Supply/demand imbalance likely to keep ratios richer in near term

Municipals were steady in light secondary trading Monday as U.S. Treasuries were flat and equities ended mixed.

The muni market will see “continued strength,” said Wesly Pate, senior portfolio manager at Income Research + Management, largely due to the supply/demand imbalance.

“We have entered into a period of a cumulative structural shortfall of tax-exempt debt relative to an organically growing demand,” he said.

“We are somewhat mystified by the drop in the issuance calendar this week given that this is neither an FOMC week nor a holiday week,” a weekly report from Wells Fargo Municipal Products Group said. “And, no, we do not believe issuers have started sitting on the sidelines in anticipation of the CPI and retail sales releases.”

The firm said it attributes this week’s drop as “idiosyncratic” and the market should expect “some lumpy issuance over the next month.”

As a result, “we expect valuations to remain mostly steady or even richen this week in the face of lighter supply as long as there is no volatility in the rates market,” noted senior strategist Vikram Rai.

The two-year muni-to-Treasury ratio Monday was at 61%, the three-year at 60%, the five-year at 58%, the 10-year at 58% and the 30-year at 82%, according to Refinitiv Municipal Market Data’s 3 p.m. EST read. ICE Data Services had the two-year at 62%, the three-year at 60%, the five-year at 59%, the 10-year at 59% and the 30-year at 81% at 3:30 p.m.

Munis will take direction cues from the Treasury market — unless there is a new credit challenge for munis, something Pate does not see on the horizon.

“While the muni market is usually very quiet to start off each week, [last] Monday proved to be the most exciting trading session as the benchmark MMD curve jumped 10bps and then was unchanged the rest of the week,” said Birch Creek strategists in a weekly report.

After Feb. 2’s “monster rate move” and the continuation Monday, the muni market had “some catching up to do” after muni toUST ratios 10-years and in dropped below 60% once again, they noted.

Despite the move, they said “traders reported decent flows whereas accounts usually run for the hills during extreme volatility.”

The week’s new-issue calendar, “heavily weighted toward ultra high-grade names that typically drive the MMD curve,” was much talked about, they said.

Traders thought new-issue concessions would lead to the muni curve moving at least five to 10 basis points wider, according to Birch Creek strategists.

However, “the higher outright yields seemed to have sparked more interest throughout the week with underwriters reporting strong subscription levels and only minimal concessions,” they said.

LSEG Lipper reported outflows for the first time after four straight weeks of inflows, with $121 million being pulled from muni mutual funds. Exchange-traded fund had $443 million of outflows, while ex-ETFs saw inflows of $322 million, according to LSEG Lipper.

Pate described last week’s outflows as a “blip.”

If fund flows are used as “an overall barometer of demand in the market,” demand should be looked at cumulatively, he said.

So even if there are weeks of outflows, there is still a level of demand that is stronger than “just about any asset class,” he said.

“With most funds still flush with cash and [this] week’s calendar very light, the firmness in the muni market is likely to remain for some time,” Birch Creek strategists said.

Secondary trading
Wake County, North Carolina, 5s of 2.92%. Georgia 5s of 2025 at 2.81%. NYC TFA 5s of 2026 at 2.69%.

Wisconsin 5s of 2030 at 2.47%. DC 5s of 2030 at 2.45%. Massachusetts 5s of 2031 at 2.56%.

Wisconsin 5s of 2033 at 2034 at 2.52%. University of California 5s of 2035 at 2.42%. NYC 5s of 2036 at 2.80%.

Triborough Bridge and Tunnel Authority 5s of 2049 at 3.79%. East Bay Municipal Utility District 5s of 2049 at 3.44% and 5s of LA DWP 5s of 2053 at 3.51%.

AAA scales
Refinitiv MMD’s scale was little changed: The one-year was at 2.93% (-2) and 2.73% (unch) in two years. The five-year was at 2.41% (unch), the 10-year at 2.43% (unch) and the 30-year at 3.57% (unch) at 3 p.m.

The ICE AAA yield curve was unchanged: 2.98% in 2025 and 2.76% in 2026. The five-year was at 2.45%, the 10-year was at 2.45% and the 30-year was at 3.53% at 3:30 p.m.

The S&P Global Market Intelligence municipal curve was little changed: The one-year was at 2.96% (-2) in 2025 and 2.76% (unch) in 2026. The five-year was at 2.44% (unch), the 10-year was at 2.45% (unch) and the 30-year yield was at 3.55% (unch), according to a 3 p.m. read.

Bloomberg BVAL was unchanged: 2.92% in 2025 and 2.77% in 2026. The five-year at 2.42%, the 10-year at 2.49% and the 30-year at 3.60% at 3:30 p.m.

Treasuries were little changed

The two-year UST was yielding 4.471% (+2), the three-year was at 4.255% (+1), the five-year at 4.124% (flat), the 10-year at 4.165% (flat), the 20-year at 4.470% (-1) and the 30-year Treasury was yielding 4.360% (-1) at 3:45 p.m.

Negotiated calendar
The Prosper Independent School District, Texas, (Aaa//AAA/) is set to price Tuesday $400 million of PSF-insured unlimited tax school building bonds, Series 2024. Piper Sandler.

The Illinois Housing Development Authority (Aaa///) is set to price Tuesday $350 million of taxable social revenue bonds, 2024 Series B. Morgan Stanley.

The Tennessee Housing Development Agency (Aa1/AA+//) is set to price Tuesday $175.500 million of taxable social residential finance program bonds, Issue 2024-1B, serials 2025-2034, terms 2039, 2044, 2049, 2054, 2055. Raymond James.

The Gloucester County Improvement Authority, New Jersey, (/AA//) is set to price Thursday $167.240 million of BAM-insured Rowan University projects loan revenue bonds, Series 2024, serials 2034-2044, terms 2049, 2054. Stifel, Nicolaus & Co.

The Humble Independent School District, Texas, (Aaa//AAA/) is set to price Tuesday $147.915 million of PSF-insured unlimited tax school building bonds, Series 2024. Piper Sandler.

The Northern Indiana Commuter Transportation District (A1/A+//) is set to price Wednesday $143.430 million of limited obligation consolidated revenue bonds, Series 2024, serials 2024-2044, terms 2049, 2054. BofA Securities.

The New York State Housing Finance Agency (Aa2///) is set to price Wednesday $133.545 million of sustainability affordable housing revenue bonds, 2024 Series A, serial 2063. RBC Capital Markets.

The Missouri Housing Development Commission (/AA+//) is set to price Thursday $130 million of single family mortgage revenue bonds, consisting of $120 million of non-AMT first place homeownership loan program bonds, 2024 Series A, serials 2025-2036, terms 2039, 2044, 2049, 2054, 2055; and $10 million of taxable first place and next step homeownership loan program bonds, 2024 Series B, serials 2025-2034, terms 2039, 2044, 2049, 2054. Raymond James.

The St. Paul Independent School District No. 625, Minnesota, (Aa1///) is set to price Wednesday  $101.600 million of Minnesota School District Enhancement Program-insured full-term certificates of participation, Series 2024A. Piper Sandler.

Guilford County, North Carolina, (Aaa/AAA/AAA/) is set to sell $180 million of GO school bonds, Series 2024, at 11 a.m., Eastern, Tuesday.

Virginia is set to sell (Aaa/AAA/AAA/) $62.175 million of GOs, Series 2024A, and $118.675 million of GO refunding bonds, Series 2024B, at 10:30 a.m. Wednesday.

Glendale, California, is set to sell $153.850 million of electric revenue bonds, at 11 a.m. Thursday, and $53.765 million of electric revenue refunding bonds, at 11:30 a.m. Thursday.

The Cherokee County School System, Georgia, (Aa1/AA+//) is set to sell $100 million of GOs at 10:30 a.m. Thursday.

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