Muni yields fall in sympathy with USTs after weaker jobs data


Municipals were firmer in secondary trading Tuesday following U.S. Treasuries after weaker jobs data sent signals of a slowing economy.

Triple-A yields fell two to six basis points while USTs rallied up to 15 basis points on the short end following fewer-than-expected job openings data, according to Roberto Roffo, managing director and portfolio manager at SWBC Investment Company.

Job openings fell below 10 million in February for the first time since May 2021, indicating that the Federal Reserve Board’s efforts to slow the labor market may be having some impact, according to the Labor Department data.

Available positions totaled 9.93 million, a drop of 632,000 from January’s downwardly revised number, the Labor Department reported Tuesday in its monthly Job Openings and Labor Turnover Survey

Expectations from Wall Street were closer to 10.4 million, according to analysts.

Municipal to UST ratios on the short end remain rich. The two-year muni-Treasury ratio was at 61%, the three-year at 62%, the five-year at 64%, the 10-year at 66% and the 30-year at 90%, according to Refinitiv MMD’s 3 p.m. ET read. ICE Data Services had the two-year at 59%, three-year at 59%, the five-year at 60%, the 10-year at 65% and the 30-year at 91% at 4 p.m.

“Technically, the short end of the curve continues to be rich on a ratio basis, but demand continues to be strong,” he said. ”The long end of the curve is relatively more attractive and offers more relative value.”

As of April 3, the one-year municipal bond is yielding 53.9% of the yield of the one-year Treasury bond, while the 10-year municipal bond is yielding 66.1% of its taxable counterpart. The 30-year municipal bond, on the other hand, is yielding 90.6% of the comparable Treasury bond, according to Refinitiv.

Outside of economic data, “a light forward calendar is driving strong demand in the secondary market and with new issues, with some deals being significantly oversubscribed,” Roffo said Tuesday. 

“Fundamentally the municipal market is in good shape, with the majority of states and localities having strong balance sheets,” Roffo said.  

The first day of the second quarter “wasn’t as active as in months with larger reinvestment figures (just $5 billion was traded), but respective levels for in-demand structures prove out bidders’ belief in the current curve,” said Kim Olsan, senior vice president of municipal bond trading at FHN Financial.

April’s scheduled calls and maturities will be around $15 billion range, she noted.

“As trade prints suggested, though, bidding points to more confidence in ongoing demand albeit with slightly longer turnover periods,” she said.

Trading in Delaware (Aaa/AAA/) GOs due 2030 and Wake County, North Carolina (Aaa/AAA/), GOs in 2031 “showed snug levels to implied spots — evidence that spread to scale isn’t so relevant as quality and structure with an eye toward recessionary themes,” she said.

Further out the curve, 4s “are benefiting from limited availability of longer-call 5s as well as reduced inflationary expectations,” she said.

The remaining balance of St. Paul waters, Minnesota (NR/AAA/) revenue”4s due 2047 (callable 2032) from a competitive sale in early March was sold at 3.84% or +62/MMD vs. its new issue yield of 4.10%— relevant for the premium dollar being paid outside of high-tax state credits,” according to Olsan.

The new-issue side of the market, she said, focuses on nearly $5 billion of California-based credits over the next two weeks and several state GOs, including Illinois, New Mexico and Louisiana.

In the meantime, she said, “limited supply is giving highly rated local issuers more profile.”

In March, there were 117 sales in the $25 million to $100 million range versus 43 issues over $100 million, she said.

“An evolution of flows during March’s strong performance cycle brought attention to the curve slope,” Olsan said.

A move toward normalization began in March.

“The 5s1s slope opened the year at negative 34 basis points but flattened to negative 24 basis points during February,” but “March’s trade flows moved the slope slightly steeper to the current negative 28 basis points,” she said.

The upcoming tax-filing deadline “has floating-rate debt affecting one-year rates, but a gradual drop in variable rate yields should provide support to the short end of the curve,” she said.

The 7s2s AAA curve started the year “at minus-one basis point but has since tightened to negative 19 basis points,” per Olsan.

Firm bidding in this range, she said, has moved the seven-year MMD yield “down 35 basis points from the end of 2022 could push more inquiry down the revenue curve for additional concession.”

The 10s5s slope has behaved in a narrow pattern in 2023.

“At the start of January, the slope was 11 basis points and is currently at six basis points — its flattest level in the last year and well through its average 24 basis points,” she said.

Select super-specialty state names, Olsan said, “are already trading close to 2.00% in the 10-year range, evidence of demand for quality and duration.

She said that “changes in the curve slope are having effects on specific structures that were oversold in last year’s weakness.”

“Premium coupons with intermediate maturities and call dates between 2027 and 2030” in recent trading sessions are trading with tighter spreads, Olsan noted.

A sale of District of Columbia (Aaa/AA+/) GO 5s “due 2034 (callable 2027) at 2.36% was spread +1/MMD, or about 15 basis points tighter than trading in the credit from January and February,” she said.

Despite the flatness of traditional mutual fund and exchange-traded fund flows as of late, Matt Fabian, a partner at Municipal Market Analytics said, “very good 1Q returns, in particular versus equities, may incite more demand with quarter-end reporting.”

Another constructive vector, he said, might “be the destabilizing slosh of dollars through tax-exempt money funds and the outsize volatility in short-term tax-exempt rates that has produced.”

Unstable 2a7 rates suggest “cash investors will have increased allocations to short-maturity fixed rate and ETF cash alternative proxies, bolstering front-end stability and outperformance,” he said.

This momentum in the first quarter “will be an essential input in the near-term as scheduled reinvestment over the next 30 days is below $10B billion,” he said. This is  weakest since at least 2018, Fabian noted.

“This reflects, mostly, a sharp decline in upcoming calls, that following: 1) high current rates; plus 2) the legacy of heavy call activity in 2020/2021 when issuers rescheduled near-term coupons,” Fabian said. “And the risk of bank selling of municipals should not be ignored; the $7.4 billion [Silicon Valley Bank] portfolio will be selling at some point, [Federal Reserve Board’s] outlook is unclear and many banks may be looking to reduce holdings.”

However, the crisis in the banking sector appears to be contained for the time being, according to Nuveen strategists Anders S. Persson and John V. Miller.

As a result, USTs sold off, as “investors took profits from the flight-to-quality rally,” they said, noting this should allow the Fed to focus on fighting inflation.

Nuveen strategists expect “fixed income, in general, to remain range bound with a good tone.”

Munis should “remain well bid, as munis didn’t experience the run up in the flight-to-quality trade,” they said.

“Money remains on the sidelines waiting to be deployed in the tax-exempt space,” Nuveen strategists said. “Also, new issuance appears muted for the foreseeable future.”

In the primary market Tuesday, Ramirez & Co. held a one-day retail order $2.551 of various purpose GOs from the state of California (Aa2/AA-/AA/). The first tranche, $1.380 billion of new-money bonds, with 5s of 10/2024 at 2.51%, 5s of 2028 at 2.28%, 5s of 2033 at 2.44%, 5s of 2039 at 3.19%, 5s of 2045 at 3.52%, 5.25s of 2045 at 3.46%, 4s of 2050 at 4.10% and 5.25s of 2050 at 3.61%, callable 4/1/2033.

The second tranche, $1.171 billion of refunding bonds, with 5s of 2025 at 2.42%, 5s of 2027 at 2.28%, 5s of 2033 at 2.44%, 5s of 2036 at 2.88%, 3.75s of 2042 at 3.85%, 5s of 2042 at 3.37% and 5s of 2042 at 3.40%, callable 4/1/2033.

Secondary trading
NYC 5s of 2024 at 2.48% versus 2.53% Thursday and 2.61% on 3/29. California 5.5s of 2025 at 2.39%. North Carolina 5s of 2026 at 2.31%-2.32%.

Florida BOE 5s of 2029 at 2.21% versus 2.23% Monday. NYC TFA 5s of 2029 at 2.22%-2.20%. New Hampshire 5s of 2030 at 2.19%.

Wake County, North Carolina, 5s of 2032 at 2.21% versus 2.26% Thursday. Triborough Bridge and Tunnel Authority 5s of 2032 at 2.26%-2.25%. New Hampshire 5s of 2033 at 2.27% versus 2.22% original on Thursday.

California 5s of 2052 at 3.51% versus 3.68%-3.70% on 3/23 and 3.68% on 3/15. Massachusetts 5s of 2052 at 3.66% versus 3.71% Friday and 3.79%-3.80% on 3/15.

AAA scales
Refinitiv MMD’s scale was bumped two to six basis points. The one-year was at 2.47% (-2) and 2.36% (-2) in two years. The five-year was at 2.19% (-2), the 10-year at 2.21% (-6) and the 30-year at 3.25% (-5) at 3 p.m.

The ICE AAA yield curve was bumped two to five basis points: 2.50% (-2) in 2024 and 2.39% (-2) in 2025. The five-year was at 2.15% (-3), the 10-year was at 2.21% (-4) and the 30-year was at 3.30% (-5) at 4 p.m.

The IHS Markit municipal curve was bumped two to six basis points: 2.45% (-2) in 2024 and 2.34% (-2) in 2025. The five-year was at 2.16% (-2), the 10-year was at 2.19% (-6) and the 30-year yield was at 3.24% (-5), according to a 4 p.m. read.

Bloomberg BVAL was bumped up two to four basis points: 2.42% (-2) in 2024 and 2.35% (-3) in 2025. The five-year at 2.15% (-3), the 10-year at 2.19% (-4) and the 30-year at 3.26% (-4) at 4 p.m.

Treasuries were firmer.

The two-year UST was yielding 3.842% (-13), the three-year was at 3.610% (-12), the five-year at 3.398% (-12), the seven-year at 3.385% (-9), the 10-year at 3.352% (-7), the 20-year at 3.731% (-4) and the 30-year Treasury was yielding 3.607% (-3) at 4 p.m.

Primary market
The San Francisco Public Utilities Commission (Aa2/AA/NR/NR) is set to price $998.56 million of wastewater revenue bonds Wednesday, consisting of $536.60 million of Series 2023A sewer system improvement program (SSIP) green bonds, $285.25 million of Series 2023B non-SSIP GOs and $176.72 million of Series 2023C SSIP refunding green bonds. BofA Securities.

Georgetown University (A3/A-//) is set to price on Wednesday $300 million of Series 2023 taxable fixed-rate bonds. Barclays Capital.

Durham County, North Carolina, (Aa1/AA+//) is set to price Wednesday $172.79 million of Series 2023A limited obligation refunding bonds with revenues pursuant to an installment financing agreement between Durham Financing Corp. and the county. PNC Capital Markets.

Plymouth-Canton Community Schools, Michigan (Aa2///) is set to sell $87.5 million school building and site GOs Wednesday. PFM Financial Advisors is the financial advisor; Miller Canfield is the bond counsel.

Christine Albano contributed to this story.

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