Munis exhibit some weakness but offer opportunities

Municipals were steady to weaker in spots to start the week, while U.S. Treasury yields rose and equities ended up.

The two-year muni-Treasury ratio Monday was at 68%, the three-year at 69%, the five-year at 67%, the 10-year at 66% and the 30-year at 87%, according to Refinitiv MMD’s 3 p.m. ET read. ICE Data Services had the two-year at 69%, the three-year at 70%, the five-year at 67%, the 10-year at 67% and the 30-year at 89% at 4 p.m.

“Munis have kept to a narrow to static trading range for much of May, with [Refinitiv] MMD steady across the curve [last] week amid the Thursday start of BlackRock’s liquidation of tax-exempt muni bonds previously held by Silicon Valley Bank and Signature Bank,” said Jeff Lipton, managing director of credit research at Oppenheimer Inc.

Despite multiple market concerns, he said “munis are holding up well, and as reinvestment demand picks up through the next few months, technicals, underscored by tempered new-issue supply … should continue to offer opportunities.

Bond Buyer 30-day visible supply sits at $11.84 billion while there is a net negative supply of $13.2 billion over the next 30-day period, according to Bloomberg data. Lipton said he believes there will be an “even deeper supply deficit beyond the next month as heavier calls and maturities arrive and new-issue product remains relatively thin.”

The muni market was relatively calm “ahead of fresh inflation data [but] debt ceiling proceedings and extended banking stress could ignite near-term rate volatility,” he said.

Even though there is a small chance of a debt limit crisis occurring, he said “certain municipal credit structures having reliance on varied types of federal funding would be most at risk for a temporary disruption.”

Currently, he does not  ”a material shift in new-issue supply.”

“While issuer hesitation over the debt-ceiling debate will come to a natural conclusion sooner rather than later, currently elevated levels of muni yields should continue to suppress refunding and new-money transactions,” Lipton said. “Although issuers may also choose to stay on the sidelines ahead of potentially lower rates, the waiting period may be longer than expected.”

Last week, trading was around $35.4 billion with 52% of the trades being dealer sells, said Jason Wong, vice president of municipals at AmeriVet Securities.

With a larger-than-average calendar, he said “secondary markets took a back a seat to the primary markets.”

Clients put up about $6.7 billion up for the bid, up from the $4.6 billion in the prior week, Wong said.

Last week, he said muni yields remained relatively unchanged “as 10-year notes rose by just 0.8 basis points to close out the week at 3.32%.”

The muni ratio fell “slightly with 10-year notes now yielding 66.94% of Treasuries compared to the prior week’s ratio of 67.18%,” according to Wong.

Investors pulled about $102 million from muni mutual funds after outflows of $846 million the previous week, according to Refinitiv Lipper.

There have been 13 straight weeks of outflows, but Lipton thinks the market is “nearing the end of the cycle and we should begin to see, at the very least, intermittent inflows given the approaching conclusion to the Fed’s tightening sequence, a pronounced net-negative supply backdrop, and the need to position muni portfolios more defensively ahead of economic contraction.”

“With rates volatility seemingly subsiding in the past few weeks, we could start to see outflows decrease and demand flow back into munis,” according to Wong.

Redemptions will top $134 billion over the “next few months and with a net negative supply of about $13.2 billion over the next 30-days, we should expect this to drive yields further down,” he said.

Coupled with higher yields, Wong said “demand should be high for new bond sales.”

Reinvestments should offset this weakness in the markets into munis, but he said “we should still be cautious until we start to see a reversal in flows in muni funds.”

Muni credit, Lipton said, “is in a strong position to weather the impact of a mild to moderate recession having the benefit of wide-ranging Federal stimulus funds, strong tax collections, and record levels of reserve/rainy day funds.”

However, he noted, “more recent tax receipts have been performing below Treasury expectations, contributing to the debt ceiling stress, but it is important to note that local jurisdictions typically rely upon property tax revenue, which is still showing favorable collection activity.”

Secondary trading
California 5s of 2024 at 2.93%-2.79%. North Carolina 5s of 2024 at 3.18%-3.09%. Washington 5s of 2025 at 2.89%-2.84%.

Maryland 5s of 2027 at 2.47%. California 5s of 2028 at 2.43% versus 2.38% on 5/3. NYC TFA 5s of 2029 at 2.51%.

NYC TFA 5s of 2032 at 2.37% versus 2.40% on 5/4. Wisconsin 5s of 2033 at 2.43%-2.42% versus 2.57% original on 4/28. Delaware 5s of 2035 at 2.48% versus 2.48% on 5/9 and 2.47% on 5/8.

Boston 5s of 2042 at 3.10%. Washington 5s of 2043 at 3.40%-3.41%. Palm Beach County, Florida, 5s of 2046 at 3.48%.

AAA scales
Refinitiv MMD’s scale was cut up to two basis points: The one-year was at 3.01% (+2) and 2.71% (+2) in two years. The five-year was at 2.33% (unch), the 10-year at 2.31% (unch) and the 30-year at 3.36% (unch) at 3 p.m.

The ICE AAA yield curve was bumped up to three basis points: 3.04% (-3) in 2024 and 2.75% (-2) in 2025. The five-year was at 2.35% (+1), the 10-year was at 2.31% (flat) and the 30-year was at 3.35% (flat) at 4 p.m.

The IHS Markit municipal curve was cut up to two basis points: 3.00% (+2) in 2024 and 2.71% (+2) in 2025. The five-year was at 2.33% (+1), the 10-year was at 2.30% (unch) and the 30-year yield was at 3.36% (unch), according to a 4 p.m. read.

Bloomberg BVAL was cut up to three basis points: 2.83% (+3) in 2024 and 2.69% (+2) in 2025. The five-year at 2.34% (+2), the 10-year at 2.31% (+1) and the 30-year at 3.39% (unch) at 4 p.m.

Treasuries were weaker.

The two-year UST was yielding 3.998% (+1), the three-year was at 3.665% (+1), the five-year at 3.459% (+2), the 10-year at 3.497% (+4), the 20-year at 3.924% (+5) and the 30-year Treasury was yielding 3.840% (+6) at 4 p.m.

Primary to come:
The California Housing Finance Agency (/BBB//) is set to price $277.326 million of partially exempt municipal social certificates on Tuesday. Serial bonds 2036. Citigroup Global Markets.

The Dormitory Authority of the State of New York (Aaa/AAA//) is set to price $275 million of Columbia University revenue bonds on Thursday. Goldman Sachs & Co.

Jackson County, Missouri, (/AA-//) is set to price $260.355 million of special obligation bonds on Tuesday. Morgan Stanley & Co.

The California Educational Facilities Authority (//AAA/) is set to price $240 million of Stanford University revenue bonds on Wednesday. J.P. Morgan Securities.

The Harris County Industrial Development Corp., Texas, (Baa3/BBB-/BBB-/) is set to price $225 million of marine terminal refunding revenue bonds on Wednesday. Serial 2050. BofA Securities.

The Springfield School District R-XII, Missouri, ( /AA+//) is set to price $190 million of general obligation school building bonds insured by the Missouri Director Deposit program. Serials 2024-2043. Stifel, Nicolaus & Co. 

El Paso, Texas, (/AA+/AA+/) is set to price $181.260 million of water and sewer revenue improvement and refunding bonds. Serials 2024-2027 and 2029-2043. Term 2045 and 2049. Stifel, Nicolaus & Co.

The Virginia Electric and Power Company (A2/BBB+/A/) is set to price $160 million of pollution control refunding revenue bonds on Tuesday. KeyBanc Capital Markets.

The Florida Housing Finance Corp. (Aaa///) is set to price $150 million of taxable homeowner mortgage revenue bonds on Tuesday. Serials 2024-2035, terms in 2038, 2043, 2047, and 2054. BofA Securities.

The Southwestern Illinois Development Authority is set to price $138.840 million of local government program revenue bonds for the Edwardsville Community Unit School District #7 Project on Wednesday. Serials 2027-2041. Stifel, Nicolas & Co.

Farmington, New Mexico, (Baa2/BBB//) is set to price $130 million of pollution control non-AMT revenue refunding bonds for the Public Service Company of New Mexico San Juan Project on Wednesday. KeyBanc Capital Markets.

The Development Authority of Burke County, Georgia, (Baa1/BBB+/BBB+/) is set to price $115 million of pollution control revenue bonds for the Georgia Power Company Plant Vogtle Project). Serials 2032. Barclays Capital.

The New Jersey Economic Development Authority (A1/A+//) is set to price $110 million of water facilities refunding revenue bonds for the New Jersey American Water project subject to the AMT on Wednesday. J.P. Morgan Securities.

The City and County of Honolulu, Hawaii, (Aaa///) is set to price $105 million of multifamily housing revenue bonds on Wednesday. Serials 2026. Citigroup Global Markets.

The Phoenix Civic Improvement Corp., Arizona, (Aa2/AA-// ) is set to price $102.935 million of senior lien airport revenue refunding bonds subject to AMT on Tuesday. Serials 2024-2032. Barclays Capital.

The Downey Unified School District, California, (Aa2///) will sell $125 million of GO bonds on Tuesday.

Frederick County, Maryland, (Aaa/AAA/AAA/) is set to sell $101.620 million of GO public facilities project bonds on Tuesday. 

The Metropolitan Council, Minnesota, is set to sell $153.910 million of GO park, transit and wastewater revenue bonds on Tuesday in three deals.

Clark County, Nevada, is set to sell $200 million of highway revenue motor vehicle fuel tax bonds on Tuesday. 

Fort Worth, Texas, (Aa1/AA//) is set to sell $220.225 million of drainage utility system revenue bonds on Wednesday in two deals. 

Loudoun County, Virginia, (Aaa/AAA/AAA/) is set to sell $194.110 million of GO debt on Tuesday.

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