Munis extend rally with yields falling most out long

Bonds

Municipals extended their rally Wednesday with triple-A yields falling double-digit basis points following strong secondary trading, while a billion-dollar bond offering from Connecticut took focus in the primary. U.S. Treasuries ended slightly better, and equities were in the black.

Triple-A yield curves were bumped eight to 10 basis points across the curve with the biggest moves out long. The continued rally puts triple-A yields on par with early May yields. The 10-year fell to 2.69% on Refinitiv MMD’s scale and its 30-year sat at 3.03%, both falling 30 basis points since Thursday. Similar moves have been seen on all triple-A yield curves.

Muni-to-UST ratios fell, with the 10-year dipping below 100%. They were at 85% in five years, 98% in 10 years and 102% in 30, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the five at 83%, the 10 at 96% and the 30 at 101% at a 4 p.m. read.

The Investment Company Institute reporting investors pulled $5.398 billion from muni bond mutual funds in the week ending May 18, down from $7.270 billion of outflows in the previous week, but marking the 18th consecutive week bringing ICI’s 2022 total figure to $70.1 billion. Refinitiv Lipper, which reports Thursday, has the total outflows for the year at $36.5 billion.

Exchange-traded funds saw another round of inflows at $901 million versus $1.756 billion of inflows the week prior, per ICI data.

In the primary Wednesday, Ramirez & Co. priced and repriced for Connecticut (Aa3/A+/AA-AA/) $1.075 billion of general obligation bonds. The first tranche, consisting of $150 million of general obligation bonds, 2022 Series C, saw 4s of 6/2023 at 1.85% (-5), 5s of 2027 at 2.52% (-9), 5s of 2032 at 3.07% (-12), 5s of 2037 at 3.37% (-11) and 5s of 2042 at 3.50% (-10), callable 6/15/2032.

The second tranche, $575 million of general obligation refunding bonds, 2022 Series D, saw 4s of 9/2022 at 1.85% (-8), 5s of 2027 at 2.53% (-9) and 5s of 2032 at 3.08% (-12), noncall.

The third tranche, $350 million of taxable general obligation bonds, 2022 Series A, saw 4.25s of 6/2023 at 2.86%%, 3.631s of 2027 at par and 4.16s of 2032 at par, make whole call.

J.P. Morgan Securities priced for the Metropolitan Washington Airports Authority, District of Columbia, (Aa3//AA-/) $205.280 million of AMT airport system revenue refunding bonds, Series 2022A, with 5s of 10/2023 at 2.37%, 5s of 2027 at 3.06% and 5s of 2032 at 3.60%, noncall.

Citigroup Global Markets priced for the Allentown Neighborhood Improvement Zone Development Authority, Pennsylvania, $116 million of City Center Project subordinate tax revenue bonds, with 5.25s of 5/2042 at par, callable in 5/1/2032.

“In a matter of days the tone has gone from struggling to find bidders to struggling to find sellers,” said Kim Olsan, senior vice president at FHN Financial.

For nearly three months, she said, “pervasive selling conditions occurred during a weaker fundamental period that drew smaller rollover needs at the same time fund buyers became net sellers on rising rates.”

“The combination of a risk-off theme giving new support to fixed-income and upcoming favorable seasonals for munis has given the market a new outlook,” she said. “Forthcoming fund flow data will shed light on exactly how deep the turnaround may be — a drop in outflow figures would add incentives for a wider rally.”

Muni spot yields, Olsan said, “have been held to a much tighter trading range than their UST counterparts.” Trading in the 5-year triple-A spot “has brought a range of 21 basis points,” which is “50% less active than the 5-year UST,” according to Olsan. The 10-year spot is in a similar pattern, “with the triple-A yield trading in range of 26 basis points.” In 20 years, she said, “the triple-A has matched UST trading within a 30 basis-point range.”

“Of note in this part of the curve is the fact that taxable equivalent yields are now above 4% (21% bracket) and 5% (37% bracket),” she said.

Muni-to-UST ratios “are often a driver to increasing demand among a broader buyer base,” Olsan noted. Short-term ratios this month are well above January’s sub-50% range at 80% and 90%. Intermediate high grades are also higher from the start of the year, with current levels above 100% (and with attractive requisite yields).

“The longer end of the curve brings a more nuanced advantage with a greater variety in coupon float,” Olsan said. “Long 4s have reached relative value over 125%/UST this month, while long-term 5s are trading with ratios around 110% (up from 75% in January).”

Buyer preferences, she noted, “appear to be shifting along the curve in recent sessions given the jump in yield and ratios.” In mid-May, “maturities inside eight years captured 35% of all secondary volume,” but after several firmer sessions, “this range has seen flows curtailed to around 25% of all trades,” Olsan said.

“In the 10-year range, trade flows have held steady over the last week, accounting for 20% of all volume,” she said. “Improving relative value and higher yields further out the curve have attracted more flows, where the share of volume increased in the secondary market to 56% from the prior week.”

Informa: Money market muni assets rise again
Tax-exempt municipal money market funds continued a five-week inflow streak as $1.29 billion was added the week ending May 23, bringing the total assets to $98.3 billion, according to the Money Fund Report, a publication of Informa Financial Intelligence.

The average seven-day simple yield for all tax-free and municipal money-market funds rose 0.06% to 0.42%.

Taxable money-fund assets gained $26.17 billion to end the reporting week at $4.361 trillion in total net assets. The average seven-day simple yield for all taxable reporting funds rose 0.03% to 0.44%.

Secondary trading
Howard County, Maryland 5s of 2023 at 1.45%. Connecticut special tax 5s of 2025 at 2.28%. Maryland 5s of 2025 at 2.20%.

California 5s of 2027 at 2.25%-2.23% versus 2.60%-2.47% Thursday.

Gilbert, Arizona green 5s of 2036 at 2.81% versus 3.00% Tuesday and 3.57% original (5/16). Anne Arundel County, Maryland, 5s of 2038 at 2.86% versus 3.12% Tuesday.

New York Dorm PITs 5s of 2041 at 3.40%-3.37%.

New York City 5s of 2047 at 3.60% versus 3.84%-3.76% Tuesday and 3.96%-3.93% Monday. Triborough Bridge and Tunnel 5s of 2047 at 3.67%-3.55% versus 3.94%-3.85% Monday.

Los Angeles Department of Water and Power 5s of 2052 at 3.33% versus 3.46% Tuesday and 3.80%-3.79% Friday. Massachusetts Bay Transportation Authority 5s of 2052 at 3.21%-3.20% versus 3.40% Tuesday and 3.48% Monday.

Triborough Bridge and Tunnel MTA bridges and tunnel 5s of 2057 at 3.66%-3.65% versus 3.92%-3.90% Tuesday.

AAA scales
Refinitiv MMD’s scale was bumped six to 12 basis points at the 3 p.m. read: the one-year at 1.76% (-6) and 2.08% (-6) in two years. The five-year at 2.31% (-10), the 10-year at 2.69% (-10) and the 30-year at 3.03% (-12).

The ICE municipal yield bumped 10 to 12 basis points: 1.71% (-10) in 2023 and 2.05% (-11) in 2024. The five-year at 2.28% (-11), the 10-year was at 2.61% (-11) and the 30-year yield was at 3.03% (-12) at a 4 p.m. read.

The IHS Markit municipal curve saw bumps: 1.73 (-8) in 2023 and 2.03% (-8) in 2024. The five-year at 2.30% (-12), the 10-year was at 2.70% (-12) and the 30-year yield was at 3.04% (-12) at 4 p.m.

Bloomberg BVAL saw six to 10 basis point bumps: 1.77% (-6) in 2023 and 2.04% (-7) in 2024. The five-year at 2.36% (-9), the 10-year at 2.68% (-9) and the 30-year at 3.03% (-10) at a 4 p.m. read.

Treasuries were little changed.

The two-year UST was yielding 2.506% (+2), the three-year was at 2.644% (-1), the five-year at 2.732% (-1), the seven-year 2.771% (-1), the 10-year yielding 2.753% (flat), the 20-year at 3.155% (flat) and the 30-year Treasury was yielding 2.978% (+1) just before the close.

No surprises in FOMC minutes
Federal Open Market Committee meeting minutes confirmed what officials have been saying: they expect half-point rate hikes at the next couple of meetings and they believe their communication has been effective.

“Many participants assessed that the Committee’s previous communications had been helpful in shifting market expectations regarding the policy outlook into better alignment with the Committee’s assessment and had contributed to the tightening of financial conditions,” the minutes said.

Balance-sheet reduction also had the support of members, the minutes noted. After balance sheet runoff is “well under way,” member said “it would be appropriate for the Committee to consider sales of agency [mortgage-backed securities] to enable suitable progress toward a longer-run SOMA portfolio composed primarily of Treasury securities.”

The economic outlook was termed “highly uncertain” by the FOMC and the minutes said “policy decisions should be data-dependent and focused on returning inflation to the Committee’s 2% goal while sustaining strong labor market conditions.”

Many panelists believe “expediting the removal of policy accommodation would leave the Committee well positioned later this year to assess the effects of policy firming and the extent to which economic developments warranted policy adjustments,” the minutes said.

Some members mentioned the difficulties caused by high inflation on consumers and that it “could impede the achievement of maximum employment on a sustained basis.”

Noting the meeting was three weeks ago, Ed Moya, senior market analyst at OANDA, said, the minutes “did give a glimmer of hope that they could adjust their policy tightening stance later in the year.”

The half-point hikes are necessary since “they are behind the curve with fighting inflation,” he said. “The Fed is optimistic about the economy, but they are growing concerned with markets for Treasuries and commodities.”

Saying the minutes were “as expected,” John Farawell, managing director of municipal underwriting at Roosevelt & Cross, said, “with inflation worries, supply chain issues and financial assets’ shaky performance it will be quite interesting to watch next month’s central bank’s move.”

Slowing growth and high inflation, he said, “obviously can signal a recession. Our Treasury market is now reinforcing this with a strong performance in the last week.”

The Fed offered no clues on the possibility of slower tightening or a higher terminal rate, said Ed Al-Hussainy, senior interest rates strategist at Columbia Threadneedle Investments. “I suspect we will have to wait until the Jackson Hole/September FOMC window for a more significant pivot, either towards a slower pace of tightening/pause or towards a higher terminal rate target.”

Markets are pricing in a 60% probability of a slowing to a quarter-point Fed hike in September, he noted, and a terminal rate near 3%, to be reached in the first quarter of next year. “This is an optimistic outlook that puts a lot of weight on the labor market and inflation slowing into yearend 2022,” Al-Hussainy said. “It is now relatively cheap to take the other side of this bet.”

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