Municipals were firmer to end the month, but underperformed a U.S. Treasury rally following cooler-than-expected inflation data that fueled recession fears. Equities sold off leading to the S&P 500 closing with the worst first half performance since the 1970s.
"A global central bank effort to fight inflation is driving rising recession fears that has given Wall Street the worst half of the year since 1970," said Edward Moya, senior market analyst at OANDA. "Added volatility from the final trading day of the quarter is especially crazy because so many investors are rebalancing their portfolios with recession stocks."
Municipals will end June and the first half of 2022 in the red, also marking one of the worst first-half performances the asset class has seen in decades.
Municipal yields fell three to seven basis points butunderperformed the moves in UST on Thursday. Muni-UST ratios were at 73% in five years, 91% in 10 years and 102% in 30, according to Refinitiv MMD's 3 p.m. read. ICE Data Services had the five at 74%, the 10 at 92% and the 30 at 102% at a 4 p.m. read.
Investors pulled more from municipal bond mutual funds, with Refinitiv Lipper reporting $1.3 billion of outflows, down from the $1.6 billion the week prior and bringing the total to $47 billion year-to-date.
High-yield saw $15.4 million of outflows after $415.8 million of outflows the week prior. Exchange-traded funds saw inflows to the tune of $476.4 million.
Poor performance doesn't let up
“June’s municipal results were less damaging than April’s, but all-in-all the quarter has been challenging on many fronts,” noted Kim Olsan, senior vice president at FHN Financial.
Bids-wanteds volumes surged 50% to a daily figure of $1.56 billion on fund outflows (ICI data) that increased 250% from Q1 levels, Olsan noted.
“To say liquidity was compromised doesn’t tell the whole story — but the takeaway is a yield set that is much more buyer-friendly than was the case in 2021,” Olsan said.
As of Wednesday, the Bloomberg municipal index saw losses of 1.93% and 9.25% for the first half of 2022.
“There is no common-era comparison — however, the conditions of post-March 2020 and through 2021 represented historic financing opportunities for issuers and less-than-ideal conditions for investors,” Olsan said.
This year has decidedly moved to a buyer's market.
“Given the evolving outlook for the economy, buyer interest in quality of rating over quantity of spread has hindered the revenue sector,” Olsan said.
The revenue sector’s loss for June will exceed that of general obligations by more than 50 basis points and the year-to-date return moves to more than 100 basis points of underperformance against GOs (revenue bonds with a YTD loss of 10%), she notes.
“Shorter durations were more heavily favored during June as buyers take a wait-and-see approach during the tightening cycle,” Olsan said. A short-term index will close out June with a flat return and has a modest 1.2% loss this year.
Intermediate bonds gave up 1.3% during the month and have lost 8.5% in 2022, while long-durations fared the worst losing 4.3% in June.
“Generic yields in both ranges will close out June up about 175 basis points from December’s close,” Olsan said.
Of particular note in longer maturities is the nuance of sub-5% couponing that prevailed in the last few years, she said. Olsan pointed to data from Refinitiv MMD that show 25-year 3s have widened out 30 basis points since January and 25-year 4s are now wider by 34 basis points.
Taxables are down 0.85% for June and 14.53% in the first half, per the Bloomberg index. Taxable muni returns are not being helped by the
Taxable muni losses compares to the Bloomberg Barclay’s U.S. Aggregate and Treasury indices that are down 9%-10% (albeit with shorter duration models).
High-yield was down 3.65% for June and 12.18% year to date, per Bloomberg’s high-yield index.
“High-yield munis are following other revenue sectors with larger losses as buyers demand wider concessions for more risk,” Olsan said. Bloomberg figures show $250 million par has been issued in BB-rated and lower sectors during Q2 — a 70% drop from the same period last year, she said.
Primary market
In the primary Thursday, J.P. Morgan Securities priced for the Alameda Corridor Transportation Authority, California, $349.185 million of taxable senior lien revenue refunding bonds, Series 2022B, with 5.396s of 10/2046 at par.
Citigroup Global Markets priced for the San Diego Unified School District, California, (/SP-1+//) $205 million of 2022-2023 tax and revenue anticipation notes, Series A, with 4s of 6/2023 at 2%, noncall.
In the competitive market, the North Dakota Public Finance Authority sold $320.915 million of taxable legacy fund infrastructure program bonds to J.P. Morgan Securities LLC. Bonds in 12/2023 with a 3.9% coupon yield 3.15%, 3.9s of 2027 at 3.73%, 4.28s of 2032 at par, 4.6s of 2037 at 4.72%, 4.8s of 2041 at 4.96%, callable 12/1/2032.
Pueblo County, Colorado, (/A//) sold $126.355 million of jail project certificates of participation to R.W. Baird. Bonds in 7/2029 with a 5% coupon yield 2.9%, 5s of 2032 at 3.20%, 4.125s of 2037 at 4.20%, 4.375s of 2042 at 4.45%, 5s of 2049 at 4.15% and 4.625s of 2052 at 4.625%, callable 7/1/2032.
Secondary trading
Columbia University 5s of 2025 at 2.01%-2.00%.
California 5s of 2027 at 2.33%-2.32% versus 2.35% Tuesday. New York City TFA 5s of 2027 at 2.48%.
Georgia 5s of 2032 at 2.73% versus 2.91% original. Maryland 5s of 2034 at 2.95%-2.93% versus 3.02%-3.00% Wednesday. Georgia 5s of 2032 at 2.97% versus 3.04% a week ago. New York City TFA 5s of 2034 at 3.26%.
Los Angeles DWP 5s of 2043 at 3.52% versus 3.66%-3.60% Wednesday. Washington 5s of 2044 at 3.42%.
New York City 5s of 2047 at 3.86% versus 3.97%-3.96% Tuesday. New York City waters 5s of 2048 at 3.77%. Charleston, South Carolina, 5s of 2052 at 3.52%-3.50% versus 3.57%-3.52% Wednesday and 3.75% original.
AAA scales
Refinitiv MMD’s scale was bumped two to seven basis points at the 3 p.m. read: the one-year at 1.60% (-2) and 1.95% (-2) in two years. The five-year at 2.22% (-4), the 10-year at 2.72% (-5) and the 30-year at 3.18% (-7).
The ICE municipal yield curve was bumped three to six basis points: 1.62% (-3) in 2023 and 1.93% (-4) in 2024. The five-year at 2.26% (-5), the 10-year was at 2.70% (-6) and the 30-year yield was at 3.21% (-6) at a 4 p.m. read.
The IHS Markit municipal curve saw two to seven basis point bumps: 1.61% (-2) in 2023 and 1.95% (-2) in 2024. The five-year at 2.22% (-2), the 10-year was at 2.72% (-7) and the 30-year yield was at 3.18% (-7) at 4 p.m.
Bloomberg BVAL was bumped three to six basis points: 1.62% (-3) in 2023 and 1.91% (-3) in 2024. The five-year at 2.23% (-4), the 10-year at 2.73% (-5) and the 30-year at 3.19% (-6) at a 4 p.m. read.
Treasuries rallied.
The two-year UST was yielding 2.956% (-8), the three-year was at 3.008% (-10), the five-year at 3.041% (-11), the seven-year 3.069% (-9), the 10-year yielding 3.014% (-8), the 20-year at 3.441% (-3) and the 30-year Treasury was yielding 3.184% (-4) at 4 p.m.
Mutual fund details
In the week ended June 29, Refinitiv Lipper reported $1.317 billion of outflows Thursday, following an outflow of $1.644 billion the previous week.
Exchange-traded muni funds reported inflows of $476.424 million after inflows of $421.720 million in the previous week. Ex-ETFs, muni funds saw outflows of $1.793 billion after $2.066 billion of outflows in the prior week.
The four-week moving average wasat negative $2.664 billion from negative $2.031 in the previous week.
Long-term muni bond funds had outflows of $901.784 million in the last week after outflows of $1.068 billion in the previous week. Intermediate-term funds had outflows of $370.155 million after $293.205 million of outflows in the prior week.
National funds had outflows of $1.057 billion after $1.297 billion of outflows the previous week while high-yield muni funds reported $15.443 million of outflows after $415.840 million of outflows the week prior.
Primary on Wednesday:
Goldman Sachs & Co. priced for the Municipal Electric Authority of Georgia $375.375 million of Plant Vogtle Units 3 & 4 bonds. The first tranche, $51.185 million of Project M bonds (A1/AA/BBB+/), saw 5s of 7/2024 at 2.73%, 5s of 2027 at 2.97%, 5s of 2032 at 3.59%, 5s of 2037 at 3.90%, 5s of 2042 at 4.13% and 5s of 2052 at 4.60%, callable 7/1/2032.
The second tranche, $212.005 million of Project J bonds (A3/AA/BBB+/), saw 5s of 7/2024 at 2.76%, 5s of 2027 at 3.00%, 5s of 2032 at 3.65%, 5s of 2037 at 3.98%, 5s of 2042 at 4.46%, 5s of 2052 at 4.63% and 4.5s of 2063 at 5.00%, callable 7/1/2032.
The third tranche, $50.620 million of Project P bonds (Baa2/BBB+/BBB+/), saw 5.5s of 7/2063 of 5.08%, callable 7/1/2032.
The fourth tranche, $61.565 million of taxable Project P bonds (Baa2/BBB+/BBB+/), saw all bonds price at par: 5.972s of 7/2036 and 6.474s of 2045, make whole call.
