Short-end strength, long-end pressure steepens yield curve

Bonds

The triple-A yield curve steepened further Wednesday, with municipals better on the short end and much weaker out long while a large general obligation deal from Maryland took the focus in the primary. U.S. Treasuries were weaker and equities ended in the red.

Triple-A yields were bumped as much as five on the short-end and cut up to 10 on long end, moving ratios higher on the 30-year. Muni-to-UST ratios were at 65% in five years, 81% in 10 years and 92% in 30, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the five at 67%, the 10 at 82% and the 30 at 93% at a 4 p.m. read.

The secondary saw choppy trading Wednesday with large blocks of liquid names — Los Angeles Department of Water and Power, New York City TFAs — trading as much as 20 to 30 basis points off on the long end.

In the competitive market Wednesday, Maryland sold $1 billion-plus of GOs. The state (Aaa/AAA/AAA/) sold $335.180 million of general obligation bonds state and local facilities loan of 2022, First Series A Bidding Group 1, to Morgan Stanley & Co., with 5s of 6/2027 at 2.00% and 5s of 2031 at 2.43%, noncall.

The state also sold $303.040 million of general obligation bonds state and local facilities loan of 2022, First Series A Bidding Group 3, to BofA Securities, with 5s of 12/2035 at 2.74% and 5s of 2037 at 2.83%, callable at 6/1/2032.

In addition, the state sold $261.780 million of general obligation bonds state and local facilities loan of 2022, First Series A Bidding Group 2, to BofA Securities, with 5s of 2032 at 2.55% and 5s of 2034 at 2.68%, callable at 6/1/2032.

Maryland also sold $150 million of taxable general obligation bonds state and local facilities loan of 2022, First Series B, to Wells Fargo Bank. Bonds priced at par: 3.04% in 6/2025, 3.15% in 2026 and 3.23% in 2027, noncall, as well.

In the primary, Goldman Sachs & Co. priced for Atlanta, Georgia, (Aa3//AA-/) $535.740 million, Series 2022. The first tranche, $169.475 million of non-AMT airport general revenue bonds, Series 2022A, saw 5s of 7/2023 at 1.52%, 5s of 2027 at 2.25%, 5s of 2032 at 2.89%, 5s of 2037 at 3.26%, 5s of 2042 at 3.38%, 5s of 2047 at 3.50% and 5s of 2052 at 3.57%, callable in 7/1/2032.

The second tranche, $204.025 million of AMT airport general revenue bonds, Series 2022B, saw 5s of 7/2023 at 1.87%, 5s of 2027 at 2.63%, 5s of 2032 at 3.27%, 5s of 2037 at 3.61%, 5s of 2042 at 3.73%, 5s of 2047 at 3.87% and 5s of 2052 at 3.89%, callable in 7/1/2032.

The third tranche, $105.905 million of non-AMT airport passenger facility charge and subordinate lien general revenue bonds, Series 2022C, saw 5s of 7/2037 at 3.26% and 5s of 2042 at 3.38%, callable in 7/1/2032.

The fourth tranche, $56.355 million of AMT airport passenger facility charge and subordinate lien general revenue bonds, Series 2022D, saw 5s of 7/2026 at 2.52%, 5s of 2034 at 3.43% and 5s of 2037 at 3.61%, callable at 7/1/2032.

Barclays Capital priced for Case Western Reserve University, Ohio, (Aa3/AA-//) $350 million of taxable corporate CUSIP bonds, Series 2022C, with 5.405s of 6/2122 pricing at par, callable 12/1/2121.

Wells Fargo Bank priced for the New York City Housing Development Corp. (Aa2/AA+//) $115.705 million of sustainable development multi-family housing revenue bonds, Series C-1. All bonds are priced at par: 2.6s of 5/2026, 2.85s of 5/2027, 2.95s of 11/2027, 3.7s of 11/2032, 3.875s of 11/2037, 4s of 11/2042, 4.125s of 11/2047, 4.25s of 11/2052 and 4.3s of 11/2057, callable 11/1/2030.

Raymond James & Associates priced for the Conroe Independent School District, Texas, (Aaa/AAA//) $154.120 million of unlimited tax school building bonds, Series 2022A, with 5s of 2/2023 at 1.34%, 5s of 2027 at 2.11%, 5s of 2032 at 2.66%, 5s of 2037 at 2.92%, 4s of 2042 at 3.53% and 4s of 2047 at 3.72%, callable in 2/15/2032.

The Investment Company Institute reported investors added $1.090 billion from muni bond mutual funds in the week ending June 1, up from $4.367 billion of outflows in the previous week. It was the first week of inflows after 19 consecutive weeks of outflows. This brings ICI’s 2022 total figure to $73.4 billion. Refinitiv Lipper, which reports Thursday, has the total outflows for the year at $36.4 billion.

Exchange-traded funds saw another round of inflows at $817 million versus $2.150 billion of inflows the week prior, per ICI data.

Mutual fund performance, affected by fund flows and herd mentality, “presents opportunities for active fixed-income management,” said Patricia Healy, senior vice president of research at Cumberland Advisors.

This trend was clear, she said, over the past three months as mutual funds experienced outflows, while inflation and Fed action fears loomed. Muni yields rose faster than USTs did, and, as such, muni-UST ratios on the long end were over 100%.

“The run-up in rates was swift, and the move back to a more normal level of interest rates was also somewhat swift,” she said. “A manager positioned appropriately can take advantage of such opportunities.”

Munis, though, “have been resilient through various interest rate cycles,” said John Bonnell, portfolio manager and managing director at Thornburg Investment Management.

“Such buoyancy derives from the various levers issuers can pull on both the expense and revenue sides of the ledger to maintain their financial health,” he noted, and “this cycle is no different and may be the strongest revenue cycles amidst a downturn.”

“Municipal receipts are up sharply in much of the nation and are likely to remain strong along with pent-up consumer demand, the tight labor market, and the still-healthy housing market,” Bonnell said. Moreover, “the current downward cycle was not sparked by a credit event or headline risk.”

“In fact, we have neither,” Bonnell said.

Instead, he said, “the current slide in the municipal market seems to be the result of a negative feedback loop, induced by slide Treasury prices and corporate bonds in response to Fed tightening and generationally strong inflationary pressures.”

Leading up to this turn, munis “saw the largest run of inflows the market has experienced in years, and it should come as no surprise that has been followed by one of the largest periods of outflows,” he said.

“The impact of these mutual fund inflows and outflows has been amplified by the doubling of municipal bond mutual fund assets during the last seven to ten years,” Bonnell said. “Investors who recognize the exaggerated swings in the municipal market may be able to seize higher coupon tax-free income emerging from the market carnage, especially compared to other fixed income asset classes.”

Munis may continue to outperform in the near-term, said Cooper Howard, fixed income strategist at Charles Schwab.

They have outperformed largely due to strong demand, and “demand should continue to be favorable because a lot of cash is set to be returned to investors in the next few months and some of that cash will be redeployed back into munis,” he noted.

“Although relative valuations have fallen substantially, they remain above their one-year averages,” he said.

“Credit conditions remain generally strong, but the risk of a recession is rising and would hurt the finances of lower-rated issuers,” Howard said. “In addition, with spreads for higher-rated issuers rising, investors are now getting better compensated for taking on risk and no longer must stretch for yield in the lowest-rated parts of the market.”

Secondary trading
North Carolina 5s of 2023 at 1.42%. Oregon 5s of 2023 at 1.05%. Florida 5s of 2023 at 1.43%.

Georgia 5s of 2026 at 2.00%-1.99%. California 5s of 2027 at 2.13%.

North Carolina 5s of 2028 at 2.26%. Maryland 5s of 2028 at 2.24%. District of Columbia 5s of 2028 at 2.17%-2.15%. Maryland 5s of 2029 at 2.32%. New York City 5s of 2029 at 2.50%.

Maryland 5s of 2032 at 2.53%. Georgia 5s of 2033 at 2.67%-2.66% versus 2.54% Tuesday.

New York City TFA 4s of 2038 at 4.15%-4.10%.

New York City TFA 5s of 2047 at 3.60% versus 3.51%-3.50% Tuesday. LA DWP 5s of 2047 at 3.31%-3.30% versus 3.01% Friday. LA DWP 5s of 2051 at 3.47% versus 3.28%-3.27% Tuesday. New York City TFA 4s of 2051 at 4.01%-4.00%.

AAA scales
Refinitiv MMD’s scale saw bumps on the short end and cuts on the long end at the 3 p.m. read: the one-year at 1.39% (-5) and 1.69% (-3) in two years. The five-year at 1.98% (-3), the 10-year at 2.45% (unch) and the 30-year at 2.92% (+10).

The ICE municipal yield curve saw bumps on the short end and cuts on the long end: 1.39% (-3) in 2023 and 1.74% (-1) in 2024. The five-year at 2.04% (+1), the 10-year was at 2.45% (+2) and the 30-year yield was at 2.96% (+5) at a 4 p.m. read.

The IHS Markit municipal curve saw a mix of bumps on the short end and cuts on the long end: 1.40% (-5) in 2023 and 1.70% (-5) in 2024. The five-year at 1.97% (-5), the 10-year was at 2.47% (unch) and the 30-year yield was at 2.91% (+10) at 4 p.m.

Bloomberg BVAL saw bumps on the short end and cuts out long: 1.44% (-6) in 2023 and 1.73% (-6) in 2024. The five-year at 2.03% (-6), the 10-year at 2.48% (+2) and the 30-year at 2.92% (+9) at a 4 p.m. read.

Treasuries were weaker.

The two-year UST was yielding 2.779% (+5), the three-year was at 2.964% (+51), the five-year at 3.040% (+5), the seven-year 3.069% (+5), the 10-year yielding 3.033% (+5), the 20-year at 3.412% (+6) and the 30-year Treasury was yielding 3.186 (+6) at the close.

Primary to come:
The Prosper Independent School District, Texas, is set to price Thursday $200 million of fixed-rate unlimited tax school building bonds, Series 2022. Piper Sandler & Co.
 
The Iowa Student Loan Liquidity Corp. (/AA//) is set to price Thursday $155.700 million of senior student loan revenue bonds, consisting of $128.500 million of taxables, serials 2023-2032, term 2039 and $27.200 million of AMT bonds, Series B, serials 2029-2032. RBC Capital Markets.
 
The Public Utility District No. 1, Washington, (Aa2/AA//) is set to price Thursday $103.220 million of wells hydroelectric revenue bonds, consisting of $36.555 million of Series A, serials 2023-2038 and $66.665 million of Series B, serials 2038-2052. Barclays Capital.

The Brazoria County Industrial Development Corporation, Texas, is set to price Thursday $100 million of Aleon Renewable Metals Project solid waste disposal facilities revenue bonds, Series 2022, term 2042. Citigroup Global Markets.

Competitive:
South Carolina (Aaa/AA+/AAA/) is set to sell $101.255 million of Clemson University general obligation state institution bonds, Series 2022A, at 10:15 a.m. eastern Thursday.

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