Bonds

Munis on sidelines; markets wary ahead of FOMC

Municipals were little changed Monday while U.S. Treasuries were weaker and equities were mixed near the close.

With a steady muni yield curve and weaker USTs, muni to UST ratios on Monday fell slightly. They were at 67% in five years, 85% in 10 years and 98% in 30 years, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the five at 66%, the 10 at 88% and the 30 at 98% at a 3:30 p.m. read.

The Federal Open Market Committee meeting on Wednesday has issuers sidelined this week as all markets await an uncertain rate picture. The new-issue calendar is the smallest of the year, estimated at $2.477 billion. Bond Buyer 30-day visible supply is at $9.31 billion while Bloomberg pegs net negative supply at $19.598 billion.

Muni new-issuance continues to be light, as is typical during the summer, said Nuveen strategists Anders S. Persson and John V. Miller, “ yet reinvestment money is robust, with billions dollars anticipated over the next several weeks.”

They expect “solid demand to continue throughout the summer.”

This supply/demand imbalance, Persson and Miller noted, “has caused municipals to remain rich, mainly due to strong demand for tax-exempt income.”

“However, some institutional investors are showing heightened interest in tax-exempt bonds now that the Treasury curve is inverted, with short-term bonds yielding more than long-term bonds,” Persson and Miller said.

As some investors expect a recession, long-term UST yields may decline further.

“Institutional investors are applying this same logic to the tax-exempt market, buying longer-term munis even if they look relatively rich,” they said. “They believe tax-exempt rates will also move lower.”
But while munis rallied higher last week, signals are mixed, said CreditSights strategists Pat Luby and John Ceffalio.

“The tax-exempt index closed higher, though it earned less than it did the week before and muni mutual fund flows turned negative again,” they noted.

Constructive signs include the tightening of triple-B and high-yield spreads, positive flows into muni exchange-traded funds for the calendar week and “the drop in put contract open interest on MUB,” they added.

Average daily trading volume rose 12% from the prior week and was 23% higher than the one-year daily average, Luby and Ceffalio said.

Additionally, the supply of secondary market bids wanteds rose 10% from the prior week and was 32% higher than the one-year average, according to Bloomberg data.

Meanwhile, “the front end of the muni curve has performed the best so far in 2022, as inflation soars and a possible recession looming, investors have been favoring the short end which has pushed ratios to 55% of Treasuries,” said Jason Wong, vice president of municipals at AmeriVet Securities. Over two months ago, those same ratios were at 90%.

While the long end of the muni-UST ratio Monday is at 101.8%, two months ago it was at 110.70%.

With USTs rising, munis “have diverged from the notion of lagging [USTs] as they have held their own and have pushed ratios to the richest levels on the short end while pushing ratios in the belly and long end to cheaper levels for 2022,” he said.

Secondary trading
Metropolitan Government of Nashville and Davidson County, Tennessee, 4s of 2024 at 1.59% versus 1.60% Thursday. NYC 5s of 2025 at 1.92%.

Indiana Finance Authority 5s of 2027 at 1.99%. NY Dorm PIT 5s of 2028 at 2.25%. NYC 5s of 2030 at 2.50%-2.49% versus 2.58% Wednesday and 2.59% on 7/14.

District of Columbia 5s of 2035 at 2.85% versus 2.82% Thursday and 2.90% Wednesday. Metropolitan Government of Nashville and Davidson County, Tennessee, 5s of 2036 at 2.89%-2.88% versus 2.96% Thursday. Triborough Bridge and Tunnel Authority 5s of 2036 at 3.09% versus 3.16% Thursday.

Washington 5s of 2040 at 3.14%-3.12%. NYC TFA 5s of 2041 at 3.44%.

District of Columbia 5s of 2047 at 3.30% versus 3.36%-3.29% Friday.

LA DWP 5s of 2052 at 3.32%-3.23% versus 3.36% on 7/14.

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 1.94%, the 10-year at 2.39% and the 30-year at 2.99%.

The ICE municipal yield curve was flat: 1.42% in 2023 and 1.71% in 2024. The five-year at 1.95%, the 10-year was at 2.43% and the 30-year yield was at 3.00% at 3:30 p.m..

The IHS Markit municipal curve was unchanged: 1.40% in 2023 and 1.72% in 2024. The five-year was at 1.95%, the 10-year was at 2.39% and the 30-year yield was at 2.99% at a 3 p.m. read.

Bloomberg BVAL was little changed: 1.42% (unch) in 2023 and 1.69% (unch) in 2024. The five-year at 1.97% (unch), the 10-year at 2.43% (-1) and the 30-year at 2.98% (unch) at 3:30 p.m.

Treasuries weakened.

The two-year UST was yielding 3.026% (+6), the three-year was at 2.979% (+6), the five-year at 2.896% (+6), the seven-year 2.893% (+6), the 10-year yielding 2.816% (+7), the 20-year at 3.288% (+8) and the 30-year Treasury was yielding 3.046% (+7) at 3:45 p.m..

Primary to come:

The Belton Independent School District, Texas, (/AAA//) is set to price Thursday $168.750 million of unlimited tax school building bonds, Series 2022, serials 2023-2052. BOK Financial Securities.

The Michigan Finance Authority is set to price Tuesday $149.490 million of state aid revenue notes, Series 2022A, consisting of $83.355 million of Series A1 and $66.135 million of Series A2. J.P. Morgan Securities.

The Unified School District No. 489, Kansas, (/A+//) is set to price Thursday $143.500 million of general obligation refunding and improvement bonds, Series 2022-B. Piper Sandler & Co.

Pinal County, Arizona, (/AA/AA/) is set to price Thursday $115.560 million of taxable green pledged revenue obligations, Taxable Series 2022. Stifel, Nicolaus & Co.

The California Community College Financing Authority is set to price next week $107.575 million of Napa Valley College Project student housing revenue bonds, consisting of $93.905 million of senior bonds, Series A, terms 2032 and 2060, and $13.670 million of subordinate bonds, Series C term 2060. Citigroup Global Markets. 

Competitive:
Essex County, New Jersey, (Aaa//AA+/) is set to sell $57.696 million of general obligation bonds, Series 2022, consisting of $44.160 million of general improvement bonds, Series 2022A, $10 million of county coll bonds, Series 2022B, $1.768 million of Series 2022C bonds and $1.768 of Series 2022D bonds, at 11 a.m. eastern Tuesday.

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