Munis underperform UST, yields diverge

Bonds

Municipals were steady in secondary trading while the last large deal of the week, the Triborough Bridge and Tunnel Authority’s $700 million of MTA Bridges and Tunnels green bonds, priced.

U.S. Treasuries saw more improvements with the 10-year falling below 4%, while equities ended mixed after gross domestic product and other economic data came in better than expected.

There has been a pullback of expectations on Federal Reserve tightening, which has, in turn, resulted in UST yields falling, said Cooper Howard, a fixed-income strategist focused on munis at Charles Schwab.

Howard noted USTs and munis have diverged over the past week, with the 10-year and 30-year UST falling 28 and 12 basis points, respectively, and the 10-year and 30-year muni rising 25 and 35 basis points, respectively, per Refinitiv MMD.

This has resulted in some underperformance on the muni side.

It was “not necessarily too surprising” because relative value was depressed with the 10-year ratio below 80%.

Historically, in October and November, the 10-year muni-USTs ratio averages about 90%. “Seeing some rising relative yields isn’t too surprising in that sense,” he said.

Municipal to UST ratios have risen this week with the 10-year approaching 90% and the 30-year topping 100%. On Thursday, the three-year was at 75%, the five-year at 79%, the 10-year at 86% and the 30-year at 102%, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the three at 73%, the five at 77%, the 10 at 87% and the 30 at 102% at a 4 p.m. read.

There continue to be strong outflows from mutual funds, though when looking closer at the movement of money, there are still inflows into money market funds.There’s “a lot of reallocation more towards shorter-term bonds, which makes sense, given the shape of the yield curve.”

“Much has been made about outflows from muni mutual funds,” he said. “However, the outflows are occurring mostly among intermediate-term and long-term funds while short-term MMFs are attracting assets.” The funds saw nearly $3 billion of inflows this week.

Refinitiv Lipper had yet to update its fund flows data as of publication.

“This dynamic has put pressure on relative yields for short-term munis which are now reading as rich relative to historical averages,” Howard added.

The heavy amount of bids wanted has caused a fair amount of selling pressure and added to the volatility.

Bids-wanteds have continued to climb above $2 billion this week with Wednesday’s total hitting $2.375 billion.

As the end of October approaches, Howard said it’s been a difficult month for municipal bond investors. Monthly returns are down about 1%, already on the back of being down 3.84% in September and then 2.2% on August.

But while muni performance has been ugly,it has not been as terrible as other fixed-income asset classes. Year-to-date, munis are down 13.02%.

While “that’s the worst performance in the history of the Bloomberg Municipal Bond Index, they’re outperforming both the Agg and corporate bond, which are down 16.7% and 20.9% [year-to-date], respectively, he said.

This poor performance has been rate-driven and not over concerns about credit quality, Howard and others have noted.

November and December will be dictated by Fed policy. He believes there will be another 75 basis point rate hike at the November meeting and more guidance provide at the meeting about what the Fed will do for the remainder of the year, which will influence the muni market.

Federal Open Market Committee meetings have generally caused issuers to pull back. “So if there is a path of higher Fed policy, tighter Fed policy, I would suspect that there would probably be low issuance,” he said.

Bond Buyer 30-day visible supply sits at $8.28 billion. Supply next week shows only six deals over $100 million.

In the primary market Thursday, J.P. Morgan Securities priced for the Triborough Bridge and Tunnel Authority (/AA+/AA+/AA+/) $700 million of climate-certified MTA Bridges and Tunnels payroll mobility tax senior-lien green bonds, Series 2022E.

The first tranche, $188.630 million of Subseries 2022E-1, saw 5s of 11/2027 at 3.53%, callable 8/15/2027.

The second tranche, $412.010 of Subseries 2022E-2b, saw 5s of 11/2027 at 3.53% (callable 8/15/2027) and 5s of 2032 at 3.90% (callable 5/15/2032).

The third tranche, $99.560 million of Subseries E-2a, mature in 4/2026 at 67% of SOFR +105 basis points, callable 10/1/2025.

Barclays Capital priced for the Michigan State Housing Development Authority (/AA+//) $243.035 million of non-AMT social single-family mortgage revenue bonds, 2022 Series D, with 3.2s of 6/2023 at par, 3.9s of 6/2027 at par, 4s of 12/2027 at par, 4.65s of 6/2032 at par, 4.7s of 12/2032 at par, 5.1s of 12/2037 at par, 5.2s of 12/2040 at par and 5.5s of 6/2023 at 4.71%.

Citigroup Global Markets priced for Palomar Health, California, (Baa3/BBB/BBB-/) $226.780 million of tax-exempt certificates of participation, Series 2022A, with 5s of 11/2027 at 4.29%, 5s of 2032 at 4.67%, 5.25s of 2036 at 4.94% and 5.25s of 2052 at 5.51%, callable 11/1/2032.

Informa: Money market munis see inflows
Tax-exempt municipal money market funds saw $2.98 billion of inflows the week ending Tuesday, bringing the total assets to $108.64 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 fell to 1.92%.

Taxable money-fund assets inflows of $12.20 billion to end the reporting week at $4.441 trillion of total net assets. The average seven-day simple yield for all taxable reporting funds rose to 2.72%.

Secondary trading
Maryland 5s of 2023 at 3.05%. NYC 5s of 2023 at 3.25%. DC 5s of 2024 at 3.22%-3.20% versus 2.96%-2.90% on 10/18. California 5s of 2024 at 3.23%.

NYC TFA 5s of 2027 at 3.34%. California 5s of 2028 at 3.35% versus 3.37%-3.34% Wednesday. NYC 5s of 2029 at 3.46% versus 3.49% Wednesday. Georgia 5s of 2031 at 3.36% versus 3.38% Wednesday.

Boston, Massachusetts, 5s of 2037 at 3.80%. Richardson ISD, Texas, 5s of 2038 at 4.15. LA DWP 5s of 2039 at 4.12%-4.10%.

Virginia Public School Authority 5s of 2047 at 4.45%-4.39% versus 4.42%-4.30% Wednesday. Richardson ISD, Texas, 5s of 2048 at 4.70%. Triborough Bridge and Tunnel Authority 5s of 2051 at 4.75%-4.76%.

AAA scales
Refinitiv MMD’s scale was unchanged: the one-year at 3.14% and 3.18% in two years. The five-year at 3.24%, the 10-year at 3.41% and the 30-year at 4.16%.

The ICE AAA yield curve was steady: 3.17% (flat) in 2023 and 3.22% (flat) in 2024. The five-year at 3.26% (flat), the 10-year was at 3.48% (flat) and the 30-year yield was at 4.27% (flat) at a 4 p.m. read.

The IHS Markit municipal curve was unchanged: 3.16% in 2023 and 3.20% in 2024. The five-year was at 3.29%, the 10-year was at 3.43% and the 30-year yield was at 4.15% at a 4 p.m. read.

Bloomberg BVAL was little changed: 3.10% (-1) in 2023 and 3.17% (-1) in 2024. The five-year at 3.24% (unch), the 10-year at 3.39% (unch) and the 30-year at 4.12% (unch) at 4 p.m.

Treasuries were firmer.

The two-year UST was yielding 4.317% (-9), the three-year was at 4.274% (-11), the five-year at 4.079% (-11), the seven-year 4.006% (-9), the 10-year yielding 3.929% (-8), the 20-year at 4.312% (-6) and the 30-year Treasury was yielding 4.077% (-6) at the close.

Real GDP growth returns to positive territory
Real GDP increased 2.6% quarter-over-quarter, “driven by a jump in net exports, resilient but decelerating private consumption, an uptick in non-residential fixed investment, and an acceleration in government spending,” said Mickey Levy and Mahmoud Abu Ghzalah of Berenberg Capital Markets.

“While this returned real GDP growth to positive territory following back-to-back quarterly contractions in H1 2022 and lifted the level of real GDP above that in Q4 2021, the underlying details of the GDP report point to continued softening in domestic demand amid elevated but moderating inflationary pressures,” they said.

Despite the rebound in headline real GDP, Levy and Ghzalah said “more nuanced gauges of domestic demand point to a broad-based slowdown in real economic activity that is likely to persist as tightening financial conditions begin to bite.”

“The underlying details of the report were not very encouraging,” said Wells Fargo Securities Chief Economist Jay Bryson.

He believes that “this combination of elevated inflation, which has been eroding household purchasing power, as well as the aggressive pace of monetary tightening will cause the economy to slip into recession starting in the second quarter of 2023.”

The U.S. economy seems to “have bounced back from those two negative GDP readings with a solid 2.6% improvement with economic activity … but when you dig into the numbers it is clear that an economic slowdown is here,” said Edward Moya, senior market analysts at OANDA.  

While the international trade component helped this quarter, that won’t remain moving forward. ”Consumer spending is softening and prices are coming down” faster, and business investment is weakening, Moya said.

The figure marked the end of the technical recession, according to a Morgan Stanley Research analysts “The upside was driven by an increase in exports, consumer spending, business investment, and government spending,” they said. “This was somewhat offset by a decline in residential investment and inventory investment.”

Morgan Stanley Research strategists expect “3Q22 to mark the peak in quarterly growth, as the cumulative effect of tighter monetary policy begins to push growth below potential.” They predict weaker growth in Q4.

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