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Municipals rebounded Thursday, pushing the 10-year triple-A yield below 3%, returning to municipal bond mutual funds after 14 straight weeks of outflows. Losses in U.S. Treasuries and equities ended after Federal Reserve officials disappointed expectations for a slower rate hike.
Triple-A yields fell three to six basis points, depending on the curve, while U.S. Treasuries rose as much as nine. As a result, ratios have fallen.
The three-year muni-UST ratio was at 66% on Thursday, the five-year at 71%, the 10-year at 77% and the 30-year at 92%, according to Refinitiv MMD’s 3pm reading. ICE data services had three at 68%, five at 73%, 10 at 81% and 30 at 95% readings at 4 hours.
Refinitiv Lipper on Thursday reported earnings of $604.704 million from municipal mutual funds for the week ending Wednesday, after spending $2.573 billion a week earlier.
High yield inflowed $386.352 million after outflows of $700.488 million a week ago, while exchange traded funds inflowed $1.791 billion after inflows of $208.763 million last week.
Kim Olson, senior vice president of municipal bond trading at FHN Financial, said: “After the challenging losses of September 2009, a new shift is emerging between tight supply and construction demand.
Muni products followed another rally in multi-digit gains in response to the post-Consumer Price Index report, she said.
“Call primary activity by creating strong secondary flows, or vice versa, and the result is tighter bids and larger subscriptions,” she said.
The $600 A1/NR of Metropolitan Nashville, TN Airports gained 10 to 20 points on Wednesday “based on a large order book, lower than prior levels in the non-AMT series, while the AMT series responded similarly at 5.50%. Due in 2052, it yielded 5.02%; ” she said.
“After a dramatic rise in prices across AAA bonds, the first implied 3% yield will now appear in 2034 — an 11-year extension from last week,” Olsan said.
High-level trading on Thursday saw many prints below the 3% threshold.
The market appears to be taking a long-term input view. Olson said CreditSights strategists expect a total of $64 billion in issuance or maturing over the next three months, which is just two months’ worth of supply.
The bond buyer’s 30-day visible supply sits at $7.14 billion.
“Part of the reason for the lower than normal January figure may be that the 2013 drawdown, which can be saved by the 10-year call feature, is below current levels with little incentive to call early,” she said. “This aspect may explain the increased demand during the waning weeks of the year and until the calendar resets in early January.”
As dealers and clients unravel new themes, Olson said, “Certain metrics point to a risk-loss/opportunity-trend.”
“There are indications that inventory management positions will decrease at various times this year … as production increases,” she said.
At the beginning of the year, inventories averaged $12.3 billion per week, but “at the end of Q1 and during Q2, when the awards were held, commitments fell to an average of $11 billion,” she said. The 10-year AAA BVAL yield rose to 2.73% from 1.54% between March and the end of June and rose to 2.95% in mid-May.
The second half of 2022 had a flexible rate range.
“The rally that took the 10-year BVAL yield to a low of 2.16% in July and August was joined by traders carrying more than $15 billion in late July,” Olson said. “Since then, mostly upward trending output has led to an average decline in shipments of nearly $10 billion — the lowest since late September.”
November’s rally, she said, “could create greater dealer confidence and lead to higher carryover figures when reported.”
According to the Municipal Securities Regulatory Board data, “more secondary interest will be generated by 2030 (to bring the desired 3% to the downside) at the expense of shorter maturities.” From November 9 to November 16, this region accounted for 73% of all trades. Ratings breakdowns show a similar theme – 69% of all secondary activity traded in AAA and AA rated bonds.
The MSRB also noted the increased volume of transactions this year, with the board reporting on its real-time transaction reporting system that year-to-date transactions increased by 61% compared to the same period in 2021, when November is expected to be the seventh. With over a million transactions in the last eight months.
The last big deals of the week at Main Market Thursday.
JP Morgan Securities to Washington Economic Development Finance Authority (Aaa///) $165 million Mura Cascade ELP LLC Project Environmental Utilities Revenue and Refund Bonds, Series 2022, 3.9s with 12/2042 Mandatory Tender Date 12/8/2023 on 6/1 /2023 can be called.
Barclays Capital to California Municipal Finance Authority (A3///) $140 million of Samuel Merritt University Revenue Bonds, Series 2022, at 5.25s due 6/2053 at 4.57%, callable on 12/1/2032.
Citigroup Global Markets to Mississippi Business Finance Corporation (B1/B+/BB-/) $100 Million Green Enviva Inc. Project Free Facility Income Bond, Series 2022, 7.75s par 7/2047, Mandatory Tender Date 7/15/2032, Full Call.
Secondary marketing
Ohio 5s of 2023 at 2.81 percent. Maryland 5s of 2024 at 2.78%. North Carolina 5s 2025 at 2.82% California 5s 2027 at 2.80% versus 2.85% Wednesday.
Wake County, North Carolina, 5s 2030 at 2.83% from 2.87% Wednesday. Washington City Sanitation District 5s of 2030 at 2.80%-2.79%. Maryland 5s of 2033 at 2.95%-2.94%.
New York City 5s of 2036 at 3.62%-3.61%. Los Angeles DWP 5s of 2041 at 3.68%. 2042 Washington 5s at 3.64% versus 3.71% Wednesday. New York City Water 5s of 2044 at 4.07%-3.87%.
California 5s of 2052 at 3.91% Massachusetts Bay Transportation Authority 5s of 2052 at 3.89% versus 3.92% Wednesday.
AAA scales
The Refinitive MMD measure fell as much as five basis points: one-year at 2.74% (-5) and two-year at 2.75% (-5). The five-year yielded at 2.81% (-3), the 10-year at 2.91% (-3) and the 30-year at 3.59% (-3).
ICE AAA’s yield fell four to five basis points: 2.77% (-5) in 2023 and 2.80% (-6) in 2024. The five-year yield was at 2.83% (-4), the 10-year was at 2.96% (-6) and the 30-year was at 3.72% (-6) at 4 pm.
IHS Markit’s long-term municipal curve points out: 2.74% (unch) in 2023 and 2.76% (unch) in 2024. The five-year was at 2.80% (inch), the 10-year at 2.91% (inch). And the 30-year yield was at 3.59% (-3) at 4 pm reading.
Bloomberg BVAL falls two to three basis points: 2.75% (-3) in 2023 and 2.79% (-3) in 2024. The five-year was at 2.81% (-3), the 10-year at 2.88% (-2) and the 30-year at 3.60% (-3) at 4 p.m.
Treasuries were weak.
The two-year UST was 4.450% (+9), the three-year at 4.218% (+8), the five-year at 3.932% (+8), the seven-year at 3.863% (+7), the 10-year The yield is 3.767% (+9), the 20-year at 4.097% (+3) and the 30-year Treasury at 3.876% (+4) last year.
Mutual fund details
Refinitiv Lipper reported $604.704 million in revenue for the week ending Wednesday, following $2.537 billion in expenses last week.
Exchange traded muni funds reported inflows of $1.791 billion after inflows of $208.763 million last week. Among ETFs, muni funds saw $1.186 billion in outflows after last week’s $2.746 billion.
Long-term muni bond funds had inflows of $1.153 billion last week, after outflows of $1.201 billion last week. Medium-term funds withdrew $178.040 million after last week’s withdrawal of $810.144 million.
National funds saw inflows of $764.236 million after outflows of $2.152 billion last week, while high-yield muni funds reported outflows of $386.352 million after outflows of $700.488 million the week before.
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