Municipals were steady throughout most of the curve ahead of a new-issue calendar of $6 billion. U.S. Treasuries were firmer and equities were mixed.
“Investors’ jitters in the lead up to next week’s Fed meeting resulted in some large macro market moves and a rise in volatility,” noted BofA Securities strategists in a weekly report.
The fed funds futures market pricing, “which only a week ago indicated a small probability of an extra hike after the Fed’s expected 25bp hike in May based on a stable environment, has now switched to a 25bp hike and done,” BofA strategists Yingchen Li and Ian Rogow wrote.
“Moreover, two Fed rate cuts are priced in for 2023, with the first in November. If so, that means the Fed will be on hold for nearly six months and then cut rates,” they said.
While the municipal market “felt quite strong” going into this week, “a one-two punch of renewed concerns about U.S. regional banks early on, and higher Treasury yields on the back of inflation concerns later this week have meaningfully dampened investor appetite,” Barclays strategists wrote in a weekly report. “On the back of this market volatility, [ratios] have continued to adjust higher, reaching the highest levels since mid-March for shorter maturities.”
The two-year muni-Treasury ratio Friday was at 66%, the three-year at 67%, the five-year at 67%, the 10-year at 68% and the 30-year at 92%, according to Refinitiv MMD’s 3 p.m. ET read. ICE Data Services had the two-year at 66%, the three-year at 67%, the five-year at 65%, the 10-year at 67% and the 30-year at 90% at 4 p.m.
Despite higher ratios, “there is still somewhat tepid demand for munis with maturities under 10 years as of late, as the yield curve is inverted all the way to 10 years, and to 12 years if one considers the Refinitiv MMD curve,” Barclays strategists Mikhail Foux, Clare Pickering and Mayur Patel said.
Looking at performance, munis underperformed again this week, with muni investment grade’s 47 basis points of total returns failing to keep pace with UST’s 108 basis points and corporates’ 82 basis points, BofA strategists said.
“Taxable munis performed strongly this week, outperforming tax-exempt munis by 83bp, govies by 22bp and corporates by 48bp.”
Over the last two weeks, taxables have outperformed, returning 15 basis points, “while both govies and corporates were modestly negative and tax-exempt munis lost 122 basis points of returns,” they said.
Tax-exempt muni IG “also underperformed [high-yield] this week by 25bp; that marks the first week HY outperformed IG since” the week ending February 15, they said.
“While HY is now besting IG for the last month by 8bp, IG is still outperforming HY for the YTD by 51bp,” they noted. “In total, muni IG gained just 26bp of returns over the last month, still good enough for about 30bp of outperformance versus govies but 61bp less than corporates and 62bp less than taxable munis.”
“Our view for munis remains the same: we expect a continued muni rates market rally and limited credit spread widening,” BofA said.
Unlike the Treasury curve, the muni AAA curve should “continue to flatten, possibly up to the initial months of the Fed’s rate cuts,” BofA said.
Barclays said the curve is “actually quite steep past the 10-year point and, if the Fed is getting close to the end of the hiking cycle, investors should be more comfortable with extending duration,” they said.
“There is some investor concern about the possible selling of longer-dated IG bonds by banks, which would likely steepen the yield curve even further,” they wrote.
“We do not lose our sleep over this; to us, it would be only a temporary dislocation,” the report said. “A sizable portion of this likely supply are securities with low coupons, which do not affect munis to the same degree as higher-coupon bonds.”
Barclays said the week’s moves made them a “little more cautious this week,” their overall outlook has not really changed.
“In our view, investors should continue adding municipal exposure, but they should do it slowly and preferably on weakness,” they said. “We continue to think that May-June should be relatively strong for our asset class, although we continue to keep a close eye on the latest developments around the debt ceiling, which could increase market nervousness and bring more volatility.”
Calendar stands at $6B
Investors will be greeted Monday with a new-issue calendar estimated at $5.986 billion.
There are $4.450 billion of negotiated deals on tap and $1.536 billion on the competitive calendar.
The negotiated calendar is led by $847 million of energy supply revenue bonds from Energy Southeast, Alabama, followed by $776 million of recently upgraded water revenue bonds from Chicago in two deals and $518 million of electric revenue funding bonds from Energy Northwest, Washington.
Long Beach USD, California, leads the competitive calendar, with $480 million of GOs in three deals, followed by $435 million of second lien sewer system revenue and refunding bonds from Portland, Oregon.
Minnesota 5s of 2024 at 3.00% versus 3.09% Thursday. North Carolina 5s of 2025 at 2.78% versus 2.82% Thursday. California 5s of 2025 at 2.76%-2.75% versus 2.72% Wednesday and 2.64% on 4/20.
NY Dorm PIT 5s of 2028 at 2.55%-2.51% versus 2.52% on 4/24. Maryland 5s of 2028 at 2.45%-2.44%. Washington 5s of 2030 at 2.42% versus 2.45% Thursday.
Baltimore County, Maryland, 5s of 2032 at 2.41%. DC 5s of 2034 at 2.46% versus 2.15% on 4/11. California 5s of 2036 at 2.87%-2.86% versus 2.89% Thursday and 2.88% on 4/21.
Oregon 5s of 2048 at 3.52%. Massachusetts 5s of 2052 at 3.77% versus 3.55% on 4/5.
Refinitiv MMD’s scale was unchanged: The one-year was at 3.00% and 2.69% in two years. The five-year was at 2.38%, the 10-year at 2.35% and the 30-year at 3.39% at 3 p.m.
The ICE AAA yield curve was cut on the short end: 3.03% (+5) in 2024 and 2.72% (+4) in 2025. The five-year was at 2.37% (flat), the 10-year was at 2.34% (-1) and the 30-year was at 3.39% (flat) at 4 p.m.
The IHS Markit municipal curve was unchanged: 2.99% in 2024 and 2.69% in 2025. The five-year was at 2.38%, the 10-year was at 2.35% and the 30-year yield was at 3.39%, according to a 4 p.m. read.
Bloomberg BVAL was little changed: 2.80% (-1) in 2024 and 2.68% (unch) in 2025. The five-year at 2.34% (unch), the 10-year at 2.34% (unch) and the 30-year at 3.40% (-1) at 4 p.m.
Treasuries were firmer.
The two-year UST was yielding 4.033% (-6), the three-year was at 3.742% (-7), the five-year at 3.502% (-10), the seven-year at 3.472% (-10), the 10-year at 3.430% (-9), the 20-year at 3.799% (-8) and the 30-year Treasury was yielding 3.671% (-8) at 4 p.m.
Primary to come:
Alabama’s Energy Southeast (A1//A+/) is set to price $846.8 million of fixed-rate and secured overnight fixed-rate energy supply revenue bonds Monday. Morgan Stanley & Co.
Washington State’s Energy Northwest (Aa2/AA-/AA/) is set to price $518.1 million of electric revenue and refunding bonds on behalf of Columbia Generating Station on Tuesday. JPMorgan Securities LLC.
Alabama’s Black Belt Energy Gas District (A2///) is set to price $471.3 million of gas project revenue bonds next week. Goldman Sachs & Co.
Chicago (/AA//AA+) is set to price $449.9 million of second lien water and wastewater revenue and revenue refunding bonds insured by Assured Guaranty Tuesday. Mesirow Financial Inc.
Chicago (/AA//AA+) is also set to price $326.3 million of senior lien wastewater transmission bonds insured by Assured Guaranty Municipal Corp. Tuesday. Serials 2029 to 2043, terms in 2048, 2053, 2058, and 2062. Stifel, Nicolaus & Co.
Minneapolis (A1/AA-/AA-/) is set to price $363 million of healthcare system revenue bonds on behalf of Allina Health System Tuesday. JPMorgan Securities LLC.
The Illinois Sales Tax Securitization Corp. is set to price $218.5 million of sales tax securitization bonds (/AA-/AA/AAA) with a forward delivery and second lien sales tax securitization bonds (/AA-/AA-/AA+) with a forward delivery on Monday. Serial bonds 2024 to 2035. RBC Capital Markets.
Johnson City, Tenn. Health & Educational Facilities Board (/A-/A/) is set to price $187.5 million of hospital revenue improvement and refunding bonds on behalf of Ballad Health on Thursday. Serial bonds 2024 to 2034, term in 2033. Banc of America Securities.
Oregon (Aa1/AA+/AA+/) is set to price $159 million of GO paper. Serial bonds 2024 to 2043, terms in 2043, 2048, 2053. UBS Financial Services.
The New York Transportation Development Corporation (Baa3///) is set to price $137.5 million of long-term taxable sustainability revenue bonds on Tuesday. Term in 2051 Citigroup Global Markets.
The Long Beach, Calif., Unified School District (Aa2/AA-//) is set to sell $480 million of general obligation bonds Tuesday. Serials 2023 to 2053.
Garland, Texas (/AA+/AAA/) is set to sell $130.5 million of taxable GO and GO refunding bonds, certificates of obligation, and water and sewer revenue refunding bonds Tuesday. Serials 2024 to 2043.
Portland, Ore., (Aa2/AA//) is set to sell $435.4 million of second lien sewer system revenue and refunding bonds on Wednesday. Serials 2023 to 2047.
Christine Albano and Lynne Funk contributed to this report.