Subdued start to the week; investors moving out long

Municipals were little changed to start the week, while U.S. Treasuries extended their selloff and equities ended mixed.

Municipal yields were steady while UST yields rose eight to 10 basis points across the curve. Ratios fell slightly as a result.

The two-year muni-Treasury ratio Monday was at 66%, the three-year at 66%, the five-year at 66%, the 10-year at 66% and the 30-year at 88%, according to Refinitiv MMD’s 3 p.m. ET read. ICE Data Services had the two-year at 68%, the three-year at 69%, the five-year at 67%, the 10-year at 67% and the 30-year at 89% at 4 p.m.

Municipal investors are slowly moving “further out in the curve as the front end continues to be rich compared to Treasuries,” Jason Wong, vice president of municipals at AmeriVet Securities said.

Muni-UST ratios have been higher, “more particularly in the front end” over the past few weeks, Wong said.

“Although this is positive for munis as the front end has become extremely rich over the past year, we are still in rich territory,” he said.

In mid-April ratios on the front end “reached an average of 58% and have moved higher to an average of about 70%, which is still rich as the average ratio for the front end is about 90%,” he noted.

Currently, Wong said “the best part of the curve has been the 12-20 year range as we have started to see larger funds move towards this portion which has driven yields down on the belly of the curve.”

Wong said there were roughly $4.59 billion up for the bid, down from $5.56 billion during the prior week, according to Bloomberg data.

Munis saw “their yields fall with 10-year notes falling by 4.4 basis points for the week to finish the week at 2.31%” after two consecutive weeks of yields rising, Wong said.

“Although yields fell for the week, munis did perform slightly better when compared to Treasuries as the 10-year notes are now yielding 67.41% compared to the prior week when ratios were at 68.76%,” he said.

Even as munis continue to improve from last year, investors continue to pull money out of funds, he said. Wong noted that outflows last week were $846 million out from muni mutual funds, according to Refinitiv, but “despite 12 consecutive weeks of outflows, muni fund inflows stand at just $4.1 billion for the year.”

“With the potential end of the hiking cycle in our sight, we could start to see money flow back into muni funds,” he said.

Strong technicals, fundamentals and valuations to drive rest of Q2
In the second quarter, three main factors will drive performance, according to Daniel Close, head of municipals at Nuveen.

Firstly, he said, “the technical environment is likely to be supportive.”

Now that there is more “clarity from the Fed on the path of interest rates, both investors and issuers may start to move off the sidelines,” he said.

Strong demand and muted muni issuance “are current tailwinds for the asset class, and inflows for both long-duration and high-yield have been positive year-to-date,” Close noted.

Thirty-day visible supply sits at $12.65 billion, per Bond Buyer data.

Secondly, he said credit fundamentals are strong.

“Municipalities have record levels of tax collections and cash on hand,” he said.

And despite interest rate volatility, he said credit conditions are solid.

Credit upgrades have outpaced downgrades “by nearly three to one based on 2022 data,” he said.

“And as essential service monopolistic providers, municipalities tend to do well in most economic environments,” Close noted.

Lastly, long-term valuations are attractive compared to USTs and corporates.

“High-yield municipal spreads could still narrow, creating the potential for additional total return,” he said.

Secondary trading
Boston 5s of 2024 at 2.85%-2.84% versus 2.81% on 5/1 and 2.65% original on 4/20. Connecticut 5s of 2024 at 2.97%. Hawaii 5s of 2026 at 2.65% versus 2.61% Friday.

Massachusetts 5s of 2028 at 2.34%. California 5s of 2029 at 2.36% versus 2.31% Thursday and 2.41% on 4/25. NYC TFA 5s of 2029 at 2.39%-2.38%.

NYC Municipal Water Finance Authority 5s of 2032 at 2.28% versus 2.29% Friday. Oregon 5s of 2033 at 2.41%. University of California 5s of 2034 at 2.34%-2.33%.

Washington 5s of 2041 at 3.25% versus 3.27% original on Thursday. Columbus, Ohio, 5s of 2041 at 3.32% versus 3.36% original on Wednesday. Oregon 5s of 2042 at 3.35% versus 3.42% original on Wednesday.

AAA scales
Refinitiv MMD’s scale was unchanged: The one-year was at 2.97% and 2.66% in two years. The five-year was at 2.31%, the 10-year at 2.31% and the 30-year at 3.36% at 3 p.m.

The ICE AAA yield curve was little changed up to one basis point: 3.01% (-1) in 2024 and 2.69% (-1) in 2025. The five-year was at 2.31% (flat), the 10-year was at 2.29% (flat) and the 30-year was at 3.34% (flat) at 4 p.m.

The IHS Markit municipal curve was unchanged: 2.96% in 2024 and 2.66% in 2025. The five-year was at 2.31%, the 10-year was at 2.30% and the 30-year yield was at 3.36%, according to a 4 p.m. read.

Bloomberg BVAL was little changed: 2.80% (unch) in 2024 and 2.66% (unch) in 2025. The five-year at 2.31% (unch), the 10-year at 2.30% (+1) and the 30-year at 3.38% (unch) at 4 p.m.

Treasuries were weaker.

The two-year UST was yielding 4.001% (+10), the three-year was at 3.720% (+9), the five-year at 3.490% (+9), the 10-year at 3.512% (+8), the 20-year at 3.918% (+8) and the 30-year Treasury was yielding 3.919% (+8) at 4 p.m.

Primary to come:
The Dormitory Authority of the State of New York is set to price $1.086 billion of school districts revenue bonds on Wednesday. Serials 2024 to 2043 with terms in 2050. RBC Capital Markets.

The Lower Colorado River Authority (/A/A+//) is set to price $481.5 million of transmission contract refunding revenue bonds on Tuesday. J.P. Morgan.

Dallas, Texas (/AA-/AA//) is planning to price $445.6 million of general obligation refunding and improvement bonds and combination tax and revenue certificates of obligation on Tuesday. J.P. Morgan.

The Board of Trustees of Michigan State University (A2/AA///) is slated to price $306.3 million of general revenue refunding bonds on Tuesday. Morgan Stanley.

The California Housing Finance Agency (/BBB///) is slated to price $277.3 million of social certificates, some of which are partially exempt on Thursday. Serials 2036. Citigroup Global Markets Inc.  

The West Virginia Hospital Finance Authority (A2/A//) is slated to price $276.4 million of revenue bonds on behalf of the West Virginia University Health System on Wednesday. Serials 2024 to 2030, with terms in 2047 and 2053. BofA Securities.

The Arkansas Development Finance Authority (/BB-/BB/) is slated to price $240 million of environmental improvement revenue green bonds subject to the alternative minimum tax. Term bond in 2053. BofA Securities.

The Texas Water Development Board (AAA/AAA/) is set to price $195.97 million of state revolving fund revenue bonds on Tuesday. Serials 2024 to 2044. RBC Capital.

Manatee County, Fla., (A1//AAA/) is set to price $182.96 million of public utilities revenue improvement and refunding bonds on Tuesday. Serials 2025 to 2043, terms in 2048 and 2053. BofA Securities.

The Illinois Housing Development Authority (Aaa////) is set to price $160 million of revenue bonds on Tuesday. Serial bonds 2024 to 2035, with terms in 2038, 2043, 2047, 2053, and 2054. Citigroup Global Markets.

The Nebraska Investment Finance Authority (/AAA///) is set to price $157.6 million of single-family housing revenue bonds including non-AMT social bonds and taxable bonds on Tuesday.  J.P. Morgan.

The Manatee County, Fla., School Board (/A+/A/) is set to price $154.3 million of certificates of participation on Wednesday. Serials 2024 to 2038. Raymond James.

The Liberty, Mo., School District #53 (/AA//) is set to price $120 million of GO school bonds on Thursday. Serials 2024 to 2043. Stifel, Nicolaus & Co.

The Ernest N. Morial New Orleans Exhibition Hall Authority (Aa3// AA+//) is set to price $114.2 million of special tax revenue bonds on Tuesday. Serials 2028 to 2042, with terms in 2047 and 2053. UBS Financial Services.

The Metropolitan Atlanta Rapid Transit Authority (Aa2/AAA//AAA/) is slated to price $112.7 million of sales tax revenue green bonds. Serials 2024 to 2032. Wells Fargo Bank.

Fresno, Calif., (/AA//) will price $100.2 million of airport revenue bonds — both AMT and non-AMT paper — insured by Build America Mutual on Thursday. Serials 2024-2037, with terms in 2042, 2047, and 2053. Raymond James.

The Michigan Strategic Fund (Aa3/A/A+/) is set to price $100 million of limited obligation revenue bonds on Tuesday. KeyBanc Capital Markets.

Marin General Hospital (/BBB/BBB//) is scheduled to price $100 million of taxable corporate CUSIP bonds on Tuesday. Morgan Stanley.

Ann Arbor Public Schools is set to sell $100 million of building and site bonds on Tuesday. Serial bonds 2024 to 2043. 

Fort Worth, Tex., (Aa3/AA//) is set to sell $263.6 million of taxable bonds, certificates of obligation, and GO improvement bonds in three deals on Wednesday. Serials 2024 to 2043.

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