Municipals were firmer Tuesday as U.S. Treasuries rallied on improved chances that Congress will raise the debt ceiling and avoid a U.S. default. Equities ended mixed.
Triple-A yields fell three to 10 basis points, depending on the scale, underperforming U.S. Treasuries, which improved by five to 14 basis points with the largest gains on the short end.
While bond yields fell Tuesday, they have “assumed an upward path through much of May thanks to the uncertain prospects of another rate hike and the unsettled debt ceiling debate,” said Jeff Lipton, managing director of credit research at Oppenheimer Inc.
Benchmark 10- and 30-year UST yields are presently up 10 and seven basis points month-to-date, but the larger losses have been seen on the short end with the two-year UST rising 31 basis points month-to-date.
“Noted advances on ultra-short Treasury tenors are largely attributable to greater uncertainty tied to the debt ceiling impasse.”
Similar maturity muni yields have risen 34 and 20 basis points respectively over the same period, “signaling that tax-exempt investors are not worlds apart from the market forces driving bond yields higher.”
Relative value ratios have been pushed to the cheapest levels for the year due to the backup in muni yields, he said.
The two-year muni-Treasury ratio Monday was at 70%, the three-year at 72%, the five-year at 73%, the 10-year at 73% and the 30-year at 92%, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the two-year at 67%, the three-year at 70%, the five-year at 69%, the 10-year at 71% and the 30-year at 92% at 3 p.m.
With muni yields rising as much as 15 basis points last week, munis “have lost 1.38% for the month bringing year-to-date returns of just 1.13%,” said Jason Wong, vice president of municipals at AmeriVet Securities.
The Bloomberg high-yield index has lost 1.52% in May brining year-to-date gains of 1.76%, taxable munis have lost 2.98% in May with positive returns of 3.32% so far in 2022 and the Impact index saw losses of 1.64% this month with gains of 1.33% year-to-date.
Munis, Wong said, are on track for their worst May since 1986.
“This negative return for munis is somewhat significant as the month of May is usually a positive month for munis,” he said.
There have only been two negative returns for the month of May over the last decade — a loss of 1.3% in 2013 and a loss of 0.3% in 2015, he said.
“With muni yields trending higher, we are starting to see ratios move closer to their 10-year average,” Wong said. “However, they are still too rich to start moving to the front end.”
Trading for last week was around “$32.87 billion for the week with 55% being dealer sells,” he said.
Wong noted that investors put up $5.38 billion up for the bid, slightly down from the $5.44 billion the week prior, according to Bloomberg data.
Investors pulled $847 million from muni mutual funds after $187 million of outflows the week prior, according to Refinitiv Lipper. This marks 15 straight weeks of outflows, and Wong expects outflows to “continue until we start to see some stability in the muni market.”
Things are looking up for munis, though.
“While the debt ceiling impasse has factored into rising yields, resolution will come and once the June FOMC concludes, market technicals will likely become the driving force,” Lipton said.
There is a net negative supply of $17.2 billion over the next 30 days, according to Bloomberg, with Lipton noting there are “even deeper supply deficits anticipated for the following two months.” Bond Buyer 30-day visible supply sits at $12.28 billion.
With this expected technical shift, muni mutual fund flows may be able to move “into more positive territory and the well-tested attributes of strong credit quality, diversification and tax efficiency should guide investor preferences,” he said.
“Higher cash flow is again available in fixed income, with munis saying ‘If I should fall behind, then even better entry points can be obtained,'” according to Lipton.
Such expectations, he said, dovetail nicely with his “defensive narrative ahead of multiple event risks, including prospects for recession.”
With elevated absolute yields and cheaper ratios, Lipton said “investors are advised to extend allocations into munis as tax-efficiency and other attributes drive the process.”
Better technicals “could direct ratios back to richer levels and so the window of opportunity to lock in better terms may hit the wall soon,” he said.
If volatility can subside, he said “this can open up possibilities to see meaningful conviction on the flow side as we hope that a cycle of net withdrawals will disappear.”
“Although cash alternatives seem rather enticing today, it may be easy to be Blinded by the Light and potentially give up longer-term investment opportunities provided by compelling yield levels,” according to Lipton.
“Should bets on a 2023 rate cut recede,” he said weakness along short-tenor Treasuries may happen.
If overall bond yields move higher, he said “munis can be expected to outperform with the constructive technicals in place over the next few months.”
Munis have been experiencing some “restless nights of late, and while the Treasury market softness is certainly having its contagion effect, heavier supply has given rise to underwriter challenges and both retail and institutional demand has yet to come out in full swing given the less compelling ratios for much of the year and the unusual muni curve inversions,” he said.
Secondary trading
Washington 5s of 2024 at 3.31%-3.25%. Ohio 5s of 2024 at 3.30%. North Carolina 5s of 2025 at 3.09%.
Oregon 5s of 2028 at 2.90%-2.89% versus 2.96% Thursday and 2.37% on 5/4. Maryland 5s of 2029 at 2.79%. NYC TFA 5s of 2030 at 2.92%-2.91% versus 2.97% Thursday.
Frederick County, Maryland, 5s of 2033 at 2.72%. Wisconsin 5s of 2034 at 2.86%-2.85% versus 2.91% Friday and 2.85% Wednesday. Raleigh, North Carolina, 5s of 2035 at 2.86% versus 2.92% Wednesday.
Crosby ISD, Texas, 4s of 2048 at 4.22% versus 4.26% Wednesday and 4.31%-4.26% Tuesday. LA DWP 5s of 2049 at 3.79%-3.77% versus 3.94%-3.89% original on Wednesday.
AAA scales
Refinitiv MMD’s scale was bumped three basis points: The one-year was at 3.28% (-3) and 3.12% (-3) in two years. The five-year was at 2.80% (-3), the 10-year at 2.69% (-3) and the 30-year at 3.59% (-3) at 3 p.m.
The ICE AAA yield curve was bumped six to 10 basis points: 3.26% (-9) in 2024 and 3.10% (-9) in 2025. The five-year was at 2.76% (-8), the 10-year was at 2.69% (-6) and the 30-year was at 3.63% (-6) at 4 p.m.
The IHS Markit municipal curve was bumped three basis points: 3.27% (-3) in 2024 and 3.12% (-3) in 2025. The five-year was at 2.80% (-3), the 10-year was at 2.68% (-3) and the 30-year yield was at 3.59% (-3), according to a 4 p.m. read.
Bloomberg BVAL was bumped up to three basis points: 3.15% (unch) in 2024 and 3.04% (-1) in 2025. The five-year at 2.72% (-2), the 10-year at 2.64% (-3) and the 30-year at 3.63% (-2) at 4 p.m.
Treasuries rallied.
The two-year UST was yielding 4.448% (-12), the three-year was at 4.102% (-14), the five-year at 3.799% (-13), the 10-year at 3.683% (-5), the 20-year at 4.055% (-9) and the 30-year Treasury was yielding 3.894% (-7) at 4 p.m.
Primary to come
Sutter Health (A1/A+/A+/) is set to price $750 million of taxable corporate CUSIP bonds Thursday. Serials 2033, 2053. Citigroup Global Markets Inc.
Riverside County, California, is set to price Thursday $360 million of tax and revenue anticipation notes. J.P. Morgan Securities LLC.
Connecticut (Aa3/AA-/AA-/AA+) is set to price $360 million of general obligation bonds Thursday. Morgan Stanley & Co. LLC.
Connecticut is also set to price $350 million of taxable GOs Thursday. Morgan Stanley & Co. LLC.
The Massachusetts Educational Financing Authority (/AA//) is set to price $352.7 million of taxable education loan revenue bonds Thursday. Serials, 2028-2033, term 2044. RBC Capital Markets.
The Irvine Facilities Financing Authority (/AA+//) is set to price $325.51 million of Gateway Preserve Land Acquisition Project lease revenue bonds Thursday. Serials, 2027-2038, terms, 2043, 2048, 2053. Stifel, Nicolaus & Company, Inc.
The Maryland Stadium Authority (/AA/AA/) is set to price Thursday $233.98 million of football stadium issue revenue bonds, serials, 2025-2037. Raymond James & Associates, Inc.
The Iowa Finance Authority (Aaa//AAA/) is set to price Thursday $186.215 million of state revolving fund revenue green bonds, serials 2025-2043, terms 2048, 2053. RBC Capital Markets.
The Utah Board of Higher Education (Aa1/AA+//) is set to price Thursday $163.195 million of University of Utah general revenue bonds, serials 2026-2053. Wells Fargo Bank, N.A. Municipal Finance Group.
The Indiana Finance Authority (/BBB-//) is set to price Thursday $140.155 million of taxable CHF-Tippecanoe, LLC student housing project revenue bonds. RBC Capital Markets.
The South Carolina State Housing Finance and Development Authority (Aaa///) is set to price $106.19 million of mortgage revenue bonds, serials 2025-2035, terms, 2038, 2043, 2048, 2053, 2054. Citigroup Global Markets Inc.
The New Jersey Housing and Mortgage Finance Agency (/AA-//) is set to price Wednesday $104.645 million of multi-family non-AMT social revenue bonds. Barclays Capital Inc.
Competitive:
Elk Grove USD, California, (Aa2///) is set to sell $132.4 million of general obligation bonds at 11:35 a.m. eastern Wednesday.
Putnam County School District, Florida, (A2//A+/) is set to sell $100 million of general obligation bonds at 11 a.m. eastern Wednesday.
Clark County, Nevada, is set to sell $100 million of sales and excise tax revenue streets and highways bonds at 11:30 a.m. eastern Thursday.
Ventura County, California, is set to sell $90 million of taxable tax and revenue anticipation notes at 11:45 a.m. eastern Thursday.