Municipals were mixed in secondary trading after U.S. Treasuries dipped to lows not seen since the beginning of the year but rose as the afternoon progressed on mixed economic news. New issues fared well and another week of $2 billion-plus inflows were reported, bringing the total to nearly $60 billion for 2021.
Triple-A benchmarks were little changed to firmer in spots on the short end after the up-and-down UST ride.
"Some rather hawkish comments made by Fed Vice Chairman Richard Clarida generated selling pressure throughout much of the Treasury curve, with munis holding steady throughout most of the tax-exempt curve,” said Jeffrey Lipton, managing director of municipal credit at Oppenheimer & Co.
The institutional need to get invested means municipals are in demand with some sacrifice over structure and credit quality, especially given current seasonal conditions as new-issue supply cannot fill the demand void left by maturing securities, bond redemptions, and coupon payments, he said.
"While retail investors have been displaying some resistance given frothy bond prices and a relatively greater degree of luxury to be more discerning when it comes to the search for value, it would seem that the largest outlet for the asset class is signaling that all that really matters is that municipal bond mutual fund flows have now been positive for 21 consecutive weeks,” Lipton said. "Against this backdrop, the new-issue market remains strong with sufficient investment outlets as money gets put to work.”
The Investment Company Institute reported another week of inflows, $2.639 billion for the week ending July 28, up from $1.881 billion the week prior. The fund complex hit its 21st consecutive week of inflows.
Exchange-traded funds saw $623 million of inflows versus $458 million the week before.
Total assets held now total $59.94 billion year-to-date, according to ICI.
“There is so much cash that has been coming into muni funds over the past two months, people just need to put the money to work,” said Howard Mackey, managing director at NW Financial Group LLC in Hoboken, New Jersey.
Bond Buyer data shows 30-day visible supply at $6.45 billion. And with most participants expecting up to $70 billion of investible cash, the scarce supply “should have a fairly good impact on demand” going forward, he said.
“Munis in general are doing very well in the first 12 to 15 years,” Mackey said. “There is a lot of demand in that part of the curve and we have seen MMD post some significant gains and lower yields over the past couple of weeks.”
“I think combined with the strong inflows, that particular trend is going to continue,” he added.
While munis are still outperforming year-to-date, the performance spread to UST continues to narrow, Oppenheimer's Lipton noted.
"If it were not for compelling seasonal technicals highlighted by strong product demand, we suspect that munis would be underperforming UST by a wider margin,” he said.
Mackey said while the ratio of municipals to Treasuries is stable, it could still be a little rich for some investors’ taste. “Some large arbitrage firms have come into the market and passed on tax-exempts because of the rich ratios,” he said.
"With munis quite rich to Treasuries this is toward the richer part of that relationship,” Mackey said. "It hasn’t seemed to hurt munis, but it has kept some buyers away from munis."
Municipal-to-UST ratios were little changed. ICE Data Services showed the 10-year muni/UST ratio at 71% and the 30-year at 74%. Refinitiv MMD had ratios at 70% in 10 years and 75% in 30.
Meanwhile, other conservative investors are trying to guard their portfolios and position themselves for future market movement, he noted.
“Some investment management funds tend to be more conservative — they will buy on the shorter end of the curve because if and when we get a reversal, the shorter the duration, the better your defense in terms of a down market,” Mackey said.
There is a noticeable demand for higher coupon bonds with 4% to 5% coupons, he added, because they are defensive in a down market.
“Once the market reverses, the impact won't be as great on their portfolios as opposed to buying lower coupon, par bonds,” Mackey said.
In the primary, the New York City Transitional Finance Authority (Aa1/AAA/AAA/) priced for institutions $930.895 million of future tax-secured subordinate refunding bonds: 3s and 5s of 2022 at 0.08%, 4s and 5s of 2026 at 0.47%, 5s of 2031 at 1.04%, 4s of 2036 at 1.42%, 3s of 2038 at 1.73% and 4s of 2038 at 1.48%.
The TFA sold $117.945 million of taxables to Jefferies: bonds in 2024 priced at 0.45% at par and at 0.85% in 2025 at par.
Jefferies LLC priced for the California Municipal Finance Authority Special Finance Agency VII $138.75 million of essential housing revenue senior bonds (The Breakwater Apartments): 3s of 2056 at 2.58% and $78 million of junior bonds: 4s of 2047 at 2.75%.
Barclays Capital Inc. priced for the Industrial Development Authority of Pima County, Arizona, (/A//) $174.275 million of Tucson Medical Center revenue refunding bonds: 5s of 2031 at 1.12%, 4s of 2036 at 1.54%, 4s of 2041 at 1.74%, 4s of 2046 at 1.84% and 3s of 2051 at 2.23%; $21 million of taxables at par: 2025, 1.20%, 2026, 1.40%, 2030, 2.00%.
Stifel, Nicolaus & Company, Inc. priced for Whittier, California, (/AA//) $133.895 million of taxable pension obligation bonds: priced at par, 2022 at 0.212%, 2026 1.069%, 2031 1.974%, 2036 2.634%, 2041 2.881% and 2046 2.961%.
Virginia Beach (Aaa/AAA/AAA/) sold $94.9 million of general obligation public improvement bonds to J.P. Morgan Securities: 5s of 2022 at 0.05%, 5s of 2026 at 0.36%, 5s of 2031 at 0.85%, 2s of 2036 at 1.82% and 2s of 2041 at 2.04%.
Secondary trading and scales
Loudoun County, Virginia, 5s of 2024 at 0.10%. Maryland Department of Transportation 5s of 2024 at 0.13%. Maryland 4s of 2025 at 0.21%-0.20% versus 0.22% Tuesday.
Georgia 5s of 2032 at 0.88%. Washington 5s of 2032 at 0.97%.
Austin, Texas, 5s of 2035 at 1.04%. Washington 5s of 2037 at 1.15%. University of Washington 5s of 2038 at 1.29%.
Fairfax County, Virginia, water 4s of 2044 at 1.46%-1.45%. Los Angeles DWP 5s fo 2046 at 1.43%-1.42%. NYC water 5s of 2050 at 1.55%.
According to Refinitiv MMD, yields sat at 0.05% in 2022 and down one to 0.05% in 2023. The yield on the 10-year sat at 0.82% while the yield on the 30-year stayed at 1.39%.
ICE municipal yield curve saw bonds steady at 0.04% in 2022 and to 0.04% in 2023. The 10-year maturity was steady at 0.85% and the 30-year yield at 1.38%.
The IHS Markit municipal analytics curve saw the one-year steady at 0.05% and the two-year at 0.06%, with the 10-year fall two basis points to 0.81%, and the 30-year yield steady at 1.37%.
Bloomberg BVAL saw levels at 0.03% in 2022 and 0.03% in 2023, both down one, while the 10-year sat at 0.82% and the 30-year at 1.36%.
Treasuries were back to Tuesday levels while equities were mixed. The 10-year Treasury was yielding 1.175% and the 30-year Treasury was yielding 1.832% in late trading. The Dow Jones Industrial Average lost 271 points or 0.77%, the S&P 500 fell 0.32% while the Nasdaq gained 0.20%.
Informa: Money market muni funds fall
Tax-exempt municipal money market fund assets fell by $338 million, lowering their total to $91.57 billion for the week ending August 3, according to the Money Fund Report, a publication of Informa Financial Intelligence.
The average seven-day simple yield for the 157 tax-free and municipal money-market funds rose to 0.02% from 0.01% the previous week.
Taxable money-fund assets rose by $2.72 billion, bringing total net assets to $4.355 trillion. The average, seven-day simple yield for the 763 taxable reporting funds rose to 0.03% from 0.02% the prior week.
Delta blues
With all eyes on Friday’s employment report, since several additional strong months of gains are needed for the Federal Reserve to be comfortable announcing a tapering of its asset purchases, Wednesday’s news could signal trouble.
Missing expectations, 330,000 jobs were added in the private sector in July, according to ADP, and the June number was revised down to a 680,000 increase from the initially reported 692,000 gain.
Economists polled by IFR Markets expected 700,000 jobs added.
“ADP’s July reading showed a clear deceleration in the pace of job growth relative to June,” said Wilmington Trust Chief Economist Luke Tilley and Senior Economist Rhea Thomas. They expect Friday’s employment report will show 350,000 jobs added in July, well below the 900,000 predicted by economists polled by IFR.
“Labor supply remains very tight, posing challenges to firms’ efforts to increase staff,” they said. “The acceleration in cases and headlines due to the Delta variant of COVID-19 arose mostly after the cutoff data for this jobs report so is not likely to have an impact this month, but it poses a risk in the August figures.”
“The big miss with the ADP raised concerns that the Delta variant is having a bigger impact on the economy,” said Ed Moya, senior market analyst for the Americas at OANDA. “The labor market recovery is extremely uneven and suggests the economy continues to struggle in matching individuals up with the current job vacancies.”
But, Moya said, seasonal factors could come into play, so “investors should not be stunned if the private payrolls portion of the NFP report does come near the 718,000 estimate.”
And the expiration of the added unemployment benefits, which has occurred in almost half the states, “will not be an immediate panacea for labor shortages,” Tilley and Thomas said. “Despite unemployment insurance claims slowing notably in states with an early curtailment of benefits, today’s data suggests that it may take time for workers to find jobs even after their benefits expire. Concerns about the virus, particularly with the Delta variant, and caregiving issues may also keep the pace of job growth moderate, particularly as demand in service industries like leisure and hospitality may moderate as we move into fall and winter months.”
Respondents to the Institute for Supply Management services survey mentioned in comments that labor issues remain, although the index set a record in July.
Despite the record 64.1 reading, “price pressures and shortages remain challenges for businesses. New orders, production and employment all strengthened as did costs,” said David Donabedian, CIO of CIBC Private Wealth Management. “The report is indicative of broad strength in the economy, with all 17 industries surveyed reporting growth in July.”
The index was 60.1 in June and economists projected a 60.4 read.
The business activity/production index rose to 67.0 from 60.4, while the employment index gained to 53.8 from 49.3 and prices grew to 82.3 from 79.5.
“This report supports a taper announcement at Jackson Hole,” said OANDA’s Moya, “which makes Friday's nonfarm payroll the most important economic data point of the month.”
Primary market to come
Mt. San Antonio Community College District, California, (Aa1/AA//) is set to price on Thursday $227.975 million of general obligation bonds. RBC Capital Markets.
Eagle Mountain-Saginaw Independent School District, Texas, (Aaa//AAA/) (PSF guarantee) is set to price $177.18 million of unlimited tax school building bonds, serials 2022-2041, term 2046, 2051. HilltopSecurities.
Chapman University (A2///) is set to price $175 million of taxable bonds, serials 2026-2036, terms 2041, 2051 on Thursday. Wells Fargo Corporate & Investment Banking.
Clifton, New Jersey, Board of Education is set to sell $168.282 million of general obligation unlimited tax school bonds at 11 a.m. eastern Thursday.
The South Carolina State Housing Finance and Development Authority (Aaa///) is set to price on Thursday $166 million of non-AMT mortgage revenue bonds, serials 2022-2033, terms 2036, 2041, 2046, 2052. Citigroup Global Markets Inc.
The Arizona Industrial Development Authority (A1/A//A+) is set to price on Thursday $151.995 million of Phoenix Children’s Hospital forward delivery bonds. BofA Securities.
The Temple College District, Texas, (/AA-//) is set to price $110.33 million of limited tax bonds. Piper Sandler & Co.
The city of Little Rock, Arkansas, (Aa3///) is set to price $108.895 million of taxable Water Reclamation System refunding revenue bonds, serials 2024-2035, term 2037. Crews & Associates, Inc.
The Department of Veterans Affairs of the state of California (Aa3/AA/AA-/) is set to price $108.565 million of taxable home purchase revenue refunding bonds, serials 2022-2026, 2034-2036, term 2040. Academy Securities.
Gary Siegel contributed to this report.
