Munis firmer 10 years and in; focus turns to monthly inflation figures

Bonds

Municipals were firmer 10 years and in Wednesday while another week of mutual fund outflows clocked in at $3.8 billion.

U.S. Treasuries closed out the session better while equities sold off on weaker earnings. The focus shifted from midterm election results to Thursday’s monthly consumer price index report.

“U.S. stocks declined as the midterm election results are still not clear, but still seems to favor a divided government outcome,” noted Edward Moya, senior market analyst at OANDA. “Wall Street is having an election hangover that most likely saw an end to Biden’s blue wave. ​Traders can now go back focusing on everything with inflation.”

Should Republicans manage to win control of one or more chambers of Congress, “this divided government would yield little near-term market reaction,” noted Morgan Stanley strategists Michael Zezas and Ariana Salvatore, “but support bond markets over time by limiting fiscal expansion potential and hence the risk that monetary policy would have to tighten more than expected to fight inflation.”

Municipal lobbyists in Washington say gridlock may be a good thing for municipals heading into next year. While some congressional seats remain tossups, voters approved some of the largest bond ballot measures across the country.

Triple-A muni yields fell one to four basis points Wednesday, depending on the curve, while USTs saw yields fall by four to eight basis points.

The three-year muni-UST ratio was at 69%, the five-year at 73%, the 10-year at 78% and the 30-year at 94%, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the three at 69%, the five at 73%, the 10 at 82% and the 30 at 96% at a 4 p.m. read.

For municipals, it was another day of mutual fund outflows with the Investment Company Institute reporting that investors pulled $3.816 billion from mutual funds in the week ending Nov. 2 after $3.843 billion of outflows the previous week. That brings year-to-date losses to $123.3 billion.

Exchange-traded funds saw another week of inflows at $1.108 billion after $1.007 billion of inflows the week prior, per ICI data.

In the primary Wednesday, Citigroup Global Markets priced for the Tarrant County Cultural Education Facilities Finance Corporation, Texas, (Aa3/AA-//) $252.036 million of fixed-rate hard put hospital revenue bonds (Baylor Scott & White Health Project). The first tranche, $123.980 million of Series 2022E, saw 5s of 11/2052 with a mandatory tender date of 5/15.2026 at 3.77%, callable 11/15/2025.

The second tranche, $128.055 million of Series 2022F, saw 5s of 11/2052 with a mandatory tender date of 11/15/2030 at 4.05%, callable 11/15/2029.

Citigroup Global Markets also priced for the Tarrant County Cultural Education Facilities Finance Corporation, Texas, (Aa3/AA-//) $247.965 million of hospital revenue bonds (Baylor Scott & White Health Project), Series 2022D, with 5.5s of 11/2047 at 5.00% and 5s of 2051 at 5.15%, callable 11/15/2032.

Citigroup Global Markets priced for the Massachusetts Department of Transportation (Aa2/AA/AA+/) $371.380 million of Commonwealth contract assistance secured VDRO subordinated metropolitan highway system revenue refunding bonds. The first tranche, $123.795 million of 2022 Series A, saw 2.21s of 1/2039 price at par.

The second tranche, $123.795 million of 2022 Series A-2, saw 2.21s of 1/2039 price at par.

The third tranche, $123.790 million of 2022 Series A-3, saw 2.21s of 1/2039 price at par.

In the competitive market, California sold $549.545 million of taxable general obligation bonds (Bid Group B) to Wells Fargo Bank, with 5.5s of 10/2023 at 4.70%, 5s of 2027 at 4.82% and 5.25s of 2031 at 5.21%, noncall.

Improving picture
Market fundamentals remain strong amid an “admittedly pretty dreary outlook for spreads overall,” said Ryan Swift, U.S. Bond Strategists at BCA Research.

There remains a “combination of reasonably attractive valuations on a relative basis, especially at long maturities,” he said. Beyond the 10- to 12-year maturity point, implied breakeven tax rates between municipal bond yields and other comparable maturity yields start to look pretty attractive, he said.

State and local governments’ balance sheets are in “excellent shape,” having benefited from a surge of federal government transfers during the pandemic and income tax revenue coming back more quickly than expected when they were making their budget plans.

“They’re sitting on big cash pools in the state and local government sector,” he said. “So it looks quite sound, and especially at the long end of the yield curve, valuations look reasonably attractive.”

Even though returns remain in the black in November, it’s been the worst start of the year for the bond market since the Great Depression, said Cooper Howard, a fixed-income strategist focused on munis at Charles Schwab. Fortunately, he said it’s unlikely to repeat. 

Returns, he said, “have been historically weak this year for two primary reasons — starting yields were very low and the Federal Reserve’s pace of rate hikes has been very rapid.”

Since March, Howard said, “the Fed has increased the federal funds target rate five times, pushing it up from near zero to a range of 3% to 3.25%.” While this has been “the fastest and most aggressive pace of tightening going back to the early 1980s,”  he believes “the pace of rate hikes will slow and ultimately stop, which should limit the upside for longer-term bond yields (which move inversely to bond prices).”

Now that yields have reset at much higher levels, Howard said “the blow from price declines should be cushioned by higher coupon income.”

Bond returns, he noted, “are mostly comprised of a coupon return and changes in prices,” adding that “coupon returns are always positive and historically have provided a buffer from falling prices.”

Since “yields were so low to start the year and rose very sharply, the coupon return wasn’t large enough to offset the decline in prices, resulting in nearly the worst 12-month total return for the bond market since the 12-months ending in 1977,” Howard said.

Secondary trading
Howard County, Maryland, 5s of 2023 at 3.06%-3.05%. Delaware 5s of 2024 at 3.11%-3.09%. Guilford County, North Carolina, 5s of 2024 at 3.16%.

California 5s of 2031 at 3.33%-3.31% versus 3.35% Tuesday. Triborough green 5s of 2032 at 3.57%-3.56% versus 3.65%-3.62% Monday. Maryland 5s of 2035 at 3.60% versus 3.62% Tuesday.

Washington 5s of 2040 at 4.15%-4.14%. DC income tax 5s of 2040 at 4.12%-4.05% versus 4.10% Tuesday.

New York City TFA 5s of 2047 at 4.60%. Triborough Bridge and Tunnel 5s of 2047 at 4.64%. University of California 5s of 2052 at 4.36% versus 4.40% Tuesday.

AAA scales
Refinitiv MMD’s scale was bumped up four basis points: the one-year at 3.08% (-2) and 3.11% (-4) in two years. The five-year at 3.14% (-4), the 10-year at 3.26% (-4) and the 30-year at 4.06% (unch).

The ICE AAA yield curve was little changed more than a basis point: 3.10% (-1) in 2023 and 3.15% (-1) in 2024. The five-year at 3.19% (-1), the 10-year was at 3.37% (-1) and the 30-year yield was at 4.15% (+1) at a 4 p.m. read.

The IHS Markit municipal curve was bumped up to four basis points out long: 3.08% (-2) in 2023 and 3.12% (-4) in 2024. The five-year was at 3.16% (-4), the 10-year was at 3.28% (-4) and the 30-year yield was at 4.05% (unch) at a 4 p.m. read.

Bloomberg BVAL was bumped one to three basis points: 3.07% (-2) in 2023 and 3.13% (-2) in 2024. The five-year at 3.15% (-3), the 10-year at 3.29% (-2) and the 30-year at 4.05% (unch) at 4 p.m.

Treasuries were closed out better.

The two-year UST was yielding 4.591% (-6), the three-year was at 4.480% (-8), the five-year at 4.238% (-6), the seven-year 4.156% (-4), the 10-year yielding 4.070% (-6), the 20-year at 4.453% (-4) and the 30-year Treasury was yielding 4.241% (-4) at the close.

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