Municipals were weaker Thursday, outperforming a U.S. Treasuries that saw larger cuts on the short end, while equities sold off.
Triple-A muni yields rose two to four basis points, depending on the scale, while UST yields were up four to nine basis points. Muni-UST ratios were at 80% in five years, 91% in 10 years and 103% in 30, according to Refinitiv MMD's 3 p.m. read. ICE Data Services had the five at 81%, the 10 at 93% and the 30 at 105% at a 4 p.m. read.
Investors pulled more from municipal bond mutual funds in the latest week, with Refinitiv Lipper reporting $3.548 billion of outflows, down from $4.106 billion of outflows in the previous week.
Cheaper ratios between municipals and Treasuries continued to spark outperformance Thursday.
Lower-rated investment-grade municipal bonds are
“I'm not sure the current environment of fear in the municipal market due to the Fed raising rates and inflation is enough to help municipals outperform significantly at this point, but the relative yields are compelling,” he said Thursday.
“Deals are getting done, but at cheaper levels because of the uncertainty and fear in the market,” Roffo said.
The volume of trading is slightly lower than yesterday and below the 30-day average, he noted.
“I think investors are getting tired of buying bonds only to have to mark them cheaper the next day.”
The broader market-under-pressure narrative persists, said Kim Olsan, senior vice president at FHN Financial.
She said fund flows are the primary metric in this year's huge yield pullback but other technical indicators, including relative value, credit spreads and yields are falling in line.
Benchmark-driven names, for instance, have realized a gradual widening. Trading in New York City Water 5s due 2031 is averaging +30/AAA, following early 2022 levels of +10/AAA. Spreads in 10-year California GOs have widened from an average of +12/AAA over the last two years to near +30/AAA. Local double-A-rated names due around 15 years are trading at yields well above 3% and with spreads of +50/AAA or wider, according to Olsan.
“Entry points for large-scale credits suggest levels near upper ranges due to sellers hitting best bids by line item whether or not historical spreads line up,” she said.
Due to the yield curve last year, Olsan said allocations were forced into a low-coupon/wider-concession arrangement. Bonds issued near the summer's yield lows have seen their yields move up by about 200 basis points.
After-tax yield of 3.65% factoring in the deeper discount, a sale of Aa1/AAA North TX Waters at 4.05% is an adjustment off its new-issue yield of 2.24% from August 2021. Similar opportunity is available in longer 3s that are trading at or above 4% yields. Florida Turnpike 3s due 2047 changed hands at 4.02%, exactly 200 basis points over its issue yield from last August, she said.
“The steep adjustment has moved rates into prime crossover buyer territory — where deep-discount tax-exempts are nearly aligned with taxable muni yields,” Olsan said.
Secondary trading
Maryland 5s of 2023 at 1.99%-1.96% versus 1.94% on Monday. North Carolina 5s of 2023 at 2.00%-1.98%. Georgia 5s of 2023 at 1.96%-1.92%. Prince George's County, Maryland 5s of 2023 at 2.07%-2.02%.
Georgia 5s of 2025 at 2.32% versus 2.18% on Monday. Maryland 5s of 2025 at 2.38% versus 2.27%-2.23% on 4/14 and 2.23% on 4/12.
NY Dorm PIT 5s of 2028 at 2.73%-2.70%. Georgia 5s of 2028 at 2.53%-2.52%. Maryland 5s of 2028 at 2.54%-2.55% versus 2.50% on Tuesday, 234% on 4/14 and 2.23% on 4/8. New York City 5s of 2028 at 2.77%. North Carolina 5s of 2029 at 2.55% versus 2.54% on Wednesday and 2.45% on Monday.
Wake County, North Carolina 5s of 2031 at 2.67%. California 5s of 2031 at 2.92%-2.88%.
Washington 5s of 2037 at 3.10%. LA DWP 5s of 2040 at 3.20% versus 3.26% on Wednesday.
NYC 5s of 2047 at 3.65%-3.64%. NYC TFA 5s of 2051 at 3.73%-3.72%. Triborough Bridge and Tunnel Authority 5s of 2051 at 3.73% versus 3.52%-3.51% on 4/13 and 3.51%-3.52% on 4/12.
AAA scales
Refinitiv MMD’s scale was cut two basis points 3 p.m. read: the one-year at 1.94% (+2) and 2.20% (+2) in two years. The five-year at 2.39% (+2), the 10-year at 2.66% (+2) and the 30-year at 3.01% (+2).
The ICE municipal yield curve was cut three to four basis points: 1.96% (+4) in 2023 and 2.25% (+4) in 2024. The five-year at 2.41% (+4), the 10-year was at 2.68% (+3) and the 30-year yield was at 3.08% (+4) at 4 p.m.
The IHS Markit municipal curve was cut two basis points: 1.95% (+2) in 2023 and 2.20% (+2) in 2024. The five-year at 2.42% (+2), the 10-year was at 2.64% (+2) and the 30-year yield was at 3.02% (+2) at 4 p.m.
Bloomberg BVAL was cut two to three basis points: 1.93% (+3) in 2023 and 2.17% (+2) in 2024. The five-year at 2.43% (+2), the 10-year at 2.66% (+3) and the 30-year at 2.98% (+3) at the close.
Treasury yields rose.
The two-year UST was yielding 2.662% (+8), the three-year was at 2.863% (+7), five-year at 2.945% (+9), the seven-year 2.953% (+7), the 10-year yielding 2.890% (+5), the 20-year at 3.112 (+5) and the 30-year Treasury was yielding 2.908% (+4) at the close.
Mutual funds see outflows
In the week ended April 20, weekly reporting tax-exempt mutual funds saw investors pull more money out with Refinitiv Lipper reporting $3.548 billion of outflows Thursday, following an outflow of $4.106 billion the previous week.
Exchange-traded muni funds reported outflows of $272.100 million after inflows of $3203.926 million in the previous week. Ex-ETFs, muni funds saw outflows of $3.276 billion after $4.310 billion of outflows in the prior week.
The four-week moving average widened to negative $3.235 billion from negative $2.724 billion from in the previous week.
Long-term muni bond funds had outflows of $1.926 billion in the last week after outflows of $1.892 billion in the previous week. Intermediate-term funds had outflows of $576.627 million after $690.433 million of outflows in the prior week.
National funds had outflows of $3.083 billion after $3.588 billion of outflows the previous week while high-yield muni funds reported $678.839 million of outflows after $719.138 million of outflows the week prior.
