Munis steady ahead of lackluster bond volume

Municipals were steady to start the week as U.S. Treasuries were firmer and equities ended the trading session up.

The two-year muni-to-Treasury ratio Monday was at 63%, the three-year at 65%, the five-year at 66%, the 10-year at 70% and the 30-year at 91%, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the two-year at 64%, the three-year at 65%, the five-year at 65%, the 10-year at 68% and the 30-year at 91% at 4 p.m.

The muni market “finally succumbed to the month-long rate sell-off that had seen valuations test historically rich levels,” said Birch Creek Capital strategists in a weekly report.

Triple-A yields rose nine to 11 basis points from five- to 30-years, with the long end of the curve underperforming by nearly 20 basis points last week, they noted.

Muni rates sold off “because they are slightly rich to Treasuries,” said Anders Persson, Nuveen’s chief investment officer for global fixed income, and Dan Close, Nuveen’s head of municipals.

“What’s driving that relationship?” they said. “Not much municipal bond reinvestment money is left to put to work.”

Also, they noted the “new-issue calendar is expected to heat up after Labor Day and should be outsized through the end of the year.”

“Muni yields may be challenged for the next few months, but we believe muni bonds still represent value,” Persson and Close said.

Since the start of August, the 10- and 30-year AAA muni yields have risen by 34 and 37 basis points, respectively, according to the Refinitiv MMD scale.

Month-to-date, Jeff Lipton, managing director of credit research at Oppenheimer Inc., said fixed-income is “flashing red across the usual suspects,” with munis underperforming UST, -1.81% versus -1.34%.

During the trading sessions ahead of Fed Chairman Jerome Powell’s speech at Jackson Hole, he said “munis were only marginally outperforming, and we suspect that the rich muni curve was prime to underperform a bond market selloff.”

If not for the benefits of summer technicals, Lipton said “munis would be showing even weaker performance.”

With the rise in yields, munis underperformed USTs “as 10-year notes are now yielding 68.64% compared to when the ratios were at 66.42%,” said Jason Wong, vice president of municipals at AmeriVet Securities.

With the underperformance in munis, he said “muni-UST ratios cheapened with the long end being impacted the most by three percentage points.”

The front end has improved slightly cheapening by two percentage points.

“Although we are seeing higher yields and cheaper bonds relative to Treasuries, investors are still not convinced that we have not seen the end of rising yields,” he said.

Investors continued to pull money from muni mutual funds, with Refinitiv Lipper reporting $534 million of outflows last week. This brings the year-to-date figure to $8 billion.

“With volatility in Treasuries continuing to put pressure on munis, investors are being pushed to the sidelines until yields settle down,” Wong said.

While desks were lightly staffed, they were “laser-focused on raising cash to meet redemptions and fund new issues,” Birch Creek Capital strategists said.

Tuesday saw the highest bid wanteds volume since December and “the uptick in lists continued throughout the week,” they said.

Overall, bid wanteds volume rose 27%, but was higher in longer duration bonds at between 35% and 45%, according to J.P. Morgan.

New issuance last week “was priced to sell and well received,” Persson and Close said.

But while issuance should have been “manageable” at around $7.5 billion, they said “underwriters had to bring deals at large concessions in order to garner interest.”

The largest deal, a $1.2 billion Michigan Trunkline deal “struggled to get done, with spreads increasing 10 basis points from pre-marketing and then needing various coupon adjustments and further spread widening to clean up balances,” they said.

“With new issues coming much cheaper than secondary offerings and [bid wanteds] piling up each day, dealers reported very little interest in secondary buying,” they noted.

While most of the trade prints have been swaps, Birch Creek Capital strategists said a “few buyers beginning to emerge in the back half of the week as they focused on absolute yields that are much more attractive than they’ve been all year.”

The yield on the IG index, which has risen around 80 basis points over the last four months, is at levels not seen since mid-November, they noted.

Secondary trading
Massachusetts 5s of 3.32% versus 3.22% on 8/17 and 3.22%-3.20% on 8/16. Tennessee 5s of 2025 at 3.33% versus 3.30% on 8/21 and 3.24% original on 8/16. Maryland Stadium Authority 5s of 2026 at 3.36%.

Triborough Bridge and Tunnel Authority 5s of 2028 at 3.05%. California 5s of 2029 at 2.88% versus 2.90% Wednesday and 2.72% on 8/16. New Hampshire 5s of 2030 at 2.97%.

NYC 5s of 2032 at 3.20%-3.19% versus 3.00% on 8/10. Vermont 5s of 2033 at 3.05% versus 3.08% Friday and 3.12% original on Thursday. Arkansas Development Finance Authority 5s of 2034 at 3.20%-3.19% versus 3.04%-3.03% on 8/10 and 3.09% original on 8/9.

San Jose Financing Authority 5s of 2043 at 3.68%-3.66%. NYC 5s of 2047 at 4.21% versus 4.17%-4.21% on 8/17 and 4.12% on 8/14.

AAA scales
Refinitiv MMD’s scale was unchanged: The one-year was at 3.27% and 3.19% in two years. The five-year was at 2.93%, the 10-year at 2.95% and the 30-year at 3.91% at 3 p.m.

The ICE AAA yield curve was bumped up to one basis point: 3.29% (unch) in 2024 and 3.23% (unch) in 2025. The five-year was at 2.90% (-1), the 10-year was at 2.88% (unch) and the 30-year was at 3.89% (-1) at 4 p.m.

The S&P Global Market Intelligence (formerly IHS Markit) municipal curve was unchanged: 3.28% in 2024 and 3.19% in 2025. The five-year was at 2.94%, the 10-year was at 2.96% and the 30-year yield was at 3.90%, according to a 4 p.m. read.

Bloomberg BVAL was cut up to one basis point: 3.27% (unch) in 2024 and 3.18% (unch) in 2025. The five-year at 2.90% (unch), the 10-year at 2.89% (unch) and the 30-year at 3.88% (+1) at 4 p.m.

Treasuries were firmer.

The two-year UST was yielding 5.046% (-2), the three-year was at 4.699% (-3), the five-year at 4.401% (-4), the 10-year at 4.201% (-4), the 20-year at 4.480% (-2) and the 30-year Treasury was yielding 4.277% (-1) near the close.

Primary to come:
Jacksonville, Florida (/AA/AA-/AA) is set to price $290.345 million of special revenue and refunding bonds, Series 2023A, and special revenue refunding bonds, Series 2023B, consisting of $259.495 million Series 2023A, serials 2024-2043, term 2048, 2053, and $30.85 million Series 2023B, serials 2024-2026. Raymond James & Associates, Inc.

The Healthcare Authority of the City of Huntsville, Alabama (A1///) is set to price Tuesday $175 million of Series 2023A refunding revenue bonds. Wells Fargo Bank

Lakeland, Florida (/AA/AA/), is set to price Tuesday $154.675 million of Energy System Revenue and Refunding Bonds, Series 2023, serials 2029-2048. Wells Fargo Bank.

The Housing Authority of King County, Washington (/AA//), is set to price $114.405 million of Kirkland Heights Project affordable housing revenue bonds, consisting of $40.9 million Series A1, serials 2028, $23.145 million Series A2, serials 2028, $50.360 million, Series A3, serials 2028-2033, 2041, term 2040. KeyBanc Capital Markets.

The South Carolina State Housing Finance and Development Authority (Aaa///) is set to price $100 million of non-AMT mortgage revenue bonds Tuesday, serials 2025-2035, term 2038, 2043, 2048, 2053, 2054. Citigroup Global Markets Inc.

The South Carolina Association of Government Organization (MIG-1///) is set to sell $230.191 million of certificates of participation (South Carolina School District Credit Enhancement Program) at 11 a.m. eastern Thursday. 

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