Constructive secondary trading and an active primary pushed triple-A muni yields lower on the back of a U.S. Treasury flight-to-safety rally after Federal Reserve Chair Jerome Powell acknowledged for the first time that it was "certainly a possibility" the U.S. economy may face a recession as the Fed continues to contend with inflation.
“Inflation has obviously surprised to the upside over the past year, and further surprises could be in store," Powell said during a Senate Finance Committee hearing.
Municipals saw yields fall three to four basis points across the yield curve, with larger moves on the front end while UST yields plummeted as much as 17 basis points.
Ratios rose as a result of the municipal underperformance. Muni-UST ratios on Wednesday were at 72% in five years, 91% in 10 years and 103% in 30, according to Refinitiv MMD's 3 p.m. read. ICE Data Services had the five at 73%, the 10 at 90% and the 30 at 102% at a 3:30 p.m. read.
The Investment Company Institute reported investors pulled $6.243 billion from muni bond mutual funds in the week ending June 15, up from $2.247 billion of inflows in the previous week. This is the third-largest figure for 2022.
The primary was particularly active Wednesday.
In the competitive market, Georgia (Aaa/AAA/AAA/) sold $259.590 million of tax-exempt general obligation bonds, Series 2022A, Bidding Group 1, to BofA Securities with 5s of 7/2023 at 1.67%, 5s of 2027 at 2.35%, 5s of 2032 at 2.91% and 5s of 2034 at 3.04%, callable in 7/1/2032.
The state also sold $263.475 million of tax-exempt general obligation bonds, Series 2022A, Bidding Group 2, to BofA Securities with 5s of 7/2035 at 3.07%, 4s of 2037 at 3.48% and 4s of 2042 at 3.69%, callable in 7/1/2032.
Georgia sold $226.595 million of tax-exempt general obligation refunding bonds, Series 2022C, Bidding Group 4, to Wells Fargo Bank with 4s of 7/2027 at 2.36% and 5s of 2032 at 2.91%, noncall, as well.
The state also sold $186.565 million of taxable general obligation bonds, Series 2022B, to J.P. Morgan, with 2.92s of 7/2023 at par, 3.43s of 2027 at par, 3.81s of 2032 at par, 4.16s of 2037 at par and 4.6s of 2042 at 4.55%, callable in 7/1/2032.
New Mexico (Aa2/AA-/) sold $260.900 million of severance tax bonds, Series 2022A, to Morgan Stanley & Co., with 5s of 7/2023 at 1.77%, 5s of 2027 at 2.48% and 5s of 2032 at 3.06%.
In the negotiated market, Citigroup Global Markets priced for the National Finance Authority, New Hampshire, (/BBB///) $313.122 million of social municipal certificates, Series 2022-1 Class A, with 4.375s of 9/2036 at 4.867%.
Citigroup Global Markets also priced for the authority $313.122 million of social municipal certificates, Series 2022-1 Class X, with 0.334s of 9/2036 at 6.326%.
Wells Fargo Bank priced for the Commonwealth Transportation Fund, Massachusetts, (Aa1/AA+//AAA/) $350 million of Rail Enhancement Program revenue bonds.
The first tranche, $200 million of sustainability bonds, 2022 Series A, saw 5s of 6/2050 at 3.88%, callable in 6/1/2031. The second tranche, $150 million of bonds, 2022 Series B, saw 5s of 6/2052 at 3.90%, callable in 6/1/2032.
Morgan Stanley & Co. priced for the Metropolitan Water District of Southern California (Aa1/AAA//) $279.570 million of water revenue refunding bonds, 2022 Series A, with 5s of 10/2023 at 1.80%, 5s of 2027 at 2.37%, 5s of 2032 at 2.97% and 5s of 2036 at 3.28%.
Wells Fargo Bank priced for Charleston, South Carolina, (Aaa/AAA//) $151.190 million of waterworks and sewer system capital improvement revenue bonds, Series 2022, with 5s of 1/2026 at 2.28%, 5s of 2032 at 2.96%, 5s of 2037 at 3.35%, 5s of 2042 at 3.55%, 5s of 2047 at 3.66% and 5s of 2052 at 3.75%, callable in 7/1/2032.
BofA Securities priced for the Northern Virginia Transportation Commission (Aa1/AA//) $115.67 million of transportation district special obligation revenue bonds, Series 2022, with 5s of 6/2023 at 5s of 1.74%, 6/2027 at 2.44%, 5s of 2032 at 3.08%, 5s of 2037 at 3.54%, 5s of 2042 at 3.74%, 5s of 2047 at 3.84% and 5s of 2052 at 3.91%, callable in 6/1/2032.
Fundamentals have been overwhelmed by a rising-rate environment and then exacerbated by negative fund flows, said John Miller, head of municipals at Nuveen.
Muni returns year-to-date have all been about rates, flows and technicals, and fundamentals have taken a backseat temporarily, he said during a media roundtable in New York on Wednesday.
“We made a huge adjustment and opened up a lot of value given high inflation rates,” he said.
Triple-A longer duration bonds have adjusted more than 200 basis points in many cases, while taxable equivalent yieldsare extremely high as a result.
“At these at these levels, even incorporating the Fed-driven environment that we're in, the adjustment has been both on an absolute basis and a relative basis,” he said.
Muni-UST ratios on the long end started at around 70% percent at the start of the year, but those ratios have risen since then, with the 30-year ratio hitting 110% a few weeks back. Ratios have since fallen, but a 100% ratio on the long end is still extremely attractive, Miller said.
“We can produce a lot more attractive cash flow and reliable dividends as a result, which have been attractive to people in the past and getting them comfortable for the second half of the year,” he said.
The massive outflows from municipal bond mutual funds have led to a softer technical environment in the first half of the year. However, Miller said, “there’s a lot of outperformance that munis can generate for us for the second half of the year.”
“Bonds don't have to rally, but we just need a little bit of stability during this new trading range, on the 10-year, on the forecast for Fed funds, that would be enough to get the confidence to push back,” he said.
Last week started roughly due to the fixed income market’s anticipation of the Fed’s three-quarter-point rate hike, said Matt Fabian, a partner at Municipal Market Analytics.
And while USTs recovered “much of that loss by Friday,” tax-exempt munis could not, with “yields holding nearly in place amid another large weekly mutual fund outflow,” he said. As a result, muni-UST ratios rose.
The MMA Consensus benchmark curve “thus retraced and re-lost” around 85% of its long-end rally since mid-May and about 75% at the front end. He said this is “dispiriting but not disconnected from expectations. He noted the expectations are “heightened volatility (for lack of dealer investment in inventory and a prevalence of low coupon bonds), a dependence on fund flows (both for price discovery and secondary market supply), and a widespread if reasonable caginess among retail-facing managers worried about buying into a loss.”
Heightened volatility, he said, was “strongly in evidence last week despite an only moderate total flow of customer-sold par, any accounts that had been receptive to buying low coupons was probably among the sellers; 3s in particular saw widespread capitulation.”
The fund flow element, he said, hasn’t improved either. ICI reported $6.2 billion of outflows for the week ending June 15 versus Lipper’s $5.6 billion of outflows last Thursday. These figures indicate munis “will simply not stabilize until the mutual funds can do so first,” he said.
“On the other hand, investors who missed their opportunity to add cheap tax-exempt positions in May now have another, even if that means addressing element number three head-on,” Fabian said.
“Finally, also as expected, high yield continues to fare worse, related fund NAVs are down 16-18% [year-to-date], a seasonal uptick in defaults is ongoing, and disrupted taxable [high-yield] markets are complicating marketing efforts to regain investor interest and assets,” he added.
Muni prices, he said, “could use an injection of high-grade supply in 4s and 5s to stabilize price discovery and reassure investors.”
Informa: Money market muni assets rise again
Tax-exempt municipal money market funds continued a nine-week inflow streak as $217.7 million was added the week ending June 21, bringing the total assets to $102.29 billion, according to the Money Fund Report, a publication of Informa Financial Intelligence.
The average seven-day simple yield for all tax-free and municipal money-market funds rose 0.14% to 0.44%.
Taxable money-fund assets lost $26.28 billion to end the reporting week at $4.374 trillion of total net assets. The average seven-day simple yield for all taxable reporting funds rose 0.38% to 0.89%.
Secondary trading
New York MTA 5s of 2023 at 2.04%. California 5s of 2023 at 1.55%.
New York City 5s of 2027 at 2.51%-2.50%. Georgia 5s of 2027 at 2.38%. Gwinnett County, Georgia, SD 5s of 2027 at 2.40%. LA DWP 5s of 2027 at 2.44%.
Boston 5s of 2030 at 2.73%. New York City waters 5s of 2032 at 3.09%-2.98%. Maryland 5s of 2033 at 3.00% versus 3.08% a week ago and 2.63% original.
Washington 5s of 2034 at 3.27%-3.26%. California 5s of 2035 at 3.33%-3.32%. Oregon 5s of 2040 at 3.46%. California 5s of 2042 at 3.64%. New York City waters 5s of 2048 at 3.90%-3.89%.
AAA scales
Refinitiv MMD’s scale was bumped three to four basis points at the 3 p.m. read: the one-year at 1.68% (-4) and 2.02% (-4) in two years. The five-year at 2.33% (-3), the 10-year at 2.88% (-3) and the 30-year at 3.35% (-3).
The ICE municipal yield curve was bumped three to four basis points: 1.72% (-3) in 2023 and 2.04% (-3) in 2024. The five-year at 2.37% (-3), the 10-year was at 2.82% (-3) and the 30-year yield was at 3.31% (-4) at a 4 p.m. read.
The IHS Markit municipal curve was bumped three basis points: 1.72% (-3) in 2023 and 2.06% in 2024 (-3). The five-year at 2.33% (-3), the 10-year was at 2.89% (-3) and the 30-year yield was at 3.35% (-3) at 4 p.m.
Bloomberg BVAL was bumped two to three basis points: 1.73% (-2) in 2023 and 2.01% (-2) in 2024. The five-year at 2.35% (-2), the 10-year at 2.86% (-3) and the 30-year at 3.34% (-3) at a 4 p.m. read.
Treasuries rallied.
The two-year UST was yielding 3.059% (-14), the three-year was at 3.195% (-15), the five-year at 3.229% (-13), the seven-year 3.240% (-13), the 10-year yielding 3.157% (-13), the 20-year at 3.498% (-9) and the 30-year Treasury was yielding 3.247% (-9) at 4 p.m.
Primary to come:
Los Angeles, California, is set to price Thursday $1.572 billion of 2022 tax and revenue anticipation notes, serial 2023. Citigroup Global Markets.
The Fred Hutchinson Cancer Center, Washington, (A2//A+/) is set to price Thursday $300 million of taxable corporate CUSIPs, Series 2022, term 2052. Barclays Capital.
The Palm Beach County Health Facilities Authority, Florida, (/BBB-/BBB/) is set to price Thursday $164.745 million of Juniper Medical Center Project hospital revenue bonds, Series 2022, consisting of $140.235 million, Series A, serials 2028-2042, terms 2047 and 2052 and $24.510 million, Series B, serials 2028-2043. RBC Capital Markets.
Gallatin County, Montana, is set to price Thursday $160 million of taxable sustainability Bridger Aerospace Group Project industrial development revenue and revenue refunding, Series 2022. D.A. Davidson & Co.
Broward County, Florida, (A1///) is set to price Thursday $127.610 million of AMT port facilities revenue bonds, Series 2022, serials 2024-2052. RBC Capital Markets.
The Rockwall Independent School District, Texas, is set to price Thursday $114.615 million of unlimited tax school building bonds, Series 2022A. Piper Sandler & Co.
Competitive:
Nassau County, New York, (A1/AA-/A/) is set to sell $245.180 million of general obligations general improvement bonds, 2022 Series A, at 10 a.m. eastern Thursday.
