Munis firmer to start week; March returns back in the black

Municipals were firmer in spots to kick off the week, while U.S. Treasury yields fell and equities ended mixed.

Triple-A yields fell one to four basis points Monday while USTs were stronger by up to 10 basis points to close the session.

The two-year muni-Treasury ratio was at 60%, the three-year at 61%, the five-year at 63%, the 10-year at 66% and the 30-year at 91%, according to Refinitiv MMD’s 3 p.m. ET read. ICE Data Services had the two-year at 59%, three-year at 58%, the five-year at 60%, the 10-year at 65% and the 30-year at 91% at 4 p.m.

Municipal returns ended March in the black. The Bloomberg Municipal Index showed March returning 2.22% and 2.78% year to date, high-yield at 1.55% positive in March and 2.73% in the first quarter, and taxable munis at 2.49% in the black in March and 5.21% year-to-date.

“The month of March started on a high note and is finishing up the same way it started — in positive territory,” said Jason Wong, vice president of municipals at AmeriVet Securities.

Muni returned “over 2.2% for the month, a great reversal from February where munis returned a loss of 2.26%,” Wong said.

Munis have returned around 2.78% in Q1, which he said is “a far cry from 2022 when we had losses of 6.23%,” he noted.

Returns, though, could be affected if rates markets “continue to drift higher in the coming weeks,” said Barclays strategists Mikhail Foux, Clare Pickering and Mayur Patel. If this happens, muni returns “would be negatively affected, although tax-exempts would likely outperform Treasuries, and MMD-UST ratios might decline slightly,” they said.

For four consecutive weeks, triple-A benchmark yields have fallen, Wong noted. In a reversal from February, where yields rose on average by 46 basis points, he said yields on average fell almost 30 basis points in March.

Even as yields fell, investors kept pulling money from muni mutual funds. Investors pulled around $194 million from those funds after outflows of $427 million the week prior, according to Refinitiv Lipper.

“With market volatility continuing to spook investors as the direction in interest rates are still up in the air,” Wong said.

For the first quarter of the year, Wong said, “yields have had a roller coaster ride as signs pointed to the Fed ending their tightening cycle to only be do a complete 180 when an unexpected jobs data report in February spurned more hikes from the Fed.”

“Then the collapse of Silicon Valley Bank and Signature Bank pushed yields lower as once again the Fed appears to be winding down their tightening policy,” Wong said. “With limited supply in munis, we could continue to see a strong bid-side market which will drive yields even lower.”

“Muni performance has been a game of tug of war this year, with January logging one of the best monthly returns since 1993, February one of the worst in 15 years and March one of the best in that time frame,” said Bloomberg Intelligence strategists Eric Kazatsky and Karen Altamirano.

“The most important narrative [one month ago] for both equities and fixed income was the Fed’s response to rising inflation,” they said.

Kazatsky and Altamirano said “a fallout issue from rising rates has been a levee break in bank-deposit outflows” despite inflation not disappearing.

Bank deposits “have been leaky for at least a year but only recently reached critical mass, likely driven by news coverage of Silicon Valley Bank,” they said.

Investors “jumped to higher-yield T bills from low-yielding deposits [but] it’s the pop in money-market rates that has driven asset growth in this low-duration option,” they said.

Haven assets, like munis and USTs, rallied due to bank outflows-induced market volatility, where these levels of elevated volatility accompanied the UST rally, they said.

“Such seesaw moves are rare in the Treasury market and stem from varied expectations of what bank runs mean for the Fed’s approach to inflation,” Kazatsky and Altamirano said.

Short triple-A-rated munis are more steady, and “the current market is one of the times we can appreciate the lagged response by tax-exempts,” they said.

“One knock-on impact in the municipal market has been a downtick in trading, some of which can be attributed to bank activity fading even more than before,” according to Bloomberg Intelligence strategists.

March typically means munis see softer performance, but this past month “defied expectations, as the overall rate market was thrown a curve ball, with so much retail-banking volatility in the U.S. and abroad that the Fed now appears to have limited runway to battle inflation,” they said.

Predictions “about future returns, even over the coming weeks, is a dangerous game,” they said, especially in such a volatile market.

“This played out in March with better-than-anticipated municipal returns, and an investor looking solely at April technicals could end up on the wrong end of a surprise market event once again,” Bloomberg Intelligence strategists said. “Assuming all stays calm, cash redemptions are seasonally on track, with an even lower percentage of the market having bonds with an April 1 payment date.”

There will be a slight boost in demand this week, as of the $15 billion of principal set to be returned to investors this month, nearly three-quarters will be paid out by April 1, according to CreditSights strategists Pat Luby and Sam Berzok. This, though, will taper off as the month continues.

However, they said, “total redemptions for April will be the lightest redemption month of the year.”

They expect “any surge in primary or secondary market supply would have an outsized impact on prices” due to the seasonally weak reinvestment demand.

Secondary trading
San Diego USD 5s of 2024 at 2.37%. Virginia Commonwealth Transportation Board 5s of 2024 at 2.51% versus 2.60% Friday.

Connecticut 5s of 2028 at 2.32%-2.29%. Massachusetts 5s of 2029 at 2.20%. Florida BOE 5s of 2029 at 2.23%-2.21%.

Triborough Bridge and Tunnel Authority 5s of 2030 at 2.25%. Wake County, North Carolina, 5s of 2031 at 2.20% versus 2.24%-2.03%. California 5s of 2033 at 2.31%-2.30% versus 2.34% Thursday.

Massachusetts Bay Transportation Authority 5s of 2042 at 3.35% versus 3.62% original on 3/16. NYC TFA 5s of 2044 at 3.66%-3.65% versus 3.69%-3.68% Friday and 3.71%-3.66% Wednesday. DC 5s of 2045 at 3.41% versus 3.46%-3.48% Thursday and 3.61%-3.59% on 3/28.

AAA scales
Refinitiv MMD’s scale was bumped up to four basis points The one-year was at 2.49% (unch, no April roll) and 2.38% (unch, no April roll) in two years. The five-year was at 2.21% (-1, no April roll), the 10-year at 2.27% (unch, no April roll) and the 30-year at 3.30% (unch) at 3 p.m.

The ICE AAA yield curve was bumped up to two basis points: 2.52% (flat) in 2024 and 2.41% (-1) in 2025. The five-year was at 2.18% (-1), the 10-year was at 2.25% (-2) and the 30-year was at 3.34% (-2) at 4 p.m.

The IHS Markit municipal curve was little changed: 2.47% (unch) in 2024 and 2.36% (unch) in 2025. The five-year was at 2.18% (-1), the 10-year was at 2.25% (unch) and the 30-year yield was at 3.29% (unch), according to a 4 p.m. read.

Bloomberg BVAL was bumped up to three basis points: 2.44% (-1) in 2024 and 2.38% (-1) in 2025. The five-year at 2.18% (-2), the 10-year at 2.24% (-2) and the 30-year at 3.30% (-1) at 4 p.m.

Treasuries were firmer.

The two-year UST was yielding 3.968% (-6), the three-year was at 3.730% (-6), the five-year at 3.515% (-6), the seven-year at 3.475% (-6), the 10-year at 3.422% (-5), the 20-year at 3.775% (-2) and the 30-year Treasury was yielding 3.638% (-1) at 3 p.m.

Primary market
Two big deals are coming out of the Golden State in the upcoming week along with large sales from a Pennsylvania issuer.

Topping the new-issue slate is the state of California’s (Aa2/AA-/AA/) $2.56 billion GO bond offering. BofA Securities is set to price the $1.38 billion of new-money and $1.18 billion of refunding GOs on Tuesday.

Separately, the San Francisco Public Utilities Commission (Aa2/AA/NR/NR) is coming to market with $998.56 million of wastewater revenue bonds.

BofA and Goldman Sachs are set to price the PUC’s $536.60 million of Series 2023A sewer system improvement program (SSIP) green bonds, $285.25 million of Series 2023B non-SSIP GOs and $176.72 million of Series 2023C SSIP refunding green bonds on Wednesday.

The University of Pittsburgh Medical Center will sell (UPMC: A2/A/A/) $800 million of taxable revenue bonds (corporate CUSIP). Underwriter: RBC Capital Markets. Pricing: Tuesday.

The Pennsylvania Economic Development’s Financing Authority will issue (A2/A/A/) $439.2 million of UPMC revenue bonds, Series 2023A, Subseries 2023A-1 (term rate mode) and Subseries 2023A-2 (fixed rate mode). Underwriter: RBC Capital Markets. Pricing: Tuesday.

And the Pennsylvania EDFA will also sell $90.55 million of Series 2023B UPMC refunding revenue bonds. Underwriter: Barclays Capital. Pricing: Tuesday.

Georgetown University (A3/A-//) plans a sale of $300 million of Series 2023 taxable fixed-rate bonds. Underwriter: Barclays Capital. Pricing: Wednesday.

Durham County, North Carolina, (Aa1/AA+//) will sell $172.79 million of Series 2023A limited obligation refunding bonds with revenues pursuant to an installment financing agreement between Durham Financing Corp. and the county. Underwriter: PNC Capital Markets. Pricing Wednesday.

The Colorado Housing and Finance Authority will issue (Aaa/AAA//) $104.84 million of taxable Class I Series F-1 single-family mortgage bonds. Underwriter: RBC Capital Markets. Pricing: Tuesday.

The largest issue going up for bid is coming from the Plymouth-Canton Community Schools in Michigan (Aa2///), which will sell $87.5 million school building and site GOs on Wednesday. PFM Financial Advisors is the financial advisor; Miller Canfield is the bond counsel.

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