Municipals were hit hard Monday following the holiday weekend with up to eight basis point cuts on the long end and damage felt across the entire curve. U.S. Treasuries were steady to weaker in spots, while equities ended in the red.
Triple-A muni yields rose four to eight basis points, depending on the scale, while UST yields rose one to four basis points on bonds. Muni-UST ratios rose as a result and were at 81% in five years, 89% in 10 years and 98% in 30, according to Refinitiv MMD's 3 p.m. read. ICE Data Services had the five at 81%, the 10 at 89% and the 30 at 99% at a 3 p.m. read.
The muni market is still reeling from apparently
Investors pulled more from municipal bond mutual funds last week, with Refinitiv Lipper reporting $4.106 billion of outflows, bringing the year-to-date total to $22.3 billion of outflows.
Partly as a result, investor bids wanteds in competition were more than 2.5 times the usual, with almost $2.1 billion on offer Wednesday and trading throughput barely 35% over average. The last time this supply-demand imbalance in the secondary market happened was in late March 2020, at the beginning of the pandemic, Block said.
“The market is likely near or at bottom with attractive absolute levels,” he said. “The question now is for how much longer, or at what point does the retail herd start thinking the same?”
The previous week's outperformance was a "head fake," since tax-exempts underperformed across the curve, with the exception of 30 years, which outperformed by -2.6 ratios due to the ridiculously low prices. Given the expected sustained fund outflows and a favorable net supply of about +$13 billion in April/May, Block believes muni underperformance will continue through at least the summer months. He expects underperformance on less defensive structures and weaker credits in particular.
Additionally, the unexpected shift in market sentiment has resulted in dismal performance for munis, said UBS Financial Services strategists Thomas McLoughlin, Kathleen McNamara, Jeannine Lennon, Sudip Mukherjee and David Perlman.
For the fourth month in a row, tax-exempt paper is expected to lose money. They said poor performance has been exacerbated by ongoing mutual fund outflows, which have hampered portfolio managers' capacity to become active buyers.
Prices have been pushed lower as a result, they said. Outflows are expected to persist until Treasury market volatility relaxes and crossover purchasers see the higher relative values presently available in the tax-exempt market, according to the UBS strategists.
When outflows exceeded seven or eight weeks in previous cycles, they said, the pattern continued until the retail market capitulated and the relative value became too large to ignore.
They expect outflows to continue for a few more weeks, at which point entry positions will become quite appealing.
Credit quality spreads have risen as a result of the volatile rate environment. The increase in spreads is mostly due to mutual fund outflows, which push portfolio managers to liquidate their holdings, the UBS strategists said.
“At present, the market technicals for the tax-exempt municipal bond market remain weak. Net supply has turned positive, consistent with seasonal trends over the March/April time frame, and outflows are likely to persist for a while longer. In the near-term, we expect continued selling pressure until the U.S. Treasury market shows some signs of stabilizing,” they said.
The balance between supply and demand for tax-exempt paper is likely to improve as the second quarter progresses. The return of higher muni yields and lower valuations in comparison to taxable alternatives is expected to entice some income investors back into the sector. June is the start of the busy summer redemption season, which is good news for munis, they said.
Secondary trading
Delaware 5s of 2022 at 1.74%. Maryland 5s of 2024 at 2.18%-2.16%. Georgia 5s of 2024 at 2.15%-2.14%.
Maryland 5s of 2024 at 2.20%. Georgia 5s of 2025 at 2.18%. Iowa Finance Authority 5s of 2025 at 2.24%.
Washington 5s of 2027 at 2.34%-2.33%. California 5s of 2028 at 2.51%. North Carolina 5s of 2029 at 2.45%. Florida 5s of 2029 at 2.47%. The City and County of Denver, 5s of 2029 at 2.44%-2.43%. California 5s of 2030 at 2.68%.
Los Angeles DWP 5s of 2033 at 2.68% versus 2.62% on 4/13, 2.60% on 4/12 and 2.60%-2.48% original (on 3/30). LA DWP 5s of 2035 at 2.80% versus 2.83% on 4/13 and 2.72% original (on 3/30). University of California 5s of 2036 at 3.00%.
New York City TFA 5s of 2044 at 3.43%-3.42% versus 3.01% on 4/4 and 3.21% original (on 3/31). LA DWP 5s of 2045 at 3.24% versus 2.77%-2.76% on 4/4.
Massachusetts 5s of 2049 at 3.18%.
AAA scales
Refinitiv MMD’s scale was cut five to eight basis points at a 3 p.m. read: the one-year at 1.82% (+5) and 2.08% in two years (+5). The five-year at 2.27% (+5), the 10-year at 2.54% (+8) and the 30-year at 2.89% (+8).
The ICE municipal yield curve was cut four to seven basis points: 1.83% (+4) in 2023 and 2.12% (+4) in 2024. The five-year at 2.28% (+4), the 10-year was at 2.53% (+4) and the 30-year yield was at 2.93% (+7) at 3:30 p.m.
The IHS Markit municipal curve was cut five to eight basis points: 1.83% (+5) in 2023 and 2.08% (+5) in 2024. The five-year at 2.30% (+5), the 10-year was at 2.52% (+8) and the 30-year yield was at 2.82% (+8) at 4 p.m.
Bloomberg BVAL was cut four to six basis points: 1.80% (+4) in 2023 and 2.05% (+5) in 2024. The five-year at 2.30% (+5), the 10-year at 2.53% (+6) and the 30-year at 2.85% (+6) near the close.
Treasury yields rose.
The two-year UST was yielding 2.467% (+1), the three-year was at 2.687% (+1), five-year at 2.798% (+1), the seven-year 2.863% (+2), the 10-year yielding 2.863% (+3), the 20-year at 3.134% (+4) and the 30-year Treasury was yielding 2.949% (+3) near the close.
Mutual funds see outflows
In the week ended April 13, weekly reporting tax-exempt mutual funds saw investors pull more money out with Refinitiv Lipper reporting $4.106 billion of outflows last Thursday, following an outflow of $3.247 billion the previous week.
The four-week moving average widened to negative $2.724 billion from negative $2.231 billion from in the previous week.
Long-term muni bond funds had outflows of $1.892 billion in the last week after outflows of $2.354 billion in the previous week. Intermediate-term funds had outflows of $690.433 million after $566.054 million of outflows in the prior week.
National funds had outflows of $3.588 billion after $2.788 billion of outflows the previous week while high-yield muni funds reported $719.138 million of outflows after $1.028 billion of outflows the week prior.
Recession fears
With inflation soaring, the Federal Reserve prepared to aggressively increase interest rates, the Russian invasion of Ukraine, and China on COVID lockdown, the market’s fear of recession is growing.
But analysts don’t expect a recession before 2024.
“An economic downturn is unlikely until 2024,” according to BCA Research Chief Global Strategist Peter Berezin. Unemployment remains 0.4 percentage points lower than what the Federal Open Market Committee considers full employment.
“Historically, the Fed’s efforts to nudge up the unemployment rate have failed,” he said. “The U.S. has never averted a recession when the three-month average of the unemployment rate has increased by more than a third of a percentage point.”
Still, he says, “despite this somber fact, there are reasons to think it will take longer for a recession to arrive than widely believed.”
Businesses and households are financially strong now, unlike before many prior recessions, Berezin noted. “There are indications that both households and businesses are set to expand — rather than retrench — spending over the coming quarters.”
But the housing market, “the most interest-rate sensitive sector of the economy,” will determine “the degree to which the Fed can raise rates,” he said. While this market has cooled, Berezin said, it “remains in reasonably good shape, supported by rising incomes and low home inventories.”
The recession risk is “pretty small” right now, Dec Mullarkey, managing director of investment strategy and asset allocation at SLC Management, said in a
Also, he said, with the difficulty companies are having hiring and retaining employees, firms may be “reluctant to actually do layoffs.” If they don’t, a key factor in recessions will be missing.
Especially in the U.S., “there are also reasons why concerns about a fully-fledged recession … may be somewhat overdone,” said Luigi Speranza, chief global economist at BNP Paribas.
Besides strong balance sheets and tight labor markets, Speranza said, the drop in consumer “sentiment overstates impact on output.” The Russian invasion of Ukraine has rattled confidence, he noted, but the degree to which consumers have been impacted depends on “measure, with the more labor market-focused Conference Board measure showing a less severe drop than that from the University of Michigan.”
Unless there’s “a further dramatic escalation of the Russia/Ukraine conflict, its impact on sentiment and prices combined with the effect of tighter monetary conditions will slow but not derail the U.S. recovery,” Speranza said. “Economic data are likely to deteriorate but concern over an imminent recession is overdone, in our view.”
Slower growth can be expected in the next 12 months, said Goelzer Director of Portfolio Management Gavin Stephens, with signals of such coming from “the bond market, housing and consumer spending.” But the chance of recession in that time is about 16%, he said, “no greater than the long-term average probability” of recession.
But as Fed rate hikes and balance sheet reduction work through the economy, he said, the chance of recession rises. “The probability of recession, therefore, should increase above its long-term average in mid-to-late 2023.”
Primary to come:
Iowa Finance Authority (Ba1/BBB-/BB+/) is set to price Thursday $854.325 million of tax-exempt, non-alternative minimum tax Iowa Fertilizer Company Project midwestern disaster area revenue refunding bonds, Series 2022, serial 2050, terms 2050 and 2050. Citigroup Global Markets.
Texas (Aaa/AAA/AAA/) is set to price Wednesday $272.170 million of general obligation bonds, consisting of $100.325 million of water financial assistance bonds, Series 2022A, serials 2023-2046; $140.615 million of water financial assistance refunding bonds, Series 2022B, serials 2023-2041; $13.210 million of water financial assistance refunding bonds, Series 2022C, serials 2023-2032; and $18.020 million of taxable water financial assistance refunding bonds, Series 2022D, serials 2023-2035. Ramirez & Co.
The New Jersey Higher Education Student Assistance Authority is set to price Thursday $266.345 million of student loan revenue and refunding bonds, Series 2022, consisting of: $22.245 million of senior bonds (Aa1///), Series A, serials 2024-2030; $202.420 million of senior bonds (Aa1///), Series B, serials 2024-2030, term 2041; and $41.500 million of subordinate bonds (A2///), Series C, serial 2052. RBC Capital Markets.
Frisco Independent School District, Texas, (Aaa/AAA//) is set to price Wednesday $205.115 million of unlimited tax school building bonds, Series 2022, serials 2023-2052, insured by Permanent School Fund Guarantee Program. RBC Capital Markets.
The Unified Government of Wyandotte County and Kansas City, Kansas, (///) is set to price Wednesday $153.960 million of Village East Project Areas 2B, 3 And 5 of sales tax special obligation revenue bonds, Series 2022, terms 2033, 2038 and 2041. Stifel, Nicolaus & Co.
San Juan Unified School District, California, (Aa2///) is set to price Thursday $150 million of Election of 2016 general obligation bonds, Series 2022, consisting of $139.180 million of bonds, Series 2022, serials 2023-2024 and 2026-2046 and $10.820 million of taxable bonds, Series 2022, serial 2022. Raymond James & Associates.
Jersey City Municipal Utilities Authority (///) is set to price Tuesday a $130 million note deal, consisting of $80 million of Series A, serial 2023 and $50 million of Series B, serial 2023. Stifel, Nicolaus & Co.
Competitive:
Virginia Public School Authority (Aa1/AA+/AA+/) is set to sell $216.460 million of school financing bonds (1997 Resolution), Series 2022A, at 10:30 a.m. eastern Wednesday.
