Municipals took a breather and were little changed Thursday, while U.S. Treasuries were mixed as the 2/10 UST curve flattened but remained inverted, sending worrisome recession signs. Equities ended in the red.
Muni to UST ratios were at 65% in five years, 82% in 10 years and 96% in 30 years, according to Refinitiv MMD's 3 p.m. read. ICE Data Services had the five at 64%, the 10 at 85% and the 30 at 97% at a 4 p.m. read.
Investors added $206.127 million to municipal bond mutual funds, per Refinitiv Lipper data, versus the $312.525 million of outflows the week prior. Total outflows sit at $47.1 billion year-to-date.
High-yield saw $176.886 million of inflows after $159.355 million of inflows the week prior.
In the primary, Morgan Stanley & Co. priced for the Massachusetts Development Finance Agency (A1///) $380.215 million of Northeastern University revenue refunding bonds, Series 2022, with 4s of 10/2023 at 1.58%, 5s of 2027 at 2.20%, 5s of 2032 at 2.95%, 5s of 2037 at 3.45%, 5s of 2042 at 3.71% and 5s of 2044 at 3.74%, callable in 2032.
BofA Securities priced for the Connecticut Housing Finance Authority (Aaa/AAA//) $100 million of social fixed rate note housing mortgage finance program bonds, 2022 Series C, Subseries C-4, at SIFMA +62.5 basis points, callable 5/15/2023.
“A newfound bid in USTs is giving the municipal supply surge an added boost with select spots on the curve showing outperformance,” said Kim Olsan, senior vice president of municipal bond trading at FHN Financial.
New York State’s Thruway Authority sale of nearly $2 billion of tax-exempt revenue bonds “offered up a temporary distraction to secondary flows, but strength in the taxable markets created a steady tone,” she said.
“Bidding results in the New York series followed recent spread ranges inside 15 years with the use of 5% structuring,” she said. “However, 4.00%-4.125% coupons in the 2049-2052 series were offered at +135/AAA — a result of rate risk following the prior sale and triple the spread of 4s from a year ago.”
The July 2021 sale saw 3s due 2048-2051 that came +73/AAA while 4s priced +46/AAA, Olsan noted.
Other new issues reflected the seasonal nature of demand, such as the Colorado Heath Facilities Authority’s Intermountain Healthcare revenue bonds, which, Olsan said, “priced the 10-year maturity at +40/AAA, a mere 10 basis point differential to the New York Thruway 10-year spread.
“Secondary momentum is a different story depending on maturity range," she said. "As the short end has rallied the most of any range — better by eight basis points over five sessions — there has been an increase in the value of the call option where modest concession can still be had.
“A prevalence of short-call selling from 2014-2016 vintages is playing into renewed demand for these structures, after a pullback during May and June when rates had sold off and the value of the call diminished,” she said.
Intermediate maturities have the benefit of a broad cross-section of buyers, but demand wanes past 15 years, she said.
Municipal Securities Rulemaking Board figures “show volume past 12 years has fallen to around 45% of all trades in the last week, down from 55% in the prior month,” according to Olsan.
“A gradual decline in muni fund outflows is constructive in the near-term with July 15 redemptions in play,” she said.
The most recent ICI outflow figure fell to $1.372 billion. This, she said, is an improvement from the $4-billion-plus figures in the past two weeks.
Seasonality, she noted, plays a role in the third quarter fund cycle. Inflows in 2020 peaked in early August and in 2021 the high point was reached in mid-July, she said.
And while valuations look attractive, BlackRock strategists Peter Hayes, James Schwartz and Sean Carney said that “summer seasonal trends are historically favorable, and credit fundamentals remain sound." They think “near-term performance will remain dependent on interest rates.”
“Fund flows are unlikely to turn positive until the market receives additional clarity on the future path of monetary policy. However, should steeper borrowing costs materially slow economic growth, municipals are poised to benefit from risk-off sentiment and increased demand for bonds,” they said.
“Returns for the second half of the year should improve but investors should tactically pick their entry points,” said Cooper Howard, fixed income strategist at Charles Schwab.
Volatile USTs have whipsawed muni-UST ratios lately, he said.
“Munis haven’t moved as sharply as Treasuries due to periods of low net supply,” he said. “We think muni investors should take advantage of the volatility in ratios and add to positions when the yield ratio is elevated.”
Taxables are getting hammered this year, down 14.8% year-to-date relative to a 7.9% drop for investment-grade tax-exempts.
He noted that “a large reason why the taxable muni index is trailing other major indices is due to the indices duration,” adding that “rising rates pose a greater headwind to performance relative to other markets.”
Informa: Money market muni assets drop
Tax-exempt municipal money market funds ended an 11-week inflow streak as $868 million was pulled the week ending July 11, bringing the total assets to $103.92 billion, according to the Money Fund Report, a publication of Informa Financial Intelligence.
The average seven-day simple yield for all tax-free and municipal money-market funds fell to 0.43%.
Taxable money-fund assets added $1.69 billion to end the reporting week at $4.408 trillion of total net assets. The average seven-day simple yield for all taxable reporting funds rose to 1.11%.
Secondary trading
North Carolina 5s of 2023 at 1.28% versus 1.30%-1.24% Wednesday and 1.27%-1.02% Tuesday. Washington 5s of 2024 at 1.72% versus 1.73% Wednesday and 1.72% Tuesday. Fairfax County, Virginia 4s of 2024 at 1.79%-1.77%. NY Dorm PIT 5s of 2025 at 1.87%.
Baltimore County, Maryland, 5s of 2028 at 2.17%. California 5s of 2029 at 2.25%-2.27%. Prince Georges County, Maryland, 5s of 2029 at 2.28%-2.27%.
Georgia 5s of 2033 at 2.57%.
NYC TFA 5s of 2041 at 3.50% versus 3.50% Monday.
Ohio Water Development Authority 5s of 2046 at 3.23%-3.22%.
LA DWP 5s of 2052 at 3.36% versus 3.37% Tuesday and 3.31% Monday.
AAA scales
Refinitiv MMD’s scale was unchanged at the 3 p.m. read: the one-year at 1.40% and 1.70% in two years. The five-year at 2.00%, the 10-year at 2.44% and the 30-year at 2.98%.
The ICE municipal yield curve was bumped up to two basis points: 1.45% (flat) in 2023 and 1.75% (flat) in 2024. The five-year at 1.99% (flat), the 10-year was at 2.47% (-1) and the 30-year yield was at 3.02% (-2) near the close.
The IHS Markit municipal curve was unchanged: 1.40% in 2023 and 1.72% in 2024. The five-year was at 2.00%, the 10-year was at 2.44% and the 30-year yield was at 2.98% at a 4 p.m. read.
Bloomberg BVAL was little changed: 1.45% (unch) in 2023 and 1.73% (unch) in 2024. The five-year at 2.02% (unch), the 10-year at 2.49% (unch) and the 30-year at 2.99% (-1) near the close.
Treasuries were mixed.
The two-year UST was yielding 3.148% (-1), the three-year was at 3.165% (+1), the five-year at 3.077% (+5), the seven-year 3.067% (+5), the 10-year yielding 2.971% (+4), the 20-year at 3.379% (-2) and the 30-year Treasury was yielding 3.118% (flat) near the close.
Mutual fund details
In the week ended July 13, Refinitiv Lipper reported $206.127 million of inflows Thursday, following an outflow of $312.525 million the previous week.
Exchange-traded muni funds reported outflows of $264.769 million after inflows of $515.478 million in the previous week. Ex-ETFs, muni funds saw inflows of $470.895 million after $828 million of outflows in the prior week.
The four-week moving average was at negative $766.982 million from negative $2.219 billion in the previous week.
Long-term muni bond funds had inflows of $141.376 million in the last week after outflows of $84.718 million in the previous week. Intermediate-term funds had outflows of $956,000 after $209.674 million of outflows in the prior week.
National funds had inflows of $147.048 million after $251.902 million of outflows the previous week while high-yield muni funds reported $176.886 million of inflows after $159.355 million of inflows the week prior.
