Muni yields keep falling, inflows continue

Bonds

Municipals were firmer once more on Thursday as triple-A benchmark yields fell further and inflows continued. U.S. Treasuries were weaker and equities ended in the red.

The three-year muni-UST ratio was at 56%, the five-year at 59%, the 10-year at 65% and the 30-year at 88%, according to Refinitiv MMD’s 3 p.m. ET read. ICE Data Services had the three at 56%, the five at 59%, the 10 at 65% and the 30 at 90% at 4 p.m.

The primary market “pumped new life into an already-firm market with a lower yield range being established,” said Kim Olsan, senior vice president of municipal bond trading at FHN Financial.

“January’s theme has been a combination of intra- and inter-market dynamics leading to a near-3% gain for the month (while strong, lagging corporate bond gains over 4%),” she said.

A growing risk-off trade with “greater focus on fixed-income assets has filtered into the tax-exempt market,” she noted.

January’s daily bid list average is 36% lower than 2022, per Bloomberg.

“The inter-connection between low supply and higher demand has led to reduced selling pressure,” Olsan said. “Within any given day’s bid list components, only a portion is comprised of benchmark-setting credits (AAA/high-AA 5s).”

Limited availability translates to” firmer bid sides, already strengthened by the inflation-is-receding theme,” she said. Generic AAA spot levels are 40 to 55 basis points lower than they were at the end of 2022.

“Feeding into high demand, the first group of larger new issues came with strong conviction,” she noted. Washington state sold GOs with “winning bids across four tranches repricing several generic spot levels along the curve by as much as 10 basis points,” Olsan noted. The five-year maturity yielded 2.08% and the 10-year was bought at 2.21%.

“In a sale of Aaa/AAA California Infrastructure bonds, spreads inside 10 years in the issue were -20/MMD — owing to the valuable in-state exemption and to 2023 issuance so far failing to reach $1 billion par value,” she said, noting, “generic yields fell (2026-2028 yielded 2.00%) and the possibility of sub-2% rates coming into play in the state.”

“Whether either sale will represent a market top is unknown, but raw yields suggest buyers will need to hold the same level of interest for that to occur,” Olsan said. “The last time the 10-year MMD rate traded to its current 2.20% area was in April and the 30-year formerly traded at its 3.14% level in August.”

In addition to macro forces pushing bond yields lower, there is a more positive tone in muni mutual fund inflows, pushing certain spot yields into resistance range.

Inflows continued as Refinitiv Lipper reported $1.511 billion was added to municipal bond mutual funds in the week ending Wednesday after $1.981 billion of inflows the week prior.

High-yield saw $822.556 million of inflows after $916.674 million of inflows the week prior, while exchange-traded funds saw inflows of $143.697 million after $454.130 million of inflows the previous week.

Based on increased flows, the one-year muni-UST ratio has “traded to 50%, down from 67% a year ago and the 10-year ratio sits at 65% from a 70% value in January 2022,” Olsan said.

The five- and 30-year AAA yields “offer more relative value than was the case last January,” she said.

“Specific to the intermediate range, tighter ratios in high-grade noncallables have drawn greater focus on optionality where some concession can be found — a very definite reversal from most of 2022 where higher yields detracted from the allure of short-optioned bonds,” Olsan said.

January is living up to its historic reputation of being a strong month in the municipal bond market, one investment professional said. 

“The broad muni market is off to its best start since 2009, led by falling Treasury yields,” Cooper Howard, director and fixed income strategist for the Schwab Center for Financial Research.

“On average, munis have returned 1.16% in the month of January going back to 1981,” Howard explained. 

This month, the market is up 2.91% based on the Bloomberg Municipal Bond Index as of Wednesday.

The longer-term is outperforming the shorter-term while lower-rated securities are outperforming relative to the higher-rated portion of the market, according to Howard.

“The strong performance this month has pushed relative yields to even more rich levels — especially for short-term bonds,” he said. 

For example, the two-year muni-UST ratio is 54%, per ICE Data Services, versus a five-year average of 87%.

“Relative yields are slightly better, but still rich relative to their longer-term averages,” he explained. “When relative yields are rich, it doesn’t bode well for future returns relative to Treasuries,” he continued.

Howard said when the 10-year muni-to-UST ratio is below 80% munis have underperformed USTs. The 10-year ratio is currently at 65%, per ICE.

Meanwhile, supply has been below average while demand, as measured by fund flows, has been improving, Howard said. 

“If demand continues to improve and supply remains low, munis may buck the historical pattern of underperforming Treasuries when yields are rich,” he explained.

Regarding market strategy, Howard said he prefers higher-rated securities and suggests extending duration for investors who have been staying very short-term.

Credit risk, on the other hand, is relatively strong in Howard’s opinion, and he believes it should continue to remain strong in 2023 — although the market may have passed the peak for credit conditions.

“Spreads have been increasing, but we believe it is due to technical factors and not concerns over credit risk,” Howard said.

In the primary market Thursday, Morgan Stanley priced for the Dallas ISD, Texas, (Aaa/AAA/AAA/) $551.460 million of PSF-insured unlimited tax school building and refunding bonds, with 5s of 2/2024 at 2.43%, 5s of 2028 at 2.16%, 5s of 2033 at 2.29%, 5s of 2038 at 2.95%, 5s of 2043 at 3.23%, 5s of 2048 at 3.42% and 4s of 2053 at 3.97%, callable 2/15/2032.

J.P. Morgan priced for the Connecticut Health and Educational Facilities Authority (Aaa/AAA//) $510.110 million of revenue bonds Yale University Issue. The first tranche, $250 million of Series 2014A, saw 2.8s of 7/2048 with a put date of 2/10/2026 priced at par, noncall.

In the competitive market, Fairfax County, Virginia, (Aaa/AAA/AAA) sold $335.155 million of public improvement bonds, Series 2023A, to BofA, with 4s of 10/2023 at 2.30%, 4s of 2028 at 2.08%, 4s of 2033 at 2.24%, 4s of 2038 at 3.16% and 4s of 2042 at 3.40%, callable 4/1/2032.

Secondary trading
Washington 5s of 2024 at 2.29% versus 2.37% Wednesday. NYC 5s of 2025 at 2.24% versus 2.30% Wednesday. Triborough and Tunnel Authority 5s of 2026 at 2.15%.

DC 5s of 2028 at 2.11%. NYC TFA 5s of 2029 at 2.14%-2.12%. Maryland 5s of 2030 at 2.11%-2.10%.

NY Dorm PIT 5s of 2034 at 2.42%. DC 5s of 2036 at 2.74%-2.75%. Washington 5s of 2036 at 2.75%.

Argyle ISD, Texas, 5s of 2047 at 3.38%-3.37%. Massachusetts 5s of 2049 at 3.40% versus 3.47%-3.44% Wednesday and 3.52%-3.50% on 1/12. NY State Environmental Facilities Corp. 5s of 2051 at 3.48%-3.45% versus 3.60%-3.62% on 1/12 and 3.70%-3.52% on 1/10.

AAA scales
Refinitiv MMD’s scale was bumped up to three basis points. The one-year was at 2.33% (-2) and 2.17% (-2) in two years. The five-year was at 2.07% (-3), the 10-year at 2.21% (unch) and the 30-year at 3.14% (unch) at 3 p.m.

The ICE AAA yield curve was bumped four to seven basis points: at 2.32% (-4) in 2024 and 2.21% (-4) in 2025. The five-year was at 2.07% (-7), the 10-year was at 2.17% (-5) and the 30-year yield was at 3.18% (-4) at 4 p.m.

The IHS Markit municipal curve was bumped up to two basis points: 2.32% (-2) in 2024 and 2.15% (-2) in 2025. The five-year was at 2.08% (-2), the 10-year was at 2.20% (-2) and the 30-year yield was at 3.14% (unch) at a 4 p.m. read.

Bloomberg BVAL was bumped up to three basis points: 2.32% (-2) in 2024 and 2.15% (-2) in 2025. The five-year at 2.09% (-3), the 10-year at 2.21% (-1) and the 30-year at 3.16% (unch).

Treasuries were weaker.

The two-year UST was yielding 4.116% (+4), the three-year was at 3.762% (+4), the five-year at 3.484% (+5), the seven-year at 3.435% (+4), the 10-year at 3.396% (+2), the 20-year at 3.688% (+3) and the 30-year Treasury was yielding 3.564% (+3) at 4 p.m.

Mutual fund details
Refinitiv Lipper reported $1.511 billion of inflows for the week ended Wednesday following $1.981 billion of inflows the previous week.

Exchange-traded muni funds reported inflows of $143.697 million after inflows of $454.130 million in the previous week. Ex-ETFs, muni funds saw inflows of $1.367 billion after inflows of $1.527 billion in the prior week.

Long-term muni bond funds had inflows of $1.478 billion in the latest week after inflows of $1.895 billion in the previous week. Intermediate-term funds had inflows of $185.112 million after inflows of $260.022 million in the prior week.

National funds had inflows of $1.377 billion after inflows of $1.844 billion the previous week while high-yield muni funds reported inflows of $822.556 million after inflows of $916.674 million the week prior.

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