Bonds

Munis little changed ahead of CPI, FOMC meeting

Municipals were steady ahead of this week’s consumer price index print and Federal Open Market Committee meeting. U.S. Treasuries were slightly firmer on the front end and equities were up near the close.

The two-year muni-Treasury ratio Monday was at 64%, the three-year at 67%, the five-year at 68%, the 10-year at 69% and the 30-year at 90%, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the two-year at 65%, the three-year at 66%, the five-year at 66%, the 10-year at 70% and the 30-year at 92% at 4 p.m.

Elevated new issues, Federal Deposit Insurance Corp. sale lists, and heavy reinvestment cash “helped to offset each other [last] week and keep the muni market stable,” said Birch Creek strategists.

The “AAA MMD curve was unchanged everywhere except the shortest maturities” as the two-year rallied four basis points and significantly outperformed USTs.

Meanwhile, 10-year notes rose “by just 1.2 basis points to close out the week at 2.58% and with 10-year notes hovering one percentage point higher than the three-year average,” said Jason Wong, vice president of municipals at AmeriVet Securities..

With yields steady, the muni-UST 10-year ratio “remained unchanged as 10-year notes are yielding 69.05% of Treasuries, compared to 69.60% a week ago,” he said.

However, since the start of the year, “muni ratios have slowly started to cheapen to levels where investors are slowly looking towards the front end of the curve,” Wong said.

Currently, 10-year ratios are around 70%, “which, comparably to Treasuries, has been the cheapest since the start of February,” he said.

With ratios becoming less volatile, there are starting to be “positive entry points in the front end even as the front end is still rich compared to the five-year ratio average,” he said.

With five-year munis yielding about 2.65%, “coupled with their Treasury ratio hovering at roughly 69% and with 10-year notes yielding about 2.58% with their Treasury ratio hovering at [around] 69.63%, we should start to see investors move into the five-year part of the curve and move away from the seven- to 12-year part of the curve,” Wong noted.

The long end is the cheapest part of the curve with the 30-year ratio at 92.65%, he said.

Last week, secondary trading was around “$38.9 billion with approximately 52% of trading being dealer sells and with the bulk of the trading being done on Wednesday,” Wong said.

Investors put up roughly $7.65 billion for the bid this past week versus the $4.9 billion put out for the bid the week prior, per Bloomberg..

Investors added $460 million to muni mutual funds last week, according to Refinitiv Lipper, marking the first time of inflows since mid-February.

This cash “along with strong [separately managed account] demand plus a focus on the FDIC lists in the intermediate part of the curve led to a surge in purchases” in the five- to 20-year range., Birch Creek strategists said.

Sales volumes, which were also elevated, did not appear to “have any issues getting absorbed even amongst the rate volatility,” they said.

Last Monday, Citi reported “the largest bid wanted volume day [year-to-date],” while Wells Fargo’s electronic traders reported the “largest number of items out for the bid this year” on Wednesday, they said.

Additionally, J.P. Morgan saw a “14% increase in dealer inventory at month end relative to the trailing one-year average,” they said.

These figures have potentially led investors to question “whether this is just a sign that dealers are bullish and want to own risk heading into the strong summer season or if it signals that customer demand may not be able to keep up with the elevated supply, which would cause dealers to fade their bids and ultimately lead to weaker markets,” Birch Creek strategists said.

While strong performance has been stopped by the uptick in supply and higher UST yields, they “expect that the elevated demand will ultimately win out and provide a boost to muni performance.”

With Refinitiv MMD ratios between two- to 10 years “at a paltry 64-69% while the 30-year is 91%, we believe demand will shift out long and help to flatten the curve,” they said.

Even if the Fed continues “to hike the policy rate, we expect the long end to remain anchored and may even benefit as a more aggressive hiking campaign would likely increase recession probabilities,” according to Birch Creek strategists.

CreditSights strategists said issuers are waiting to see what the Fed will do at this week’s Federal Open Market Committee meeting, with this week’s primary calendar at $3.5 billion.

Even though next week will be a holiday-shortened week, CreditSights strategists predict issuance will be more in line with recent, and non-FOMC-week volume.

The futures market was pricing by “a terminal Fed Funds rate of 5.29% as of the July FOMC meeting,” as of the close on Friday, they said.

“Once investors have comfort that the terminal rate for Fed Funds is near,” they expect an increase in demand.

But at the current pace of issuance, they believe net supply “will be negative in June, July and August, before turning sharply positive in September and October.”

“The likely near-term imbalance between reinvestment demand and new-issue supply will, at the very least, affect the ability of investors to find bonds that suit their needs; but we also expect that the imbalance will tighten spreads and potentially increase the opportunity costs of not putting money back to work promptly,” CreditSights strategists said.

In the competitive market Monday, the Johnson County USD, Kansas, (Aaa/AA+//) sold $150 million of GOs to J.P. Morgan Securities, with 5s of 10/2024 at 3.06%, 5s of 2028 at 2.73%, 5s of 2033 at 2.74%, 5s of 2038 at 3.29% and 4s of 2043 at 4.07%, callable 10/1/2032.

Secondary trading
Nevada 5s of 2024 at 3.19%-3.15%. Washington 5s of 2026 at 2.91%. Maryland 5s of 2026 at 2.84% versus 2.83% on 6/5 and 2.87% on 6/1.

Ohio 5s of 2028 at 2.73% versus 2.75% Friday. NYC 5s of 2028 at 2.91%-2.88% versus 3.03% on 6/6 and 3.26% original on 6/2.

Connecticut 5s of 2031 at 2.86% versus 2.88% on 5/22. NYC 5s of 2032 at 2.85% versus 2.89% Thursday and 3.12% original on 6/2. Board of Regents of the University of Texas System 5s of 2034 at 2.85% versus 2.85%-2.90% original Wednesday.

Ohio Water Development Authority 5s of 2043 at 3.56%. Indiana Finance Authority 5s of 2053 at 4.18%-4.14% versus 4.20%-4.18% Thursday and 4.25%-4.23% original on 6/7.

AAA scales
Refinitiv MMD’s scale was unchanged: The one-year was at 3.07% and 2.95% in two years. The five-year was at 2.66%, the 10-year at 2.59% and the 30-year at 3.50% at 3 p.m.

The ICE AAA yield curve was bumped up to one basis point: 3.08% (-1) in 2024 and 2.99% (-1) in 2025. The five-year was at 2.65% (flat), the 10-year was at 2.60% (flat) and the 30-year was at 3.56% (flat) at 4 p.m.

The IHS Markit municipal curve was unchanged: 3.06% in 2024 and 2.95% in 2025. The five-year was at 2.66%, the 10-year was at 2.58% and the 30-year yield was at 3.49%, according to a 4 p.m. read.

Bloomberg BVAL was unchanged: 3.03% in 2024 and 2.93% in 2025. The five-year at 2.63%, the 10-year at 2.57% and the 30-year at 3.54% at 4 p.m.

Treasuries were firmer 10 years and in.

The two-year UST was yielding 4.579% (-3), the three-year was at 4.223% (-3), the five-year at 3.898% (-3), the 10-year at 3.740% (-1), the 20-year at 4.053% (flat) and the 30-year Treasury was yielding 3.885% (flat) at 4 p.m.

Primary to come:
The Louisiana Stadium and Exposition District (A2//A/) will price $549.5 million of tax-exempt Series 2023A senior revenue bonds Thursday. Serials 2024-2053. BofA Securities.

The Greater Texoma, Texas, Utility Authority (/AA//) is set to price $208.9 million of Series 2023A contract revenue bonds on behalf of the city of Sherman Project on Tuesday. Serials 2027 to 2053 are insured by Build America Mutual Assurance Co. RW Baird

The Colorado Housing & Finance Authority (Aaa/AAA//) is set to price $159.9 million of Class i 2023 Series K-1 single-family mortgage bonds Tuesday. Serials 2024 to 2033; terms 2038, 2041, 2053. RBC Capital Markets.

The Wisconsin Housing & Economic Development Authority (Aa3/AA+//) is set to price $121 million of Series 2023 A and B non-AMT housing revenue bonds Tuesday. Wells Fargo Bank.

The Florida Development Finance Corp. is set to price $120 million of solid waste disposal revenue bonds Thursday behalf of the Waste Pro USA Inc. project. Serials 2032. Citigroup Global Markets.

The Minnesota Housing Finance Agency (Aa1/AA+//) is set to price $150 million of non-AMT tax-exempt and taxable social bonds on Thursday. Serials 2024 to 2035, terms in 2038, 2043, 2048, 2053. RBC Capital Markets.

Competitive
Chesterfield County, Virginia, (Aaa/AAA//) is set to sell $104 million of GO debt Wednesday. 

The Richland County, S.C., School District #2 (Aa2/AA//) is set to sell $158.42 million of GO debt Wednesday.

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