Munis stronger as June reinvestment kicks off

Municipals were firmer Thursday as the June reinvestment period began, providing some additional support. U.S. Treasury yields fell and equities ended up a day after the House passed a bill to increase the debt limit, quelling some market concerns about a U.S. default.

Municipals continued to ride the positive momentum from USTs as triple-A yields were bumped four to eight basis points, depending on the scale. U.S. Treasuries fell one to four basis points.

The two-year muni-Treasury ratio Thursday was at 70%, the three-year at 72%, the five-year at 73%, the 10-year at 72% and the 30-year at 91%, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the two-year at 68%, the three-year at 70%, the five-year at 70%, the 10-year at 72% and the 30-year at 92% at 3 p.m.

Munis are being supported by USTs and the June reinvestment this year appears to be meaningful, said Craig Brandon, co-head of municipals at Morgan Stanley Investment Management.

The start of June marks a big period of reinvestment, he said, as market participants await to see if it will drive positive performance.

“It seems to be a pretty firm tone [Thursday] … and the market is probably being supported by some June reinvestment happening now,” he said.

He said all eyes will be on Friday’s jobs report, which will impact whether the Fed hikes rates or pauses during its June meeting.

Over the past year or so, the data has exceeded expectations, and if that trend continues on Friday, Brandon said, “What happens? Does that put another Fed hike on the table?”

He said market participants are expecting the Fed to pause in June and hike rates another 25 basis points in July.

A larger-than-expected employment figure has the potential to weaken UST and munis as a result.

Conversely, weak employment numbers may see USTs rally, and munis rallying in sympathy.

“I don’t think anyone is really sure what rates are going to do here,” he said. “Everybody thinks at some point rates are going to go down, but everyone’s waiting around to try to time the market and not put money to work until you’re convinced that rates are going down. People aren’t convinced rates are going down.”

If economic data comes in weaker and retail investors believe the Fed is done hiking rates, that is when Brandon thinks the “money will turn around and come in.”

If inflows return to the mutual fund complex, technicals could be a very strong tailwind for munis in the second half of the year,” he said.

He said munis are currently “holding their own without the flows” but the market will see “a pretty positive year” once they return.

Outflows continued as Refinitiv Lipper reported investors pulled $1.345 billion from municipal bond mutual funds for the week ending Wednesday. This is the first time since the week ending April 19 that outflows have topped $1 billion when that week saw $2.876 billion of outflows.

Despite this increase, outflows year-to-date are $7.99 billion, per Lipper, considerably lower than the outflows experienced during the first five months of 2022 when $36.37 billion was pulled from muni mutual funds.

“To me, it’s almost relatively flat compared to the magnitude of the moves we’ve had over the last few years,” Brandon said.

If there is a return of inflows into muni mutual funds, there will be “a pretty good rally in the muni market,” he said.

However, retail is waiting around “to be convinced that this is it: Rates are going down; they’re done going up. But I don’t think retail is convinced today yet.”

In the primary market Thursday, Morgan Stanley priced for Connecticut (Aa3/AA-/AA-/AA+/) $715.855 million of GOs. The first tranche, $100 million of GOs, Series 2023 A, saw 5s of 5/2024 at 3.41%, 5s of 2028 at 2.99%, 5s of 2033 at 2.99%, 5s of 2038 at 3.49% and 5s of 2043 at 3.74%, callable 5/15/2033.

The second tranche, $265.855 million of GO refunding bonds, 2023 Series B, saw 5s of 8/2023 at 3.45%, 5s of 2028 at 2.99% and 5s of 2033 at 3.00%, noncall.

The third tranche, $350 million of taxable GOs, 2023 Series A, saw 5.125s of 5/2024 at 5.009%, 4.506s of 2028 at par and 4.648s of 2033 at par, noncall.

BofA Securities priced for Raleigh, North Carolina, (Aaa/AAA/AAA/) $298.545 million of combined enterprise system revenue and revenue refunding bonds, with 5s of 3/2024 at 3.29%, 5s of 9/2024 at 3.25%, 5s of 9/2028 at 2.74%, 5s of 9/2033 at 2.73%, 5s of 9/2038 at 3.22%, 4s of 9/2044 at par, 5s of 9/2048 at 3.63% and 4s of 9/2053 at 4.13%, callable 9/1/2033.

Raymond James priced for the Maryland Stadium Authority (/AA/AA/) $226.835 million of football stadium issue revenue bonds, with 5s of 3/2025 at 3.24%, 5s of 2028 at 3.05%, 5s of 2033 at 3.03% and 5s of 2037 at 3.46%, callable 3/1/2033.

Wells Fargo Bank priced for the Utah Board of Higher Education (Aa1/AA+//) on behalf of the University of Utah $163.790 million of general revenue bonds, Series 2023B, with 5s of 8/2026 at 2.96%, 5s of 2028 at 2.80%, 5s of 2033 at 2.78%, 5s of 2038 at 3.29%, 5s of 2043 at 3.61%, 5.25s of 2048 at 3.73% and 5.25s of 2053 at 3.83%, callable 8/1/2033.

Citigroup Global Markets priced for the South Carolina State Housing Finance and Development Authority (Aaa///) $106.190 million of mortgage revenue bonds, with 3.35s of 1/2025 at par,  3.35s of 7/2025 at par, 5s of 1/2028 at 3.32%, 5s of 7/2028 at 3.35%, 3.95s of 1/2033 at par, 4s of 7/2033 at par, 4.45s of 7/2038 at par, 4.75s of 7/2043 at par, 4.9s of 7/2048 at par, 4.95s of 7/2053 at par and 5.75s of 1/2054 at 4.26%, callable 7/1/2032.

In the competitive market Thursday, Clark County, Nevada, (Aa2/AA+//) sold $100 million of sales and excise tax revenue streets and highways bonds, to Jefferies, with 5s of 7/2030 at 2.78%, 5s of 2033 at 2.79%, 5s of 2038 at 3.35% and s of 2043 at 4.08%.

May performance disappoints
Following the Federal Deposit Insurance Corp. “rescue of [Silicon Valley Bank] et al. in April, markets remained unsettled throughout May on debt ceiling and potential U.S. default concerns amidst hawkish Fedspeak and continued inflationary data,” including April’s higher-than-expected core PCE increasing to 4.7% year-over-year,” said Peter Block, managing director of credit strategy at Ramirez & Co.

The Fed hiked rates 25 basis points on May 3 “to a target range of 5%-5.25% and hinted at a possible pause in June,” he said.

However, he noted that “Fed meeting minutes from May and hawkish Fed speakers throughout the month mostly debunked the sentiment, raising the probability of additional rate hikes throughout 2023.”

The market is currently pricing around a 65% chance of a 25 basis point rate hike in June, around a 35% chance of another 25 basis point rate hike in July and around a 30% chance of a cut in September, he said.

UST yields rose sharply across the curve in May, up 40 bps in two years, up 28 bps in five years, up 21 in 10 years and up 12 in 30 years, he said. All curves remained inverted.

Total issuance through the end of May is down 27% year-over-year at $136 billion, including around $30 billion in May. He noted the large drop in taxables in the first five months of the year, down 54% year-over-year.

The drop in issuance has led Block to revise his total issuance for 2023 downward to $350 billion from $350 billion.

“The revision stems primarily from our view of continued elevated rates further adversely impacting new-money issuance,” he said.

New-issue supply, particularly inside 10 years, “continued to hit headwinds in May on an inverted … and volatile MMD curve, relatively low absolute rates, and full valuations,” he said.

Underwriters, he noted, “were in many cases forced to widen spreads in the front-end to attract demand, resulting in inverted spreads.”

Fund outflows in May were manageable, he said, at around $2 billion. Year-to-date, nearly $8 billion has been pulled from muni mutual funds, per Refinitiv Lipper.

Despite the muni headwinds so far this year, Block anticipates strong near-term demand in June through August on an avalanche of reinvestment of around $127 billion, which combined with the expected new-issue supply of $97 billion, should result in around a net supply of negative $30 billion. Bloomberg lists the 30-day net negative supply at $20.6 billion.

In sympathy with USTs, he said tax-exempts sold off in May and underperformed across the yield curve by between three to seven ratios.

Despite the underperformance, Block said muni-UST ratios, spreads, and sector values “remain fully/fairly valued heading into June.”

The secondary market, he said, was firm in May as bid wanteds were down 15% below average and trading throughput was down 10% below average.

“Dealer inventory of fixed coupon bonds grew in May to an above average around $12 billion partially due to some hangover supply from the $7.5 billion SVB/Signature bank portfolio and unsold new issue balances,” he said.

“The debt ceiling debacle appears close to resolution without a U.S. default,” Block said. “With this concern behind us, markets should return to obsessing on economic data and the Fed which is almost, but not yet, through with raising rates as inflation remains ‘sticker’ than expected.”

All else equal, he said munis “should outperform Treasuries through August on strong demand” due to around $30 billion of negative net supply.

Secondary trading
Maryland 5s of 2024 at 3.19%-3.03% versus 3.21%-3.05% Wednesday and 3.31% original on 5/24. North Carolina 5s of 2024 at 3.20%-3.14% versus 3.29%-3.24% Wednesday. NYC TFA 5s of 2024 at 3.18%.

Maryland 5s of 2027 at 2.77%. Energy Northwest 5s of 2028 at 2.80% versus 2.93% Tuesday. Ohio 5s of 2029 at 2.79%.

Washington 5s of 2032 at 2.67%-2.66%. Columbus 5s of 2032 at 2.63%-2.60% versus 2.67% Wednesday. DASNY 5s of 2034 at 2.64% versus 2.68% Wednesday and 2.68% original on 5/19.

Texas Water Development Board 5s of 2047 at 3.68%-3.69% versus 3.87% on 5/24 and 3.67% on 5/16. Crosby ISD, Texas, 5s of 2048 at 4.14% versus 4.22% Tuesday and 4.31%-4.26% on 5/23.

AAA scales
Refinitiv MMD’s scale was bumped five to eight basis points: The one-year was at 3.16% (-8, no June roll) and 3.02% (-6, no June roll) in two years. The five-year was at 2.70% (-6, no June roll), the 10-year at 2.59% (-6, no June roll) and the 30-year at 3.50% (-5) at 3 p.m.

The ICE AAA yield curve was bumped four to seven basis points: 3.17% (-7) in 2024 and 3.01% (-7) in 2025. The five-year was at 2.66% (-6), the 10-year was at 2.61% (-5) and the 30-year was at 3.55% (-4) at 4 p.m.

The IHS Markit municipal curve was bumped six to eight basis points: 3.15% (-8) in 2024 and 3.02% (-6) in 2025. The five-year was at 2.70% (-6), the 10-year was at 2.58% (-6) and the 30-year yield was at 3.49% (-6), according to a 4 p.m. read.

Bloomberg BVAL was bumped four to six basis points: 3.06% (-6) in 2024 and 2.96% (-5) in 2025. The five-year at 2.64% (-5), the 10-year at 2.56% (-5) and the 30-year at 3.54% (-4) at 4 p.m.

Treasuries were firmer.

The two-year UST was yielding 4.342% (-4), the three-year was at 3.988% (-4), the five-year at 3.704% (-2), the 10-year at 3.608% (-2), the 20-year at 3.985% (-2) and the 30-year Treasury was yielding 3.833% (-1) at 4 p.m.

Mutual fund details
Refinitiv Lipper reported $1.345 billion of outflows from municipal bond mutual fund outflows for the week that ended Wednesday following $847.068 million of outflows the previous week.

Exchange-traded muni funds reported inflows of $45.461 million after outflows of $587,000 in the previous week. Ex-ETFs muni funds saw outflows of $1.391 billion after $846.480 million of outflows in the prior week.

Long-term muni bond funds had outflows of $513.789 million in the latest week after outflows of $346.922 million in the previous week. Intermediate-term funds had outflows of $290.203 million after outflows of $216.852 million in the prior week.

National funds had outflows of $1.147 billion after outflows of $736.341 million of outflows the previous week while high-yield muni funds reported outflows of $473.393 million after outflows of $420.675 million the week prior.

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