Municipals were steady throughout most of the curve, though the front end did see smaller cuts on Friday to close out week that saw a significant correction for the asset class, while U.S. Treasuries were weaker, and equities ended down.
It was too-rich ratios, too much outperformance to taxables and too much supply this week that put a halt to the rally for munis. Triple-A yields saw large cuts to scales throughout the week, leaving the two-year upward of 30 basis points higher than a week ago, the 10-year around 25 basis points higher and the 30-year up 20-plus, depending on the scale.
Ratios rose as a result. The two-year muni-Treasury ratio Friday was at 61%, the three-year at 63%, 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 64%, three-year at 65%, the five-year at 64%, the 10-year at 67% and the 30-year at 92% at 4 p.m.
A week ago, the two-year was at 54%, the 10-year at 60% and the 30-year at 85%, according to Refinitiv MMD while ICE Data Services had the two-year at 58%, the 10-year at 61% and the 30-year at 88%.
After weeks of outperformance, the muni market corrected this week, "with yields of [investment-grade] and some of the liquid [high-yield] benchmarks moving up 25-35bp in a hurry, while Treasuries were largely unchanged," Barclays strategists Mikhail Foux, Clare Pickering and Mayur Patel said in a weekly report.
As munis did very well during the market turbulence in March, outperforming Treasuries during and after that volatility subsided, the asset class became "a victim of their own success, muni high-grade valuations have become quite unattractive."
With the significant increase in yields this week, munis "finally broke their winning sequence," BofA strategists said in a weekly report.
Barclays strategists noted it's hard to pinpoint one "specific reason for this significant underperformance," but believe it was "a combination of a sharp move up in Treasury yields early in the week and richness of high-grade municipal valuations, coupled with heavier supply."
The "high-grade market has become much more attractive, at least compared with its recent valuations, although it is still hard to call it very cheap at the moment," they said.
BofA strategists argued the main catalyst was rich muni-UST ratios, but "the persistent Treasury market selloff, muni mutual fund outflows and a large muni new-issuance calendar this week" also played a role.
"This can be considered an acknowledgment of the nearly 40bp 10-year Treasury yield backup over the past two weeks," the BofA report said. "Once the range-bound Treasury yield selloff ends, muni yields should decline again."
Barclays strategists see this market "correction as a reset to more normal levels, and have become much more positive on the muni market prospects going forward, as technicals will remain supportive."
Summer redemptions are "looming large and are quite sizable; supply should pick up, but will not overwhelm; and with the Fed inching closer to the end of the tightening cycle, rates are unlikely to come under significant pressure," Barclays said.
Muni credit spreads "widened to their highest levels in this cycle by early April, and narrowed only a few basis points in recent days," according to BofA strategists.
They were cautious on muni credit spreads in March "based on the view that the regional banking problem was expected to put some pressure on the economy going forward." Their view is unchanged.
"Muni credit spreads may still widen some if the economy weakens significantly," but they said they need to see "what happened in corporate credit spreads as well as muni credit spreads, historically."
Muni credit spreads' new widening "may simply represent the typical time lag, which is now six months after corporate credit spreads reached their wides in October," BofA strategists noted.
Their narrowest levels were reached in late 2021, "six months after corporate credit spreads did as well (which were the narrowest in early July 2021)," they said.
Overall, BofA strategists said "BBB-rated muni index spreads to the AAA-rated index widened approximately 90bp since the low, about 20bp away from a typical widening cycle except for the two deep recessions of 2008/2009 and 2020."
"The widening in the current cycle may well resemble that of 2003 or even 2013, a phenomenon every 10 years," they said. "If the Fed does work out a soft landing, there are good reasons to expect a better outcome given what corporate credit spreads seem to suggest."
Calendar stands at $7.2B
Investors will be greeted Monday with a new-issue calendar estimated at $7.208 billion.
There are $4.236 billion of negotiated deals on tap and $2.972 billion on the competitive calendar.
The negotiated calendar is led by $585 million of taxable corporate CUSIPs from Providence St. Joseph Health Obligated Group, followed by $442 million of GOs from Columbus, Ohio.
Two bellwether names lead the competitive slate. Washington will come with $1.3 billion of GO refunding bonds in four deals, followed by Delaware with $397 million of GOs in two deals.
Thirty-day visible supply sits at $12.15 billion, per Bond Buyer data.
Secondary trading
Texas 5s of 2024 at 2.95%. Washington 5s of 2025 at 3.01%-3.00%. Maryland 5s of 2025 at 2.65%.
Frederick County, Maryland, 5s of 2027 at 2.49%-2.46%. NYC 5s of 2028 at 2.54%.
Wisconsin 5s of 2032 at 2.43%. Triborough Bridge and Tunnel Authority 5s of 2032 at 2.46%. Texas A&M University System 5s of 2034 at 2.57%,
South Carolina 5s of 2040 at 3.15%. NYC TFA 5s of 2042 at 3.58%.
AAA scales
Refinitiv MMD's scale was cut three basis points at one-year: The one-year was at 2.80% (+3) and 2.56% (unch) in two years. The five-year was at 2.36% (unch), the 10-year at 2.36% (unch) and the 30-year at 3.40% (unch) at 3 p.m.
The ICE AAA yield curve was cut up to three basis points: 2.86% (+3) in 2024 and 2.66% (+2) in 2025. The five-year was at 2.36% (+1), the 10-year was at 2.35% (flat) and the 30-year was at 3.43% (flat) at 4 p.m.
The IHS Markit municipal curve was cut at the one-year: 2.78% (+3) in 2024 and 2.56% (unch) in 2025. The five-year was at 2.36% (unch), the 10-year was at 2.35% (unch) and the 30-year yield was at 3.40% (unch), according to a 4 p.m. read.
Bloomberg BVAL was little changed: 2.68% (+1) in 2024 and 2.57% (unch) in 2025. The five-year at 2.30% (unch), the 10-year at 2.33% (unch) and the 30-year at 3.40% (unch) at 4 p.m.
Treasuries were weaker.
The two-year UST was yielding 4.190% (+3), the three-year was at 3.891% (+2), the five-year at 3.662% (+3), the seven-year at 3.616% (+3), the 10-year at 3.570% (+3), the 20-year at 3.905% (+4) and the 30-year Treasury was yielding 3.775% (+3) at 3:30 p.m.
Primary to come
The Providence St. Joseph Health Obligated Group (A2/A/A/) is set to price Wednesday $585 million of taxable corporate CUSIPs, Series 2023. Morgan Stanley.
Columbus, Ohio, (Aaa/AAA/AAA/) is set to price Thursday $441.760 million of tax-exempt and taxable GOs, consisting of $320.215 million of Series 2023A, serials 2024-2043; $25.125 million of Series 2023B, serials 2024-2038; $23.960 million of Series 2023C, serials 2024-2041; $51.750 million of Series 2023D, serials 2024-2038; $5.325 million of Series 23-1, serials 2025, 2029; and $15.385 million of Series 23-2, serials 2024, 2026-2029. BofA Securities.
The Ohio Water Development Authority (Aaa/AAA//) is set to price Wednesday $339.030 million of Ohio Water Pollution Control Loan Fund refunding revenue bonds, Series 2023A, serials 2024-2032. Ramirez & Co.
The Virginia Port Authority (Aa1/AA+/AA+/) is set to price Wednesday $201.465 million of non-AMT Commonwealth Port Fund revenue bonds, consisting of $149.145 million of new bonds, Series 2023A, serials 2032-2048, and $52.320 million of refunding bonds, Series 2023B, serials 2028-2036. Wells Fargo Bank.
Norfolk, Virginia, (Aa2/AAA//) is set to price Tuesday $183.350 million, consisting of $168.270 million of general obligation capital improvement and refunding bonds, Series 2023A, and $15.080 million of general obligation capital improvement bonds, Series 2023B. Morgan Stanley & Co.
The Greater Asheville Regional Airport Authority (Baa2///A+/) is set to price Thursday $175 million of AMT airport system revenue bonds, Series 2023, serials 2027-2043, terms 2048, 2053. Siebert Williams Shank & Co.
The New York State Environmental Facilities Corporation (Aaa/AAA/AAA/) is set to price Tuesday $149.125 million of green 2010 Master Financing Program state revolving funds revenue bonds, Series 2023A, serials 2023-2036, 2043, terms 2037-2042. Loop Capital Markets.
The Oregon Department Of Administrative Services (Aa2/AAA//AAA/) is set to price Tuesday $148.100 of tax-exempt Oregon State Lottery revenue bonds, 2023 Series A, serials 2024-2025, 2033-2043. Citigroup Global Markets.
Hartford, Connecticut, (Aa3/AA-//) is set to price Wednesday $124.090 million of special obligation refunding bonds, Series 2023, serials 2024-2033. Siebert Williams Shank & Co.
The Albuquerque Municipal School District No. 12, New Mexico, (/AA//) is set to price Wednesday $117 million, consisting of $70 million of Series A and $47 million of Series B. Stifel, Nicolaus & Co.
Nassau County, New York, (Aa3/AA-/A+/) is set to price Tuesday $114.860 million of general obligation refunding general improvement bonds, 2023 Series B. J.P. Morgan Securities.
Richardson, Texas, (Aaa/AAA//) is set to price Monday $101.465 million of GOs, Series 2023, consisting of $47.905 million of Series GO, serials 2024-2043; $44.560 million of Series COBS, serials 2024-2043; and $9 million of Series TXBL, serials 2024-2043. Stifel, Nicolaus & Co.
Competitive
Union County, North Carolina (Aaa/AAA/AAA/) is set to sell $134.405 million of general obligation school bonds at 11 a.m. eastern Tuesday.
Delaware (/AAA//) is set to see $362.84 million of general obligation bonds at 11 a.m. eastern and $34.115 million of GOs at 11:30 a.m.
Washington (Aaa/AA+/AA+/) is set to sell $1.332 billion Wednesday: $206.325 million of various purpose general obligation refunding bonds at 11:15 a.m. eastern; $289.26 million of various purpose GO refunding bonds at 10:45 a.m. eastern; $327.32 million of various purpose GO refunding bonds at 10:15 a.m. eastern and $509.68 million of motor vehicle fuel tax and vehicle related fees general obligation refunding bonds at 11:45 a.m. eastern.
