Municipals were steady Thursday as several larger deals priced and inflows returned to municipal bond mutual funds after 16 straight weeks of outflows. U.S. Treasuries were firmer and equities were up near the close.
The two-year muni-Treasury ratio Thursday was at 65%, the three-year at 68%, the five-year at 69%, the 10-year at 70% and the 30-year at 90%, according to Refinitiv MMD's 3 p.m. read. ICE Data Services had the two-year at 65%, the three-year at 67%, the five-year at 66%, the 10-year at 69% and the 30-year at 91% at 3:15 p.m.
Refinitiv Lipper reported investors added $460 million to municipal bond mutual funds for the week ending Wednesday. This follows $1.345 billion of outflows the week prior.
"How fund flows end up shaping up this week is going to be very meaningful for how we start the summer," said Tom Kozlik, managing director and head of public policy and municipal strategy at HilltopSecurities.
The return of inflows could potentially be attributed to the return of some investor confidence in the market.
With the debt ceiling impasse over, "I think that this is a time where investors can now sit back and look at the more traditional pros and cons for investing," he said. "But it very well could be that investor confidence might be starting to build."
However, Kozlik said he is skeptical that inflows will continue.
Jeff Lipton, managing director of credit research at Oppenheimer Inc., concurred saying that given the more compelling technicals there's a chance to see a return to intermittent positive fund flows, but that it may not "necessarily be a more enduring positive cycle."
Amid ongoing Treasury volatility Thursday, municipals were slow and steady and benchmark yields were largely unchanged, according to a New York trader.
"Munis are somewhat steady," he said Thursday afternoon. "The deals went OK today and this week," he said. "They weren't a ball of fire and some had balances," he said, adding that the market is heavier at the end of this week than last.
Overall, he said some of the mood and tone of the market had to do with next week's upcoming Federal Open Market Committee meeting.
"I think you have everyone gearing up for the Fed next week, which is usually a fairly quiet week," the trader said.
"The market usually sits down a little bit and waits for what the Fed is going to do," he said.
"The question that is becoming increasingly more difficult to answer is what will the Fed do," Lipton said. "Are we going to see a 25 basis point rate hike or are we going to see a [skip]?"
The CME FedWatch Tool, which analyzes the probability of a potential Fed rate hike at the next FOMC meeting, lists a 30% chance of a 25 basis point rate hike as of 1:30 p.m. Thursday.
Lipton believes there will be a 'pause' or 'skip' from the Fed at the June FOMC meeting.
"The tone and the sentiment coming from [Fed Chair] Jerome Powell, since the conclusion of the last FOMC meeting, would suggest that he's more on the side of taking a break for June, reassessing the data … then making a decision for July," he said.
With more than 500 basis points of tightening in a little over a year, he said the "FOMC has earned the right to hold rates steady at next week's meeting."
Along with next week's FOMC meeting, the trader said the upcoming seasonally sparse market heading into the July 4 holiday, traditionally puts a damper on the climate in municipals and keeps things quiet as the third quarter kicks off, according to the trader.
Demand for the Federal Deposit Insurance Corp. lists stemming from the Signature and Silicon Valley Bank failures are flowing well and finding homes, he noted.
"Bonds are going away fairly easily, and the inventory is not problematic for the market," he said.
The Fed uncertainty and traditionally quiet holiday mood, the lack of supply in the general municipal market has been supporting demand for paper, and investors have been choosy, the trader noted.
"I don't think there were a lot of bonds in the market the last few weeks," he said. "There are not a whole lot of bonds around."
"Customers have money, but are being selective," he said. "Retail is still active on 4% coupons that they can sell at par with decent sales credit."
Retail has been slow in June, something he attributes to the back-to-back volatility in April and May, according to Lipton.
However, market participants are anticipating a "return to positive muni performance given more compelling technicals," he said.
There is a net negative supply of $25.4 billion over the next 30 days, according to Bloomberg, with Lipton expecting there will be "a rather significant supply deficit over the next few months."
Bond Buyer 30-day visible supply sits at $8.24 billion.
Lipton said that should "result in more favorable performance, perhaps a return to positive performance for munis."
He expects "June, to be a better month than May, and perhaps July could turn out to be even a better performance month for municipals."
In the primary market Thursday, Barclays Capital priced for the New York City Housing Development Corp. (Aa2/AA+//) $646.370 million non-AMT sustainable development bonds. The first tranche, $172.855 million of 2023 Series A-1, saw all bonds pricing at par: 3.1s of 11/2026, 3.25s of 5/2028, 3.35s of 11/2028, 3.95s of 5/2033, 3.95s of 11/2033, 4.3s of 11/2038, 4.6s of 11/2043, 4.75s of 11/2048, 4.85s of 11/2053, 4.95s of 11/2058 and 5s of 5/2063, callable 6/1/2031.
The second tranche, $419.870 million of Series 2023 A-2, saw 3.7s of 5/2063 with a put/tender date of 12/30/2027 at par, callable 12/1/2025, and 3.73s of 5/2063 with a put/tender date at 12/29/2028 at par, callable 6/1/2026.
The third tranche, $53.645 million of 2022 Series G, saw all bonds pricing at par: 3.2s of 11/2027, 3.25s of 5/2028, 3.35s of 11/2028, 3.95s of 5/2033, 3.95s of 11/2033, 4.3s of 11/2038, 4.6s of 11/2043, 4.75s of 11/2048, 4.85s of 11/2053 and 4.95s of 11/2058, callable 6/1/2031.
BofA Securities priced for Ohio (Aaa/AAA//) $300 million of green water pollution control loan fund revenue bonds, Series 2023B, with 5s of 6/2028, 5s og 12/2028 at 2.76%, 5s of 6/2033 at 2.80%, 5s of 12/2033 at 2.84%, 5s of 12/2038 at 3.30% and 5s of 12/2043 at 3.56%, callable 6/1/2033.
In the competitive market, Wells Fargo Bank won Arlington County's (Aaa/AAA/AAA/) $187.375 million of GO public improvement bonds, with 5s of 6/2024 at 3.11%, 5s of 2028 at 2.71%, 5s of 2033 at 2.64%, 5s of 2038 at 3.22% and 4s of 2043 at 3.98%, callable 6/15/2032.
Jefferies won Corpus Christi ISD, Texas', $110 million of PSF-insured unlimited tax school building bonds, with 5s of 8/2028 at 2.80%, 5s of 2033 at 2.79%, 5s of 2038 at 3.37%, 4s of 2043 at 4.05%, 4s of 2048 at 413% and 4.125s of 2053 at 4.24%, callable 8/15/2032.
Secondary trading
Connecticut 5s of 2024 at 3.12% versus 3.19% Wednesday. Washington 5s of 2024 at 3.10% versus 3.14%-3.10% Wednesday and 3.35% on 5/22. Georgia 5s of 2025 at 3.05%-3.01%.
Maryland 5s of 2027 at 2.76%-2.74%. Triborough Bridge and Tunnel Authority 5s of 2028 at 2.70%. California 5s of 2028 at 2.67% versus 2.87% on 5/25.
NYC 5s of 2032 at 2.89% versus 2.87% Tuesday and 3.12% original on 6/2. DASNY 5s of 2033 at 2.53%-2.52% versus 2.50% Monday and 2.62%-2.61% on 5/31. Iowa Finance Authority 5s of 2034 at 2.81% versus 2.85%-2.79% Wednesday and 2.91% original on 6/2.
NYC TFA 5s of 2044 at 3.66%. DC 5s of 2045 at 3.60% versus 3.58%-2.59% Tuesday and 3.63%-3.62% on 5/31.
AAA scales
Refinitiv MMD's scale was bumped up to two basis points: The one-year was at 3.07% (-2) and 2.95% (-2) in two years. The five-year was at 2.66% (unch), the 10-year at 2.59% (unch) and the 30-year at 3.50% (unch) at 3 p.m.
The ICE AAA yield curve was bumped up to two basis points: 3.10% (-2) in 2024 and 2.99% (-1) in 2025. The five-year was at 2.65% (-1), the 10-year was at 2.60% (flat) and the 30-year was at 3.57% (flat) at 3:15 p.m.
The IHS Markit municipal curve was bumped up to two basis points: 3.06% (-2) in 2024 and 2.95% (-2) in 2025. The five-year was at 2.66% (unch), the 10-year was at 2.58% (unch) and the 30-year yield was at 3.49% (unch), according to a 3 p.m. read.
Bloomberg BVAL was little changed: 3.03% (unch) in 2024 and 2.93% (unch) in 2025. The five-year at 2.63% (unch), the 10-year at 2.57% (+1) and the 30-year at 3.54% (unch) at 3:15 p.m.
Treasuries were firmer.
The two-year UST was yielding 4.524% (-4), the three-year was at 4.172% (-6), the five-year at 3.862% (-8), the 10-year at 3.718% (-7), the 20-year at 4.050% (-7) and the 30-year Treasury was yielding 3.888% (-5) at 4 p.m.
Mutual fund details
Refinitiv Lipper reported $459.867 million of inflows from municipal bond mutual fund outflows for the week that ended Wednesday following $1.345 billion of outflows the previous week.
Exchange-traded muni funds reported outflows of $131.858 million after inflows of $45.461 million in the previous week. Ex-ETFs muni funds saw inflows of $591.725 million after $1.391 billion of outflows in the prior week.
Long-term muni bond funds had inflows of $899.418 million in the latest week after outflows of $513.789 million in the previous week. Intermediate-term funds had outflows of $9.947 million after outflows of $290.203 million in the prior week.
National funds had inflows of $390.555 million after inflows of $1.147 billion of outflows the previous week while high-yield muni funds reported inflows of $379.630 million after outflows of $473.393 million the week prior.
Christine Albano contributed to this report.
