Munis, USTs strengthen to start the second half of 2022

Bonds

Municipals were stronger following along with, but underperforming U.S. Treasuries, which extended their rally and saw yields fall even further to start the second half of the year on continued recessionary fears. Equities ended in the black.

Triple-A yields fell by four to seven basis points while USTs saw yields fall by up to 16 at the close.

Muni-UST ratios were at 76% in five years, 92% in 10 years and 100% in 30, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the five at 74%, the 10 at 92% and the 30 at 102% at a 4 p.m. read.

With the Fourth of July holiday shortening the week, investors will see a paltry $2.861 billion of new issues to kick off the second half of 2022.

The new-issue calendar for the week is led by the Triborough Bridge and Tunnel Authority with $632 million of MTA Bridges and Tunnels TBTA Capital Lockbox, city sales tax revenue bonds.

This is a new MTA credit, which received a triple-A from Fitch Ratings and AA+ from S&P Global Ratings. The bonds are repaid through the dedicated city sales tax proceeds.

Other notable deals in the primary include $270 million of revenue refunding bonds from the Oklahoma City Water Utilities Trust and $104 million of certificates of obligation from Temple, Texas.

In the competitive market, the Jefferson County School District Finance Corporation, Kentucky, will sell $77 million of revenue bonds.

Heading into the three-day weekend, munis extended their rally in both the taxable and tax-exempt markets.

“It’s more of the same story we’ve seen on a year-to-date basis where we whipsaw about based on what Treasuries are doing,” said John Mondillo, head of municipals at abrdn.

The rally comes on the heels of inflationary data coming in below expectations on Thursday.

“What’s spooked investors thus far this year, is whether or not that trend continues, and we start to see those inflationary numbers, month over month, quarter over quarter, come down in a consistent manner before we hit a little bit more bullish on fixed income in general,” he said.

However, he said the rally may be short-lived. Until continued outflows from tax-exempt municipal bonds abate, Mondillo said there won’t be a sustained rally in the municipal marketplace.

Fund flows remained negative in June, “with the pace of outflows remaining just as strong as the previous month,” according to Barclays strategists Mikhail Foux, Clare Pickering and Mayur Patel.

Going into July, Mondillosaid he believes it will be another choppy month, where there will be periods of rallies, followed by periods of selloffs. He said the market volatility will be driven by data as “its trickles in and the market tries to get its feet under itself and determine which direction we’re going in. Is inflation abating? Is the Fed able to tame inflation with their hike cycle, or are things going to get dramatically worse?”

Despite this, he’s cautiously optimistic.

“If you look at the performance over the last two months, we haven’t seen as bad of performance in the asset class versus the first four months,” Mondillo said. “That’s probably a positive and something that we can look to.”

He noted reinvestment tends to be strong in July and August when a significant amount of coupon payments and called bonds are been reinvested in the asset class. “We feel that this July and August will be no different,” he said.

Barclays strategists estimated that June redemptions were $47 billion, “higher than the average for the month in recent years, and investors also received about $12 billion in coupon payments.” They expect redemptions to remain elevated in July and predict $40 billion to $45 billion of bond redemptions and around $12 billion of coupon payments.

Mondillo believes the only unknown is whether fund outflows slow in the “sleepy summer months” of July and August to reverse some of the negative performance thus far this year.

“The Bloomberg Municipal Index posted a total return of -1.6% in June, bringing year-to-date returns to -9.0%,” Barclays strategists said. “Munis underperformed the US Treasury Index, which returned -0.9% during the month.”

They noted the “GO bond index returned -1.4% in June and outperformed the revenue bond index, which returned -1.9%.”

Total return performance, they said, “was negative across most of the curve, with the short end outperforming the most.”

“The biggest outperformers were the +1y (+0.03%) and 3y (-0.1%) indices,” they said. “On the opposite side of the ledger, the +22y muni index performed the worst in relative total return terms (-3.8%), with the 20y (-2.6%) index also underperforming.”

New York beefs up its deals
New York State, New York City and their public authorities plan to sell $8.69 billion of bonds in the third quarter, Comptroller Thomas DiNapoli said Thursday.

The deals include $7.19 billion of new money and $1.5 billion of refundings and reofferings.

This month’s deals include $7.99 billion of which $6.49 billion is new money and $1.5 billion of which is refundings and $700 million is scheduled for August, all of which is new money. No issuance has been scheduled for September.

The calendar includes bond sales by the New York City Transitional Finance Authority, the New York State Energy & Research Development Authority, the New York State Thruway Authority, the New York Transportation Development Corp., the Port Authority of New York & New Jersey and the Triborough Bridge and Tunnel Authority.

Secondary trading
Delaware 5s of 2025 at 1.99%. New York City 5s of 2025 at 2.07%-2.05%.

New York City TFA 5s of 2027 at 2.45% versus 2.48% Thursday. Anne Arundel County, Maryland, 5s of 2027 at 2.21% versus 2.23% Thursday. Washington 5s of 2027 at 2.14%-2.12%.

New York Dorm PITs 5s of 2028 at 2.55%-2.53%. New York Dorm PITs 5s of 2029 at 2.68%-2.66%.

Georgia 5s of 2033 at 2.75%-2.73%. NYC TFA 5s of 2034 at 3.19%-3.18% versus 3.26% Thursday.

Washington 5s of 2041 at 3.22%-3.21%. Los Angeles DWP 5s of 2041 at 3.31%.

New York City 5s of 2047 at 3.80%-3.79% versus 3.86% Thursday. Salt Lake City, Utah, 5s of 2052 at 3.41%-3.40%.

AAA scales
Refinitiv MMD’s scale was bumped up to seven basis points at the 1 p.m. read: the one-year at 1.60% (-3, +3 July roll) and 1.93% (-3, +1 July roll) in two years. The five-year at 2.18% (-5, +1 July roll), the 10-year at 2.66% (-6, no roll) and the 30-year at 3.11% (-7).

The ICE municipal yield curve was bumped three to seven basis points: 1.58% (-4) in 2023 and 1.90% (-3) in 2024. The five-year at 2.19% (-6), the 10-year was at 2.63% (-7) and the 30-year yield was at 3.14% (-7) at the close.

The IHS Markit municipal curve saw four to seven basis point bumps: 1.57% (-4) in 2023 and 1.91% (-4) in 2024. The five-year at 2.18% (-4), the 10-year was at 2.66% (-6) and the 30-year yield was at 3.11% (-7) at the close.

Bloomberg BVAL was bumped four to six basis points: 1.59% (-4) in 2023 and 1.87% (-4) in 2024. The five-year at 2.18% (-5), the 10-year at 2.68% (-5) and the 30-year at 3.14% (-5) at the close.

Treasuries rallied.

The two-year UST was yielding 2.835% (-12), the three-year was at 2.855% (-15), the five-year at 2.879% (-16), the seven-year 2.919% (-15), the 10-year yielding 2.882% (-13), the 20-year at 3.354% (-8) and the 30-year Treasury was yielding 3.105% (-8) at the close.

Primary to come:
The Triborough Bridge and Tunnel Authority, New York, (/AA+/AAA/) is set to price Thursday $632.255 million of TBTA Capital Lockbox — City Sales Tax sales tax revenue bonds, Series 2022A. Goldman Sachs & Co.

The Oklahoma City Water Utilities Trust (Aaa/AAA//) is set to price Wednesday $270.170 million of taxable utility system revenue refunding bonds, Series 2022. J.P. Morgan Securities.

The City of Temple, Texas, (/AA//) is set to price Thursday $104.280 million of combination tax and revenue certificates of obligation and limited tax notes, consisting of $45.270 million of certificates of obligation, Series 2022A serials 2023-2042; $40.735 million of certificates of obligation, Series 2022B, serials 2025-2047, $12.180 of taxable certificates of obligation, Series 2022C, serials 2025-2047; and $6.095 million of limited tax notes, Series 2022 serials 2023-2029. Raymond James & Associates.

Chip Barnett contributed to this report.

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