Ratios are still rich on the short end, though recent weakness inside 10 years “has served to reduce the inversion in the 10s2s [Refinitiv] MMD curve,” she noted. 

“After reaching a negative 53 basis point slope in May, the implied 10-year AAA 3.00% yield is just 13 basis points inverted to the 2-year spot,” she said. 

And while generic AAA spots between 2027 and 2032 are through 3%, most credits can be bought above that level (excluding California and several Northeast states), Olsan noted. 

“Further normalization of the curve should provide support to the range that still carries much tighter ratios as compared to longer maturities,” she said.

The two-year muni-to-Treasury ratio Monday was at 62%, the three-year was at 63%, the five-year at 66%, the 10-year at 69% and the 30-year at 90%, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the two-year at 64%, the three-year at 65%, the five-year at 65%, the 10-year at 69% and the 30-year at 90% at 4 p.m.

“Wider concessions have developed along the credit curve as mismatched fundamentals — about $18 billion in roll offs vs. an estimated $8 billion in supply in the coming 30 days — give bidders the upper hand,” she said.

Nuveen’s Close and Perssons noted last week’s new-issue supply was priced to sell and that trend should continue through year-end. As such, they are “constructive on fixed income in general and tax-exempt bonds specifically.”

They noted the high-yield municipal market — which has been outperforming investment grades of late — remains “unusually quiet.” 

“Despite index average yields hovering at 6%, fund flows remain flat to slightly negative,” they said. “We believe a significant supply constraint is going unappreciated. The intricacies of bond structures are creating a wide dispersion of relative value in this market.”

Secondary trading
Washington 5s of 2024 at 3.40%. North Carolina 5s of 2024 at 3.20%. New York City 5s of 2025 at 3.21%.

Connecticut 5s of 2027 at 3.11%. Montgomery County, Maryland, 5s of 2028 at 3.00%. North Carolina 5s of 2028 at 2.95%.

Minnesota 5s of 2033 at 3.13%. Dane County, Wisconsin, 5s of 2037 at 3.56%.

Harris County, Texas, 5s of 2048 at 4.21%.

AAA scales
Refinitiv MMD’s scale was unchanged: The one-year was at 3.25% and 3.13% in two years. The five-year was at 2.90%, the 10-year at 3.00% and the 30-year at 3.94% at 3 p.m.

The ICE AAA yield curve was cut up to one basis point: 3.30% (+1) in 2024 and 3.21% (+1) in 2025. The five-year was at 2.95% (+1), the 10-year was at 2.99% (+1) and the 30-year was at 3.98% (+1) at 4 p.m.

The S&P Global Market Intelligence (formerly IHS Markit) municipal curve was little changed: 3.26% (unch) in 2024 and 3.14% (unch) in 2025. The five-year was at 2.94% (unch), the 10-year was at 3.00% (unch) and the 30-year yield was at 3.93% (unch), according to a 4 p.m. read.

Bloomberg BVAL was little changed: 3.28% (unch) in 2024 and 3.19% (unch) in 2025. The five-year at 2.93% (unch), the 10-year at 2.95% (unch) and the 30-year at 3.98% (unch) at 4 p.m.

Treasuries were mixed.

The two-year UST was yielding 5.062% (+3), the three-year was at 4.738% (+1), the five-year at 4.458% (+1), the 10-year at 4.313% (-1), the 20-year at 4.576% (-2) and the 30-year Treasury was yielding 4.391% (-2) near the close.

Primary market to come:
The San Diego Unified School District is set to price Wednesday $670 million of dedicated unlimited ad valorem property tax GOs, consisting of $23.655 million of taxable green Election of 2018 bonds (Aa2///), Series G-1, serial 2024; $51.345 million of green Election of 2018 bonds (Aa2//AAA/AAA/), Series G-2, serials 2024-2028; $275 million of green Election of 2018 bonds (Aa2//AAA/AAA/), Series G-3, serials 2024-2043, terms 2048 and 2053; $16.435 million of taxable sustainability Election of 2022 bonds (Aa2///), Series A-1, serial 2024; $8.565 million of sustainability Election of 2022 bonds (Aa2//AAA/AAA/), Series A-2, serials 2024-2028; and $295 million of sustainability Election of 2022 bonds (Aa2//AAA/AAA/), Series A-3, serial 2048, term 2053. Citigroup Global Markets. 

The Patriots Energy Group Financing Agency (A1///) is set to price next week $578.720 million of gas supply revenue bonds, consisting of $567 million of tax-exempt bonds, Series 2023A-1, and $13 million of taxable bonds, Series 2023A-2. Goldman Sachs.

Philadelphia (A1/A+/A+/) is set to price Tuesday $575 million of water and wastewater revenue bonds, Series 2023B. Goldman Sachs.

The Washington State Housing Finance Commission (/BBB//) is set to price Tuesday $328.165 million of partially tax-exempt social municipal certificates, Series 2023-1, Class X, serial 2037. Citigroup Global Markets.

The Washington State Housing Finance Commission (/BBB//) is set to price Tuesday $328.165 million of social municipal certificates, Series 2023-1, Class A, serial 2037. Citigroup Global Markets.

The New Jersey Educational Facilities Authority (A2/A-/A/) is set to price Monday $262.765 million of revenue bonds, consisting of $185.220 million of Higher Education Capital Improvement Fund issue, Series 2023A, serials 2024-2043, terms 2048 and 2053, and $77.545 million of Higher Education Equipment Leasing Fund Program issue, Series 2023A, serials 2024-2033. Siebert Williams Shank.

The Minneapolis-St. Paul Metropolitan Airports Commission (/A+/A+/) is set to price Tuesday $170.925 million of subordinate airport revenue refunding bonds, consisting of $162.400 million of governmental/non-AMT bonds, Series 2023A, serials 2025-2035, and $8.525 million of private activity/AMT bonds, Series 2023B, serials 2025-2026. Ramirez & Co.

Competitive:
Cape May County, New Jersey (Aa1///), is set to sell $96 million of GOs at 11 a.m. eastern Wednesday.

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