Munis weaker but outperform UST selloff

Bonds

Municipals were weaker to kick off the holiday-shortened week, but outperformed a U.S. Treasury selloff that saw the 30-year UST yield hit just shy of 3.5%, while equities saw losses.

Triple-A benchmark yields rose up to seven basis points, while UST yields rose 11 to 15 bps with the largest losses on the long bonds, near the close.

The two- and three-year muni-UST ratios are around 65% to 69%. The five-year was at 70%, the 10-year at 82% and the 30-year at 100%, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the five at 73%, the 10 at 89% and the 30 at 102% at a 4 p.m. read.

“Muni bonds have lost roughly 2.19% for the month of August virtually erasing all the gains we had back in July,” said Jason Wong, vice president of municipals at AmeriVet Securities.

Last week, “with the selloff continuing for munis, outflows from municipal bond mutual funds ramped up with investors pulling about $3.4 billion from those funds last week,” he said. This follows the prior week’s outflows of $1.8 billion, according to Refinitiv Lipper, and marks the fourth consecutive week of outflows.

The muni market may get a “temporary boost of support this week as investors received $18 billion of maturing and called bond proceeds on Sept. 1,” said CreditSights strategists Pat Luby and John Ceffalio. However, they noted, reinvestment demand for the rest of the month will be light.

As new-issue volume increases and peaks in October, they anticipate “the market will remain volatile, and that in the months ahead, yields will be biased higher and new-issue spreads will widen, especially for intermediate to long bonds where demand from individual investors is not as strong.”

They also expect “monthly net supply will be positive in each of the last four months of the year but will peak in October due to the forecast surge in issuance.”

For September, they predict volume will total $38 billion, exceeding total redemptions by $16 billion.

With two-thirds of the year over, “munis are poised to have their worst year in decades as the Feds aggressive rate hike campaign to tackle high inflation has pushed investors away from the fixed income markets,” Wong said.

While there were positive gains in July of 2.64%, “those gains were virtually erased in August as munis were down 2.19%,” he said.

“Long bonds lost the most in August losing roughly 3.52% and are now down 14.57% for year,” he noted.

There are some positive news for long bonds as ratios are now above 100% versus USTs. “Munis year-to-date have lost around 8.62% and are still poised to lose even more ground unless we start to get a clearer picture as to when Fed Rate campaign will come to an end,” he noted.

With the next consumer price index number coming out in two weeks, followed by the Fed’s decision a week later, Wong said there should be “a clearer picture as to where rates will go by the end of year.”

“If inflation is held in check and the Fed backs off from another 75-basis points rate hike, we should start to see rates stabilize and investors moving back to munis,” he said.

In the competitive market Tuesday, Madison, Wisconsin, sold $72.355 million of general obligation promissory notes, Series 2022-A, to BofA Securities, with 5s of 10/2023 at 2.35%, 5s of 2027 at 2.50% and 4s of 2032 at 3.00%, callable 10/1/2029.

The city also sold $22.035 million of general obligation refunding bonds, Series 2022-C, to BofA Securities with 5s of 10/2023 at 2.35%, 5s of 2027 at 2.48% and 4s of 2032 at 3.10%, callable 10/1/2030.

The city sold $20.160 million of taxable general obligation promissory notes, Series 2022-B, to Northland Securities with 4s of 10/2023 at 3.65%, 4s of 2027 at 3.75% and 4s of 2032 at par, callable 10/1/2029.

Secondary trading
Louisiana 5s of 2023 at 2.33%. Ohio 5s of 2024 at 2.38% versus 1.76% on 8/12. Montgomery County, Maryland, 5s of 2024 at 2.36%-2.30%. NYC 5s of 2025 at 2.45%.

Maryland 5s of 2027 at 2.47%-2.45%. Georgia 5s of 2029 at 2.55%-2.53%. Wake County, North Carolina, 5s of 2030 at 2.57%.

NYC TFA 5s of 2034 at 3.47%. DC 5s of 2036 at 3.38% versus 3.15%-3.17% Tuesday and 3.15% on 8/29.

NYC 5s of 2038 at 3.82%-3.80% versus 3.60% Wednesday and 3.57% on 8/29. DC 5s of 2039 at 3.56%. LA DWP 5s of 2042 at 3.65% versus 3.40% Tuesday and 3.39% on 8/29.

AAA scales
Refinitiv MMD’s scale was cut five to seven basis points five years and out at the 3 p.m. read: the one-year at 2.28% (unch) and 2.31% (unch) in two years. The five-year at 2.40% (+5), the 10-year at 2.72% (+5) and the 30-year at 3.48% (+7).

The ICE AAA yield curve was cut two to five basis points: 2.34% (+2) in 2023 and 2.37% (+2) in 2024. The five-year at 2.43% (+3), the 10-year was at 2.81% (+4) and the 30-year yield was at 3.46% (+5) at a 3:30 p.m. read.

The IHS Markit municipal curve was cut six basis points five years and out: 2.26% (unch) in 2023 and 2.34% (unch) in 2024. The five-year was at 2.44% (+6), the 10-year was at 2.75% (+6) and the 30-year yield was at 3.46% (+6) at a 3 p.m. read.

Bloomberg BVAL was little changed: 2.34% (+2) in 2023 and 2.35% (+2) in 2024. The five-year at 2.38% (+4), the 10-year at 2.71% (+5) and the 30-year at 3.46% (+7) at 3:30 p.m.

Treasuries sold off.

The two-year UST was yielding 3.495% (+11), the three-year was at 3.564% (+13), the five-year at 3.439% (+15), the seven-year 3.419% (+14), the 10-year yielding 3.338% (+15), the 20-year at 3.751% (+14) and the 30-year Treasury was yielding 3.486% (+14) just before the close.

Primary to come:
California (/AA-//) is set to price Thursday $2.5 billion of general obligation bonds, consisting of $1.3 billion of various purpose general obligation bonds and $1.2 billion of general obligation refunding bonds. Barclays Capital.

The Omaha Public Power District, Nebraska, (Aa2///) is set to price Thursday $405.520 million of electric system revenue bonds, consisting of $337.475 million of 2022 Series A and $68.045 million of 2022 Series B. J.P. Morgan Securities.

The Harris County Flood Control District, Texas, (Aaa///AAA/) is set to price Wednesday $225 million of sustainability improvement refunding bonds, Series 2022A, serials 2023-2025 and 2027-2042, term 2047. Citigroup Global Markets.  

The Indiana Housing and Community Development Authority (Aaa//AAA/) is set to price Wednesday $198.335 million of social single family mortgage revenue bonds, consisting of $169.555 million of non-AMT bonds, Series C-1; $3.780 million of AMT bonds, Series C-2 and $25 million of taxable bonds, Series D. J.P. Morgan Securities.

Kentucky (A1//A+/) is set to price Thursday $193 million of State Property and Buildings Commission Project No. 127 revenue bonds, Series A. Citigroup Global Markets.

The Maryland Economic Development Corp. (Baa2///) is set to price Thursday $178.455 million of taxable United States Citizenship and Immigration Services Headquarters Project federal lease revenue bonds, serial 2035. Oppenheimer & Co.

The Joint School District No. 28J, Colorado, (Aa1///) is set to price Wednesday $124.870 million of general obligation refunding bonds, Series 2022, serials 2022-2028, insured by the Colorado State Intercept Program. RBC Capital Markets.

Competitive:
Pennsylvania (Aa3/A+/AA-/) is set to sell $1 billion of general obligation bonds, First Series of 2022, at 11 a.m. eastern Wednesday.

Dane County, Wisconsin, is set to sell $8.555 million of general obligation corporate purpose bonds, Series 2022B, and $76.435 million of general obligation promissory notes, Series 2022A at 11 a.m. eastern Thursday, and $14.560 million of taxable general obligation promissory notes, Series 2022C, and $47.435 million of AMT general obligation airport project promissory notes, Series 2022D, at 11:30 a.m. Thursday.

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