Municipals were little changed and U.S. Treasuries were mixed in what amounted to a relatively quiet day for fixed-income markets, while equities were mixed to end the day.
Municipals took more of a wait-and-see approach ahead of a calendar filled with general obligation bonds from credits across the spectrum.
Municipal to UST ratios were still elevated at 91% in five years, 104% in 10 years and 108% in 30, according to Refinitiv MMD's 3 p.m. read. ICE Data Services had the five at 91%, the 10 at 101% and the 30 at 108% at a 4 p.m. read.
Deep-in-the-red municipal returns are not helping assuage investor concerns, creating a negative feedback loop that has yet to see a pause.
“The constant barrage of bids-wanteds is a new source of supply into the market, competing with the new-issue calendar for investors' attention and dealers' capital,” according to CreditSights' weekly report.
Year-to-date, $114.35 billion of bonds have been put out for the bid, an average of more than $1.24 billion per day, according to Bloomberg.
"The avalanche of bonds being sold on waning investor demand has resulted in woeful underperformance YTD, including last week when tax-exempts underperformed across the board, notably by +11.3 ratios in 10 years (102.4%) and +9.6 ratios in 30 years (107.8%)," said Peter Block, managing director of credit strategy at Ramirez & Co., in his weekly municipal report.
Municipal to UST levels are cheap and "obviously a solid value, although it appears that cheapness — no matter how measured — in and of itself isn’t a panacea in this unprecedented market environment," Block said. "We’re afraid that tax-exempts, especially in the 10- to 30-year part of the curve, are likely to get even cheaper before they get richer, at least until there is clarity on inflation."
The more than 10% losses so far is "the largest loss municipals have had and the third losing year since 2000, when the two others had lost just about 2.5%," noted Jason Wong, vice president of municipals at AmeriVet Securities Inc.
"Even though ratios are at their highest in nearly 20 months, we still have not reached the bottom as this should continue until the Fed gets a hold on inflation and bring inflation back down to 2%," Wong said. "With the Fed expected to raise rates a few more times, we can be in for the wild ride for the rest of 2022."
Heavy outflows continued across municipal bond funds last week, but "munis still offer value, with municipal-to-Treasury yield ratios nearing 110%," noted Nuveen's head of municipals, John Miller, in a weekly comment.
"Credit quality remains strong, but substantial credit spread dispersion opportunities exist due to liquidity pressure," he said.
Miller joins others who have noted that because of current interest rates and ratios,
"Outsized reinvestment money" is expected in the next few months "that should keep municipal bonds well bid", Miller said, noting the$44 billion coming on June 1 and the $48 billion on July 1.
Block noted this summer is a critical period as reinvestment peaks June through August.
"The market is likely to see another leg down if weakness persists during this period as reinvestment falls off a cliff in September," Block said.
Crossover buyer opportunity?
“Rising municipal bond yields are attracting attention from income-oriented investors, but are also reminding market participants of the onerous tax treatment of some bonds with more than a de minimis amount of market discount,” said CreditSights strategists Pat Luby, John Ceffalio and Sam Berzok.
The underperformance of munis, relative to the corporate bond market, they said, means that “banks, insurance companies and other taxable investors subject to the 21% federal corporate income tax rate can now buy tax-exempt municipals at yields higher than the after-tax yields on comparably rated corporate bonds.”
While the yields are attractive, they don’t expect those investors to be indiscriminate buyers.
CreditSights strategists said the $61 billion of net mutual fund redemptions “has not only contributed to the supply of secondary market selling,” but has also “reduced demand for the new-issue market.”
They said municipal bond redemptions have picked up in May and will peak in June, helping to stimulate demand.
“Weekly net flows into municipal bond exchange-traded funds have set records, as secondary market turnover has also been very heavy,” they said.
“Reduced demand in the new-issue market has allowed investors with money to invest to be more selective about which issues to consider and what prices they are willing to pay,” CreditSights strategists said.
They noted that bond structure, especially couponing, is becoming a much more important factor in valuing bonds.
“With 3% and 4% coupon bonds underperforming and often flirting with trading below their market discount cutoff prices, there is an opportunity for investors subject to the 21% federal income tax to consider bonds that are priced using an expected 37% tax rate on the market discount,” they said.
They added that relative values are compelling, as “tax-exempt yields are now competitive with comparably rated corporate bonds.”
“Heightened volatility and extreme changes in spreads are generally a function of market technicals and not of variations in issuer credit conditions,” they said, though there are exceptions.
They see “the mutual fund outflows as the primary catalyst for muni market underperformance” and anticipate that “when net redemptions finally slow down, tax-exempt prices and spreads could react quickly.”
Secondary trading
Mecklenburg County, North Carolina, 5s of 2023 at 1.92%. Washington 5s of 2023 at 2.06% versus 2.07%-2.04%. North Carolina 5s of 2024 at 2.34%-2.33%.
Washington 5s of 2026 at 2.56%-2.51%. Anne Arundel County, Maryland, 5s of 2026 at 2.58%-2.57%. Hennepin County, Minnesota, 5s of 2026 at 2.47%.
Ohio 5s of 2027 at 2.66%-2.61%. Boston 5s of 2027 at 2.65%-2.64%. Washington 5s of 2029 at 2.92%-2.90% versus 2.86% Thursday. California 5s of 2030 at 3.05%-3.04%.
Energy Northwest 5s of 2040 at 3.62%. Washington 5s of 2044 at 3.66%-3.65% versus 3.53% a week ago. New York MTA 5s of 2046 at 4.06%.
Triborough Bridge and Tunnel 5s of 2047 at 4.16%-4.15%. Tribes 5s of 2051 at 4.20%-4.19% versus 4.16%-4.15% Friday. New York City water 5s of 2051 at 4.04%-4.03%.
AAA scales
Refinitiv MMD’s scale was unchanged at the 3 p.m. read: the one-year at 1.99% and 2.31% in two years. The five-year at 2.58%, the 10-year at 2.99% and the 30-year at 3.32%.
The ICE municipal yield curve was little changed: 2.01% (-1) in 2023 and 2.36% (unch) in 2024. The five-year at 2.58% (unch), the 10-year was at 2.89% (unch) and the 30-year yield was at 3.35% (unch) at a 4 p.m. read.
The IHS Markit municipal curve was unchanged: 2.02% in 2023 and 2.32% in 2024. The five-year at 2.63%, the 10-year was at 2.98% and the 30-year yield was at 3.32% at 4 p.m.
Bloomberg BVAL was little changed: 2.01% (unch) in 2023 and 2.29% (unch) in 2024. The five-year at 2.63% (unch), the 10-year at 2.91% (unch) and the 30-year at 3.23% (unch) at a 4 p.m. read.
Treasuries were mixed.
The two-year UST was yielding 2.577% (flat), the three-year was at 2.746% (-3), five-year at 2.826% (-4), the seven-year 2.890% (-4), the 10-year yielding 2.889% (-3), the 20-year at 3.319% (flat) and the 30-year Treasury was yielding 3.105% (+3) at the close.
Primary to come:
Illinois (Baa1/BBB+/BBB+/) is set to price on Wednesday $1.7 billion of general obligation bonds consisting of $925 million of Series 2022A, serials 2023-2042; term 2047; and $775.125 million of refunding bonds, Series 2022B, serials 2023-2037. Citigroup Global Markets Inc.
New York City (Aa2/AA/AA-/AA+)
Gilbert, Arizona, (/AAA/AAA/) is set to price on Tuesday $467.81 million of Water Resources Municipal Property Corp. senior lien utility system revenue green bonds, Series 2022. J.P. Morgan Securities LLC.
The Trustees of Princeton University (Aaa/AAA//) is set to price on Tuesday $300 million of taxable corporate CUSIP bonds, Series 2022, term 2052. Loop Capital Markets.
The New Jersey Educational Facilities Authority (Aaa/AAA//) is set to price on Tuesday $300 million of Princeton University revenue bonds, Series A, serials 2027, 2032. Ramirez & Co., Inc.
The Ohio Air Quality Development Authority (Baa2/BBB//) is set to price on Tuesday $234 million of Duke Energy Corp. Project air quality development refunding bonds. Morgan Stanley & Co. LLC.
The Ohio Air Quality Development Authority (Baa2/BBB//) is set to price on Tuesday $168 million of Duke Energy Corp. Project air quality development refunding bonds, non-AMT, Series 2022B, serial 2030. KeyBanc Capital Markets.
Memphis, Tennessee, (Aa2/AA//) is on the day-to-day calendar with $229.605 million of taxable general improvement refunding bonds, Series 2022B. J.P. Morgan Securities LLC.
The Vista Unified School District, San Diego County, California, (/AA//) is set to price on Tuesday $150 million of general obligation bonds, serials 2023-2024, 2030-2042; terms 2046, 2051, insured by Build America Mutual. Stifel, Nicolaus & Company, Inc.
The Florida Housing Finance Corp. (Aaa///) is set to price on Wednesday $135 million of homeowner mortgage revenue social bonds, 2022 Series 2. Morgan Stanley & Co. LLC.
The Indiana Finance Authority (Aa3/AA//) Is set to price on Thursday $134.355 million of CWA Authority Project first lien wastewater utility refunding revenue forward delivery bonds, Series 2022A, serials 2022-2042. Citigroup Global Markets Inc.
The Ohio Housing Finance Agency (Aaa///) is set to price on Thursday $130 million of mortgage-backed securities program residential mortgage revenue social bonds, 2022 Series B. J.P. Morgan Securities LLC.
The Maryland Department of Housing and Community Development residential revenue social bonds, Series 2022A, serials 2030, terms 2037, 2042, 2047, 2052. RBC Capital Markets.
The West Virginia Economic Development Authority (Baa1/A-/A-/) is set to price on Wednesday $104.375 million of Appalachian Power Company — Amos Project solid waste disposal facilities revenue bonds, remarketing, consisting of $45.375 million of Series 2009A, serial 2042, and $50 million of Series 2009B, serial 2042. KeyBanc Capital Markets.
Competitive:
Prince George’s County, Maryland, (Aaa/AAA/AAA/) is set to sell $273.610 million of general obligation bonds at 10:45 a.m. eastern Tuesday. Serials 2023-2042.
St. Louis, Missouri, (/AA//) is set to sell $114.475 million of convention center revenue bonds at 11 a.m. eastern Wednesday. Serials 2034-2047.
