Municipal bond mutual funds saw much larger inflows Thursday and the ninth consecutive week of high-yield inflows while there was a firmer bid in the secondary market, but munis underperformed U.S. Treasuries for the second session.
Federal Reserve Board Chairman Jerome Powell testified for the second day before Congress, during which he said before cutting rates members want "to become more confident that inflation is moving sustainably" toward its 2% target.
"When we do get that confidence — and we're not far from it — it'll be appropriate to begin to dial back the level of restriction," he told the Senate Banking Committee.
LSEG Lipper reported fund inflows of $869.2 million for the week ending Wednesday following inflows of $72.8 million the week prior. The four-week moving average is at $241.1 million of inflows from the prior week's $3.11 million of outflows.
High-yield funds saw the ninth consecutive week of inflows at $435.9 million following $352.6 million the week prior.
Triple-A municipal yields fell two to three basis points, underperforming UST gains, unsurprising given the outperformance that characterized the back half of February.
The market is being led by a supply/demand picture more than rates or ratios. Ratios are at extremely tight levels historically and there are buyers engaging at these levels, but large amounts of cash continue to sit on the sidelines.
The two-year muni-to-Treasury ratio Thursday was at 60%, the three-year at 59%, the five-year at 59%, the 10-year at 59% and the 30-year at 84%, according to Refinitiv Municipal Market Data's 3 p.m. EST read. ICE Data Services had the two-year at 60%, the three-year at 59%, the five-year at 59%, the 10-year at 60% and the 30-year at 83% at 3:30 p.m.
"The ongoing muni/UST yield relationship will remain in focus for where allocations can be maximized," Kim Olsan, senior vice president of trading at FHN Financial said.
Olsan looked at various tenor ranges over the last five years, with some compelling data points:
She notes that since 2020, there has been a wide high/low range in ratios, a lot which was "caused by the March 2020 aberration when ratios skyrocketed as pandemic lockdowns occurred."
"There was a 10-day period then when the curve flattened to around 50 basis points and yields traded 3.25%-3.50%," Olsan said. Then, she notes, "ratios blew out as high as 679% (5-year BVAL/UST) but across the broader horizon have carried an average ratio of 79% in that range."
The 5-year BVAL/UST low value was 37% in early 2021, well through the current 58% level, she said.
Intermediate ratios have averaged 83% since 2020, reaching a low of 53%, again in 2021, she said.
"Long-end value is currently about 10 percentage points off the average of 95% but the steepness of the curve is offsetting otherwise tight ratios," Olsan said. "The 20s10s BVAL curve sits at 86 basis points — or more slope than was in place from 1-30 years in late March 2020."
Olsan said that what distinguishes the current yield curve from wider periods since 2020 "is the value in absolute yields."
Looking at short-term yields that hover around 3% currently, they were below 2% at the onset of the pandemic and intermediate yields that were in the mid-2% range now "offer about 100 basis points more raw yield than where March 2020 closed out," she said.
"Current long-end yields above 3.50% contrast with sub-2% levels at the end of 1Q20," Olsan noted.
How upcoming supply affects ratios is yet to be seen, given they have not budged much since the start of 2024.
Bond Buyer 30-day visible supply sits at $12.4 billion. That includes two very large deals from the Dormitory Authority of the State of New York, which will bring nearly $3 billion of state personal income tax revenue bonds tax-exempt and taxable refunding bonds, as well as a combined $2.7 billion CommonSpirit Health exempt and taxable and corporate CUSIP bonds.
How the markets react to the Fed still hangs over, as well.
And while Powell's testimony offered "nothing to indicate that a rate-cut cycle was about to begin," said Interactive Brokers Chief Strategist Steve Sosnick, markets do expect a cut in June, pricing in a 95% probability, he said.
"Yet if I was a central banker, I'd be wondering why a rate cut is even necessary," given "a solid economy, high productivity, and relatively full employment, alongside global stock markets and a wide range of speculative assets like bitcoin at or near all-time highs."
Rate cuts are used to stimulate the economy, Sosnick said, "but it's doing fine with rates where they are. And markets are telling us that they're doing more than fine with the current status quo, even as expectations for future cuts have shrunk."
AAA scales
Refinitiv MMD's scale was bumped two basis points in the belly. The one-year was at 2.95% (unch) and 2.71% (unch) in two years. The five-year was at 2.40% (unch), the 10-year at 2.40% (-2) and the 30-year at 3.57% (unch) at 3 p.m.
The ICE AAA yield curve was bumped two to three basis points: 2.97% (-2) in 2025 and 2.74% (-2) in 2026. The five-year was at 2.42% (-2), the 10-year was at 2.42% (-3) and the 30-year was at 3.52% (-2) at 4 p.m.
The S&P Global Market Intelligence municipal curve was better in spots: The one-year was at 2.93% in 2025 and 2.71% in 2026. The five-year was at 2.40% (-1), the 10-year was at 2.40% (-2) and the 30-year yield was at 3.54% (unch), according to a 3 p.m. read.
Bloomberg BVAL was bumped two to three basis points: 2.91% (-3) in 2025 and 2.76% (-3) in 2026. The five-year at 2.40% (-3), the 10-year at 2.46% (-3) and the 30-year at 3.60% (-2) at 3:30 p.m.
