Municipals improved again Thursday pushing the 10-year triple-A yield firmly below 3% while inflows into municipal bond mutual funds returned after 14 consecutive weeks of outflows. U.S. Treasuries saw losses and equities ended down after Federal Reserve officials tempered expectations of a slowdown in rate hikes.
Triple-A yields fell by three to six basis points, depending on the curve, while U.S. Treasuries rose as much as nine. Ratios fell as a result.
The three-year muni-UST ratio on Thursday was at 66%, the five-year at 71%, the 10-year at 77% and the 30-year at 92%, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the three at 68%, the five at 73%, the 10 at 81% and the 30 at 95% at a 4 p.m. read.
Refinitiv Lipper on Thursday reported $604.704 million of inflows from municipal bond mutual funds for the week ending Wednesday after $2.573 billion of outflows the week prior.
High-yield saw inflows of $386.352 million after outflows of $700.488 million the week prior while exchange-traded funds saw inflows of $1.791 billion after $208.763 million of inflows the previous week.
“A new paradigm is taking hold between limited supply and building demand, following September’s challenging losses,” said Kim Olsan, senior vice president of municipal bond trading at FHN Financial.
The post-Consumer Price Index report reaction of muni yields’ multi-digit gains was followed by another rally, she said.
“Call it primary activity creating firmer secondary flows or vice versa, the result is tighter bids and larger oversubscriptions,” she noted.
A pricing of $600 A1/NR Metropolitan Nashville TN Airports on Wednesday drew final yields 10 to 20 basis points “lower than preliminary levels in the non-AMT series based on a large order book; the AMT series saw a similar repricing with a 5.50% due 2052 at a 5.02% yield,” she said.
“After dramatic price bumps in generic AAA scales, the first implied 3% yield now appears in 2034 — an extension of 11 years from the prior week,” Olsan said.
High-grade trading on Thursday showed more prints well below the 3% threshold.
It seems the market is taking a longer-term view of inputs. Olsan noted that CreditSights strategists estimate in the next three months a total of $64 billion will be redeemed or mature, which is roughly worth just two months of supply.
Bond Buyer 30-day visible supply sits at $7.14 billion.
“One possible reason for the lower-than-usual January figure may be issuance in 2013 that would be redeemable by a 10-year call feature carried yields well below current levels with little incentive to be called in early,” she said. “That aspect may explain growing demand in the waning weeks of the year and early in January until the calendar reengages.”
While dealers and customers decipher new themes, Olsan said “certain metrics point to a risk-off/opportunity-on trend.”
“Inventory management over different periods this year suggests declining positions … as yields rose,” she said.
Early in the year, inventories averaged $12.3 billion weekly, but “late in Q1 and during Q2 as the selloff took hold, commitments fell below an average of $11 billion,” she said. Between March and the end of June, the 10-year AAA BVAL yield rose from 1.54% to 2.73% before reaching a high of 2.95% in mid-May.
The second half of 2022 has had a volatile rate range.
“A rally in July and August that took the 10-year BVAL yield as low as 2.16% was offset by more constructive inventories with dealers carrying more than $15 billion in late July,” Olsan said. “A mostly upward-trending yield since then has brought a decline in average carry to settle around $10 billion — with a steadily smaller figure since the end of September.”
November’s rally, she said, “could presage more dealer confidence and bring higher carry figures when reported.”
Municipal Securities Rulemaking Board data points “to more secondary volume being generated past 2030 (to achieve the coveted 3% yield-to-worst) at the expense of shorter maturities,” she said. From Nov. 9 to Nov. 16, this range captured 73% of all trades. Ratings breakdowns show a similar theme — 69% of all secondary activity traded in AAA- and AA-rated bonds.
The MSRB also pointed to the increased trading volumes this year with the board announcing that year-to-date trading on its Real-Time Transaction Reporting System is up 61% from the same period in 2021, with November expected to be the seventh of the last eight months with trades exceeding one million.
The last large deals of the week priced in the primary market Thursday.
J.P. Morgan Securities priced for the Washington Economic Development Finance Authority (Aaa///) $165 million of Mura Cascade ELP LLC Project environmental facilities revenue and refunding bonds, Series 2022, with 3.9s of 12/2042 with a mandatory tender date of 12/8/2023 at par, callable 6/1/2023.
Barclays Capital priced for the California Municipal Finance Authority (A3///) $140 million of Samuel Merritt University revenue bonds, Series 2022, with 5.25s of 6/2053 at 4.57%, callable 12/1/2032.
Citigroup Global Markets priced for the Mississippi Business Finance Corporation (B1/B+/BB-/) $100 million of green Enviva Inc. Project exempt facilities revenue bonds, Series 2022, with 7.75s of 7/2047 at par, mandatory tender date of 7/15/2032, make whole call.
Ohio 5s of 2023 at 2.81%. Maryland 5s of 2024 at 2.78%. North Carolina 5s of 2025 at 2.82%. California 5s of 2027 at 2.80% versus 2.85% Wednesday.
Wake County, North Carolina, 5s of 2030 at 2.83% versus 2.87% Wednesday. Washington Suburban Sanitation District 5s of 2030 at 2.80%-2.79%. Maryland 5s of 2033 at 2.95%-2.94%.
New York City 5s of 2036 at 3.62%-3.61%. Los Angeles DWP 5s of 2041 at 3.68%. Washington 5s of 2042 at 3.64% versus 3.71% Wednesday. New York City waters 5s of 2044 at 4.07%-3.87%.
California 5s of 2052 at 3.91%. Massachusetts Bay Transportation Authority 5s of 2052 at 3.89% versus 3.92% Wednesday.
Refinitiv MMD’s scale was bumped up to five basis points: the one-year at 2.74% (-5) and 2.75% (-5) in two years. The five-year at 2.81% (-3), the 10-year at 2.91% (-3) and the 30-year at 3.59% (-3).
The ICE AAA yield curve was bumped four to five basis points: 2.77% (-5) in 2023 and 2.80% (-6) in 2024. The five-year at 2.83% (-4), the 10-year was at 2.96% (-6) and the 30-year yield was at 3.72% (-6) at a 4 p.m. read.
The IHS Markit municipal curve was out long basis points: 2.74% (unch) in 2023 and 2.76% (unch) in 2024. The five-year was at 2.80% (unch), the 10-year was at 2.91% (unch) and the 30-year yield was at 3.59% (-3) at a 4 p.m. read.
Bloomberg BVAL was bumped two to three basis points: 2.75% (-3) in 2023 and 2.79% (-3) in 2024. The five-year at 2.81% (-3), the 10-year at 2.88% (-2) and the 30-year at 3.60% (-3) at 4 p.m.
Treasuries were weaker.
The two-year UST was yielding 4.450% (+9), the three-year was at 4.218% (+8), the five-year at 3.932% (+8), the seven-year 3.863% (+7), the 10-year yielding 3.767% (+9), the 20-year at 4.097% (+3) and the 30-year Treasury was yielding 3.876% (+4) at the close.
Mutual fund details
Refinitiv Lipper on Thursday reported $604.704 million of inflows for the week ending Wednesday following $2.537 billion of outflows the previous week.
Exchange-traded muni funds reported inflows of $1.791 billion after inflows of $208.763 million in the previous week. Ex-ETFs, muni funds saw outflows of $1.186 billion after outflows of $2.746 billion in the prior week.
Long-term muni bond funds had inflows of $1.153 billion in the latest week after outflows of $1.201 billion in the previous week. Intermediate-term funds had outflows of $178.040 million after outflows of $810.144 million in the prior week.
National funds had inflows of $764.236 million after outflows of $2.152 billion the previous week while high-yield muni funds reported inflows of $386.352 million after outflows of $700.488 million the week prior.