Munis weaker once more, outflows continue

Bonds

Municipals were weaker in spots Wednesday as outflows from mutual funds continued. U.S. Treasuries were mixed and equities ended down.

Triple-A benchmark yields were cut up to five basis points, depending on the scale, while UST yields fell up to five basis points out long.

The three-year muni-UST ratio was at 60%, the five-year at 63%, the 10-year at 67% and the 30-year at 89%, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the three at 61%, the five at 64%, the 10 at 69% and the 30 at 91% at a 3 p.m. read.

“With only a few days remaining in the year, muni bonds have had a tough year losing roughly 8.44% for the year with the long end of the curve taking the brunt of the losses as Fed policies to lower inflation concerns have sent investors to the shorter end,” said Jason Wong, vice president of municipals at AmeriVet Securities.

“The long end,” he said, “has lost roughly 15.38% for the year as the sell-off has sent yields on 30-years to 3.55%,” according to MMD.

At the beginning of the year, 30-year bonds were at 1.50%, per MMD.

“As you go further down the curve, munis have fared much better with bonds maturing in 10 years only losing about 6.51% and bonds maturing in five years only losing about 5.24%,” Wong said.

Munis have only had four months of positive returns, “something investors are not used to seeing as munis investors are accustomed to stability in the markets,” he said.

Coming into 2022, there was “probably a little bit more constructive optimism about the market,” after market participants went through “a lot of professional and personal trauma from the pandemic,” said Pat Luby, a CreditSights strategist.

He said, “the transition of the market from a benign interest-rate environment to a rising rate environment … generated a tremendous emotional response on the part of many investors.”

Luby noted it’s “been the big driver of many mutual fund net outflows,” but also revealed, “that a lot of market participants had not been through this kind of market environment before. So there’s this tremendous confluence of events that was new to a lot of market participants.

The biggest source of demand in the muni market is direct and indirect demand from individual investors, Luby said.

Institutional investors, he noted, are much more opportunistic in the muni market and not necessarily present to provide demand.

“The market is simply more reliant on a single class of investors for demand and therefore subject to greater volatility,” Luby said.

Outflows continued with the Investment Company Institute reporting investors pulled $4.129 billion from mutual funds in the week ending Dec. 21, after $3.052 billion of outflows the previous week.

Exchange-traded funds saw outflows at $531 million after $1.309 billion of inflows the week prior, per ICI data.

Luby said outflows partly stem from the decline in NAVs, which “tends to frighten a lot of retail investors and financial advisors if they react to decline in NAVs by removing money from the funds,” he said.

And anecdotally, he has heard “there’s a fair amount of tax loss harvesting that’s been going on in selling mutual funds and harvesting those tax losses.”

Luby said the impact of this year’s massive net negative outflows from muni mutual funds is twofold.

For one, he said, “it removes an important source of demand for long-duration paper from the long end of the market, which is why the long end of the yield curve partly has underperformed.”

Mutual fund portfolio managers are trying to raise funds and pay exiting shareholders, “instead of figuring out where they’re going to be putting new money to work and therefore being active in the new issue [market],” Luby said.

Additionally, he said “the sale of bonds from portfolios into the secondary market has pushed prices lower,” and “there’s not as much demand in the secondary market as there is in the primary market.”

“When mutual funds are selling in the secondary market, it has a disproportionately negative effect on prices, and then that turns into a cycle in which the redemption of mutual fund shares leads to the sale of bonds,” he said.

That “leads to the downward spiral in prices, which leads to the decline in NAVs, which frightens more municipal mutual fund investors to exit their mutual funds leads,” Luby said. “And the cycle repeats itself.”

Muni money market funds see inflows
Tax-exempt municipal money market fund assets gained $3.86 billion, raising their total net assets to $107.66 billion in the week ended Dec. 26, according to the Money Fund Report, a publication of Informa Financial Intelligence.

The average seven-day simple yield for the 144 tax-free and municipal money-market funds rose to 3.18%.

Taxable money-fund assets were up $5.13 billion in the week ended Dec. 27, bringing total net assets to $4.563 trillion.

The average, seven-day simple yield for the 780 taxable reporting funds increased to 3.89%.

Overall, the combined total net assets of the 924 reporting money funds grew by $9.0 billion to $4.671 trillion in the week ended Dec. 27.

Economy
Wednesday’s indicators showed weakness in the economy, as pending home sales fell more than expected and the Texas service sector was nearly flat in December, while labor growth in the sector softened.

Pending home sales dropped 4.0% in November, its sixth straight decline, after falling 4.7% in October, the National Association of Realtors reported.

“Pending home sales recorded the second-lowest monthly reading in 20 years as interest rates, which climbed at one of the fastest paces on record this year, drastically cut into the number of contract signings to buy a home,” NAR Chief Economist Lawrence Yun said. “Falling home sales and construction have hurt broader economic activity.”

All four regions of the country saw pending sales decline, with the Northeast down 7.9%, the Midwest 6.6% lower than a month earlier, the South off 2.3% and the West fell 0.9%.

Year-over-year pending home sales plunged 37.8% in November.

As for the Texas service sector, the Federal Reserve Bank of Dallas’ December outlook survey, showed revenues fell to negative 0.6 from 5.5 in November. The employment index fell to 5.6 from 8.3, with part-time employment and hours worked also down in the month.

Respondents saw business conditions deteriorating from November, at both the general and at the company levels, and the future general business activity index fell further into negative territory.

“Growth in input prices and wages moderated in December, while selling prices growth picked up slightly,” said Jesus Cañas, Dallas Fed senior business economist. ”Perceptions of broader business conditions worsened further and respondents’ expectations regarding future business activity suggested waning optimism for growth next year.”

The bank’s manufacturing survey, released on Tuesday, showed growth in the sector, but “perceptions of broader business conditions continued to worsen,” according to the report. The general business activity index fell further negative, while the company index narrowed but remained in negative territory.

The employment index rose, while prices and wages “saw little movement” in the month.

Secondary trading
NYC 5s of 2023 at 2.95% versus 2.91% Thursday and 2.20% on 12/6. DC 5s of 2023 at 2.90%-2.88%. Georgia 5s of 2024 at 2.70%-2.67%.

California 5s of 2028 at 2.58%. Washington 4s of 2029 at 2.63% versus 2.55% on 12/12 and 2.57% on 12/7. Wisconsin 5s of 2030 at 2.60%-2.56%.

Massachusetts 5s of 2038 at 3.36%-3.35%. NYC TFA 5s of 2039 at 3.70%. Texas Water Development Board 5s of 2041 at 3.55% versus 3.41% on 12/14 and 3.47%-3.43% original on 12/13.

Michigan State Building Authority 5s of 2047 at 3.88% versus 3.82% on 12/21 and 3.85%-3.82% on 12/15. Indianapolis Local Public Improvement Bond Bank 5s of 2052 at 4.01% versus 3.91% on 12/14 and 3.98%-4.01% original on 12/7.

AAA scales
Refinitiv MMD’s scale was cut on the short end: the one-year was at 2.86% (+5) and 2.60% (+3) in two years. The five-year at 2.52% (unch), the 10-year at 2.60% (unch) and the 30-year at 3.55% (unch).

The ICE AAA yield curve was cut two to four basis points: 2.77% (+2) in 2023 and 2.62% (+2) in 2024. The five-year was at 2.57 (+3), the 10-year was at 2.64% (+2) and the 30-year yield was at 3.59% (+4) at 4 p.m.

The IHS Markit municipal curve was cut five basis points in one-year: 2.84% (+5) in 2023 and 2.61% (+3) in 2024. The five-year was at 2.55% (unch), the 10-year was at 2.61% (unch) and the 30-year yield was at 3.54% (unch) at a 4 p.m. read.

Bloomberg BVAL was cut up to three basis points: 2.80% (+3) in 2023 and 2.65% (+2) in 2024. The five-year at 2.53% (+1), the 10-year at 2.61% (unch) and the 30-year at 3.55% (+1).

Treasuries were weaker five years and out.

The two-year UST was yielding 4.356% (-2), the three-year was at 4.179% (-1), the five-year at 3.974 (+3), the seven-year 3.971% (+5), the 10-year yielding 3.887% (+4), the 20-year at 4.136% (+3) and the 30-year Treasury was yielding 3.974% (+5) at 4 p.m.

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