Municipalities were weak on Wednesday as outflows from mutual funds increased. U.S. Treasury yields fell, and stocks ended higher.
The three-year muni-UST ratio is at 62%, five-year at 66%, 10-year at 69% and 30-year at 93%, according to Refinitive MMD’s 3pm reading. ICE data services had three at 63%, five at 66%, 10 at 71% and 30 at 94% at 4 hours of reading.
Investors took $3.052 billion out of mutual funds last week after spending $2.447 billion, the Investment Company Institute reported.
Another week saw inflows of $1.279 billion after inflows of $1.351 billion a week earlier, according to ICI data.
“The decline in muni rates came on the heels of sovereign debt actions, leaving the ratios to recover somewhat with just a few sessions left in 2022,” said Kim Olsson, senior vice president of municipal bond trading at FHN Financial.
The short end of December’s price action left it exposed to inflation – the 2023 MMD spot is up 32 basis points since late November, while the 10-year yield is lower. At 19 basis points, the 30-year yield is flat over that period.
The problem, which followed the Bank of Japan’s changes in bond yield controls, “suggests slightly wider entry points and volumes with buyers using cash reserves,” she said.
Secondary stocks added $10 billion on Tuesday, which she said was “an increase from recent sessions where production slowed.”
“The supply is 100% generated from secondary flows, which means that any material correction is impossible,” says Olsan.
“Average median AA-rated earnings and Texas PSF-backed school names showed some expansion earlier this month behind strong ratings of +20/AAA,” she said. “Similarly longer 4% coupons are trading up 15 basis points from levels a few weeks ago, giving away some of the gains made in those structures through inflation-based bidding.”
For 2022, Olson says, “The sharp and prolonged rebound that began in February has pushed the major spot levels above last year’s range.”
One-year MMD yields averaged 0.10% and five-year highs traded at an average of 0.50% in 2021, she said.
With the consolidation cycle in full force, the short end of the argument is a one- to five-year yield trading average of 1.80% to 2.15%, she said.
“Medium bonds that saw an average of 1 percent last year move to a median of 2.50%, and 20-year high yields that traded below 1.50% in 2021 have offered an average of more than 2.75% this year,” Olson said. “Long yields, which averaged in the 1.00% range at the end of the curve, have averaged about 3% this year.”
“The 20 GO index reflects the market’s performance this year,” said the bond buyer.
The average yield on the index in 2021 was 2.18 percent. “The average yield has risen to 3.23% this year, rising to 4.16% at the end of October,” Olsan said.
“As a barometer of the broader market, the index reflects market pressures in various areas of weakness,” she said. “Over the 10-year cycle, the average yield of the index is 3.44%, in the range expected to close in 2022.”
The starting point for municipal investments is their tax-backed status, which was “in the front half of the curve with TEYs trading below 3% in 2021 with extremely low yield testing,” she said.
In the year The 2022 yield correction, she said, “raised the needle pretty well on the whole curve.”
“Short-term munis offer TEYs in the 4% range and values grow over 5% over 10-15 years,” Olson said. “The long-term 4s are trading at an absolute level that puts TEYs well into the 6% range. With 2023 holding a stable (and slightly lower) yield range, TEY values are gaining traction with high-net-worth investors. Municipal bonds are the biggest share.”
Informa: Money market sees income stream.
Tax-exempt municipal money market funds saw inflows of $80.6 million in the week ended Tuesday, bringing total assets to $103.80 billion, according to the Money Fund Report, a publication of Informa Financial Intelligence.
The average seven-day simple yield for all tax-exempt and municipal money market funds rose to 2.91 percent.
Taxable mutual fund assets rose from $30.93 billion to end the reported week at $4.558 trillion, out of total net assets. The average seven-day simple yield for all taxable reporting funds rose to 3.80 percent.
2023 Washington 5s were up 2.82% from 2.31%-2.71% on Monday. 2023 Maryland 5s at 2.90%-2.89%. NYC TFA 5s of 2024 at 2.68%.
Ohio 5s 2026 at 2.60% from 2.48% original on 12/7. Florida 5s of 2027 at 2.61%-2.59%. 2028 DC 5s at 2.56%-2.54%.
Columbus, Ohio, 5s of 2034 at 2.79% from 2.84% Tuesday. Maryland 5s of 2036 at 3.06%-3.03%.
Massachusetts 5 of 2048 at 3.76% -3.79%. LA DWP 5s of 2052 at 3.84% from 3.66% on Friday. Illinois Finance Authority 5s 2052 at 4.55%, up from 4.47%-4.49% Friday and 4.45%-4.44% Thursday.
Refinitiv’s MMD benchmark was cut by five basis points: one-year yield at 2.81% (+5) and two-year yield at 2.57% (+3). The five-year at 2.48% (unch), the 10-year at 2.54% (unch) and the 30-year at 3.49% (unch).
ICE AAA’s yield curve has been weak over the long term: 2.73% (flat) in 2023 and 2.58% (-1) in 2024. The five-year was at 2.54% (flat), the 10-year at 2.61% (+1). And the 30-year yield was at 3.51% (+1) at 4 p.m
The IHS Markit municipal curve is cut at the short end: 2.79% (+5) in 2023 and 2.58% (+3) in 2024. The five-year yield was at 2.51% (unch), the 10-year was at 2.55% (unch) and the 30-year yield was at 3.47% (unch) at the 4pm reading.
Bloomberg cut BVAL by up to three basis points: 2.74% (+3) in 2023 and 2.60% (+2) in 2024. Five-year 2.49% (ounce), 10-year 2.57% (ounce) and 30-year at 3.50% (+1) at 4 p.m.
Treasuries were strong.
The two-year UST was 4.215% (-4), the three-year at 3.990% (-3), the five-year at 3.777% (-1), the seven-year at 3.764% (-2) and the 10-year yield. 3.675% (-1), the 20-year is yielding at 3.921% (-2) and the 30-year Treasury at 3.732% (-1).
The consumer confidence report brought welcome news for the Federal Reserve, as housing continued to suffer.
Consumer confidence rose to 108.3 in December, up from 101.4 a month earlier, and better than the 101.0 expected by economists polled by the IFR.
The current situation index jumped from 138.3 to 147.2, while the expectations index rose from 76.7 to 82.4.
“Consumer confidence rebounded in December, reversing a series of declines in October and November, reaching its highest level since April 2022,” said Lynn Franco, senior director of economic indicators at the Conference Board. “Inflation fell to the lowest level since September 2021 in December, with the recent drop in gas prices a big boost.”
Scott Anderson, chief economist at the Bank of the West, said the increase was broad-based. “Spending plans were mixed with many consumers expecting to buy a car in the next six months, but few expected to buy a home or major appliance.”
And while inflation expectations have eased, they say they are “still high” at an average of 6.7 percent next year.
“This report will be well received by the Fed as it raises interest rates to reduce inflation,” he said.
“December’s performance easily beat top economist expectations and suggests a material improvement in consumer sentiment as 2022 approaches,” said Wells Fargo Securities Senior Economist Sam Bullard and Economic Analyst Jeremiah Cole.
But despite the increase in confidence since the summer, consumers “are still more cautious than they will be in 2021.”
Future confidence levels will depend on “the Fed’s ability to provide a soft landing on what is known as a narrow runway,” Bullard and Cole said. “Fixing inflation is one aspect of rising consumer confidence, but a large part of the Conference Board’s measure is determined by the health of the labor market. The potential cost of pulling out of the floor in a still-strong labor market could be higher for 2023.”
Separately, existing home sales fell 7.7 percent to 4.09 million in November for the tenth consecutive month. Economists had expected a reading of 4.2 million.
Wells Fargo Securities Economist Charlie Dougherty, Economist Jackie Benson and “The current weakness in home sales is explained by affordability as the volume of home sales increases significantly in 2022.” Economic analyst Patrick Barley.
He said those declines will be limited by a lack of supply as inflation continues to decline. However, “the combination of price moderation and lower financing costs appears to be driving some buyers back into the market.”
Wells Fargo sees a gradual decline in loan defaults over the next two years. “That said, we’re also predicting a recession in the second half of 2023,” Dougherty et al said. “In other words, lower mortgage rates may improve affordability and help stabilize buyer demand in the near term, but expect a challenging macroeconomic backdrop for the housing market in 2023.”