Municipals and U.S. Treasuries rallied hard Tuesday as demand for safe-haven assets intensified, while equities ended mixed.
Triple-A benchmarks were bumped eight to 10 basis points, depending on the scale, while USTs saw double-digit bumps seven years and in.
Muni-to-UST ratios were at 88% in five years, 101% in 10 years and 106% in 30, according to Refinitiv MMD's 3 p.m. read. ICE Data Services had the five at 86%, the 10 at 99% and the 30 at 105% at a 4 p.m. read.
In the primary, Siebert Williams Shank & Co. priced for the Katy Independent School District, Texas, (Aaa/AAA//) $265.890 million of unlimited tax school building bonds, Series 2022, with 5s of 2/2023 at 1.75%, 5s of 2027 at 2.51%, 5s of 2032 at 2.96%, 5s of 2037 at 3.26%, 4s of 2042 at 3.83%, 4s of 2047 at 3.93% and 4s of 2052 at par, callable 2/15/2031.
BofA Securities priced for the Metropolitan St. Louis Sewer District (Aa1/AAA//) $109.100 million of wastewater system improvement and refunding revenue bonds, Series 2022B, with 5s of 5/2023 at 1.85%, 5s of 2027 at 2.50%, 5s of 2032 at 2.98%, 5s of 2037 at 3.25%, 5s of 2042 at 3.40%, 5s of 2047 at 3.50% and 5.25s of 2052 at 3.55%, callable 5/1/2031.
In the competitive, Loudoun County, Virginia, (Aaa/AAA/AAA/) sold $165.685 million of general obligation public improvement bonds, Series 2022A, to J.P. Morgan Securities, with 5s of 12/2022 at 1.50%, 5s of 2027 at 2.43%, 5s of 2032 at 2.77%, 4s of 2037 at 3.28% and 4s of 2042 at 3.42%, callable 12/1/2031.
Fort Worth, Texas, (Aa1//AA/) sold $150 million of water and sewer system revenue bonds, Series 2022, to Citigroup Global Markets, with 5s of 2/2023 at 1.83%, 5s of 2027 at 2.48%, 5s of 2032 at 2.95%, 5s of 2037 at 3.15%, 4s of 2042 at 3.91%, 4s of 2047 at par and 4s of 2052 at 4.05%, callable 2/15/2031.
Since April, funds have needed to liquidate, which is a drastic shift from last year when rates were so depressed and funds were flush with cash, said Jason Ware, head of municipal trading at InspereX.
“There was so much demand within the funds, but it kept muni rates in check. And then once that coin flipped, the buyer, the steadfast buyer, the pillar of the market, became the opposite and became a seller," he said.
Now, munis are an inefficient product, he said. While tax-exempt, Ware said, they’re not looked at as a bastion of liquidity in “the grand scheme of fixed-income products.”
“They’re slow-moving, which is why they tend to outperform sell-offs in Treasuries and underperform a Treasury rally," he noted.
Munis are now, though, more attractive for buyers. Higher interest rates encouraged investors to seek liquidity within their funds and get their money out of bonds. Funds have sold and that's pushed interest rates higher.
“In some cases, it's dislocated portions of the market maybe more than it should have because, when you have such liquidity needs, you don't have as efficient of a market to systematically liquidate a lot of that stuff,” Ware said. “You get periods where bonds sell maybe a little bit cheaper than they should just because clients need that liquidity.”
For market participants constantly bidding and looking for value, these are the types of markets where spreads widen and nominal yields become more attractive, the latter of which prompts crossover buyers to enter the market.
Over the past several trading sessions, it’s been tough finding substantial cash buyers of munis beyond retail investors. There has been some crossover buying, but it's dissimilar from the past when crossover buyers came in and supported the market.
“A large part of that is because all of the peripheral fixed-income products are experiencing widening,” he said. “Also, the liquidity aspect is holding those buyers back from being in munis hand over fist.”
Burt Mulford, portfolio co-manager of fixed and strategic income at Eagle Asset Management, said several major technicals are beginning to improve in the muni market.
For one, summer months "provide lower supply to the market," and May is anticipated to continue its historical trend of 10% declines month-over-month, he said.
Furthermore, "summer redemption season begins in June, and summer redemptions have averaged 42% higher than the annual monthly average over the last five years," he said. "Reinvestment into the market increases demand for munis in conjunction with supply tapering off."
Lastly, he said, "the U.S. tax deadline consistently creates selling pressure in the market when investors sell bonds to fund their tax bills."
As triple-A municipal benchmark yields have risen at least 165 basis points across the curve year-to-date, it is a good time to buy high-grades.
“Given how much the bond market has priced in regarding Fed rate hikes, it's a good time to look at high-quality bonds as a portfolio buffer against further equity declines,” said Anthony Valeri, director of investment management at Zion Wealth Management in San Diego.
The combination of heavy new issuance and volatile markets was overwhelming in May, he noted. Supply this week is lighter ahead of the summer reinvestment season.
“Nascent signs of stabilization can be found in the municipal bond market,” Michael Pietronico, chief executive officer at Miller Tabak Asset Management, said.
“The key moving forward is bid wanteds,” he said. “If secondary market selling falls consistently below $1 billion, firming will happen fast.”
Tax-loss selling could slow given the strong summer technicals for reinvestment, he added, as June 1 and July 1 coupon redemptions, and called and maturing bonds have traditionally generated a swell of demand in the summer.
Secondary trading
Georgia 5s of 2024 at 2.05%-2.04%. Ohio 5s of 2024 at 2.20%.
Massachusetts 5s of 2029 at 2.71% versus 2.80% on 5/23. Gilbert, Arizona, 5s of 2031 at 2.88%-2.98% versus 2.96%-3.06% on 5/20 and 3.23% on 5/18.
California 5s of 2037 at 3.22%-3.13% versus 3.27% on 5/23 and 3.39%-3.38% on 5/12. Washington 5s of 2039 at 3.26% versus 3.33% on 5/23 and 3.69%-3.68% on 5/18. Triborough Bridge and Tunnel Authority 5s of 2040 at 3.50% versus 3.67% on 5/23 and 3.66%-3.65% on 5/20. NYC TFA 5s of 2041 at 3.60%.
NYC 5s of 2047 at 3.84%-3.76% versus 3.96%-3.93% on 5/23 and 4.41%-4.40% on 5/17.
Triborough Bridge and Tunnel Authority 5s of 2051 at 3.81%-3.87% versus 4.15% on 5/20 and 4.3% on 5/19. New York University 5s of 2051 at 3.75%-3.74%.
AAA scales
Refinitiv MMD’s scale was bumped eight to 10 basis points at the 3 p.m. read: the one-year at 1.82% (-8) and 2.14% (-8) in two years. The five-year at 2.41% (-9), the 10-year at 2.79% (-10) and the 30-year at 3.15% (-10).
The ICE municipal yield bumped nine to 10 basis points: 1.81% (-9) in 2023 and 2.16% (-9) in 2024. The five-year at 2.39% (-9), the 10-year was at 2.72% (-10) and the 30-year yield was at 3.15% (-10) at a 4 p.m. read.
The IHS Markit municipal curve saw bumps: 1.81 (-10) in 2023 and 2.11% (-10) in 2024. The five-year at 2.42% (-10), the 10-year was at 2.82% (-10) and the 30-year yield was at 3.16% (-10) at 4 p.m.
Bloomberg BVAL saw nine to 10 basis point bumps: 1.83% (-10) in 2023 and 2.12% (-9) in 2024. The five-year at 2.45 (-9), the 10-year at 2.77% (-9) and the 30-year at 3.13% (-9) at a 4 p.m. read.
Treasuries were better.
The two-year UST was yielding 2.484% (-14), the three-year was at 2.660% (-13), the five-year at 2.756% (-11), the seven-year 2.791% (-10), the 10-year yielding 2.760% (-9), the 20-year at 3.162% (-9) and the 30-year Treasury was yielding 2.971% (-8) just before the close.
Primary to come:
Connecticut is set to price Wednesday $1.075 billion of GOs, consisting of $150 million of general obligation bonds, 2022 Series C, serials 2023-2042; $575 million of general obligation refunding bonds, 2022 Series D, serials 2022-2028 and 2030-2032; $350 million of taxable general obligation bonds, 2022 Series A, serials 2023-2032. Ramirez & Co.
The Metropolitan Washington Airports Authority, District of Columbia, (Aa3//AA-/) is set to price Wednesday $209.410 million of AMT airport system revenue refunding bonds, Series 2022A. J.P. Morgan Securities.
Midland, Texas, (Aa1//AAA/) is set to price Wednesday $173.705 million of taxable general obligation refunding bonds, Series 2022A, serials 2022 and 2030-2050. Raymond James & Associates.
The Tennessee Housing Development Agency (Aa1/AA+//) is set to price Thursday $149.990 million of non-AMT social residential finance program bonds, serials 2023-2034, terms 2037, 2042, 2048 and 2053. RBC Capital Markets.
