Municipals sold off once more Friday morning, as yields rose significantly for the fourth time this week as the aftereffects of President Donald Trump's tariffs continue to plague the financial markets.
High-grade munis and USTs "whipsawed this week amid pronounced volatility over trade policy actions," said J.P. Morgan strategists led by Peter DeGroot.
"The current market sell-off is the result of forced selling given the confluence of this week's around 45bps jump in 10yr UST rates, record ETF outflows, elevated tax-exempt supply, lower reinvestment capital, legislative uncertainty, all against the backdrop of global policy and broader capital market disruption," they noted.
Before Trump's pivot on tariffs on Wednesday afternoon, postponing many of them for 90 days, munis had risen 80 to 100 basis points over the week, "the highest absolute levels in five years and longer on the curve in over a decade," they said.
"Three-day moves of this magnitude have not been observed since the pandemic," Barclays strategists said.
Munis rallied hard Thursday, erasing all of Wednesday's losses and then some as munis were bumped 26 to 54 basis points, depending on the scale, sending muni-UST ratios lower.
However, Friday saw munis start to sell off once more with yields cut 25 to 30 basis points, depending on the scale.
"This week has turned out to be one of the worst and most volatile ever for munis, especially for high-quality high-grade ones," said Barclays strategists Mikhail Foux and Grace Cen, noting it is reminiscent of what happened with munis during the onset of the COVID-19 pandemic.
During that time, they noted there were "very large swings of the AAA curve, while the rest of the market has been outperforming due to poor liquidity."
This week has boasted the fourth, fifth and eighth largest daily selloffs in the past 15 years, Barclays strategists said.
Most of the other large selloffs happened during the start of COVID in March and April 2020, with the rest occurring during the recent Federal Open Market Committee rate-hiking cycle and in the wake of Trump's win in 2016, they noted.
In these instances, "these sell-offs presented a buying opportunity, but it took some time for the market to stabilize, and we think the same will occur this year," Barclays strategists said.
Rate volatility served as the primary reason for this week's risk-off, "coupled with large net issuance, outflows (likely to continue for some time after this week), tax-related selling, as well as continued selling by ETFs and rather heavy positioning by primary dealers going into the current sell-off," they said.
And while the "market turned around in a hurry on Thursday with one of the best daily performances in recent history," Friday saw munis sell off once more, according to Barclays strategists.
"As typically happens in abrupt and large sell-offs, investors focused their selling on higher-rated names, with low-rated names actually outperforming," they said. "This was especially true for muni high yield, which outperformed the IG index (especially its long bucket) by a sizable amount, and now it is trading at the tightest level to high grade in recent history."
New-issue calendar
Issuance for the week of April 14 is estimated at $8.9 billion, with $7.955 billion of negotiated deals and $945 million of competitive deals on tap.
New York City leads the negotiated calendar with $1.75 billion of taxable GOs, followed by the Department of Airports for the City of Los Angeles with $1.477 billion of revenue bonds.
The competitive calendar is led by North Carolina with $300 million of limited obligation bonds.
Next week's new-issue calendar is up substantially from the previous, which was set at an estimated $10.686 billion but ended up being $3.96 billion as multiple issuers moved deals to the day-to-day calendar or postponed them due to extreme market volatility.
Some deals still priced, but they faced some difficulties.
"Wider spreads, concession. You had to do a lot with structure, 5.25s, 5.5s. It's almost become a deal by appointment market," said Jock Wright, a underwriter at Raymond James.
"It's going to be very challenging in this environment toprovide liquidity to issuers, especially if you're an underwriter," he said, noting it may be difficult to get underwriters to want to commit a lot of capital and get under balances, "because everything you underwrite will probably be worth less the next day."
The many deals on the day-to-day calendar are waiting for stability to return to the marketplace, he noted.
Next week will be "tricky," because while it's a lighter calendar, if the deals on the day-to-day calendar price, that could send supply up to $20 billion, Wright said
However, "until we get a semblance of stability, I don't think we're going to be able to function very well," he said.
