A stronger tone following UST; supply falls to a trickle

Bonds

Municipals were stronger Friday on the back of the U.S. Treasury rally amid concerns of rising COVID-19 outbreaks in Europe.

Triple-A benchmarks were bumped by one to three basis points beginning around the five-year mark with the larger moves out longer, but the asset class underperformed the five- to six-basis point moves in UST.

Ratios rose slightly, with the municipal-to-Treasury ratios at 51% in five years, at 71% in 10 years and 81% in 30 years, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the five-year at 51%, the 10 at 74% and the 30 at 82%.

Municipal primary volume for the Thanksgiving week is estimated at $496.8 million, down from total sales of $10.994 billion priced this week.

There are $402.9 million of municipal bond sales scheduled for negotiated sale and $93.9 million on the competitive calendar.

The only large deal scheduled is Desert Community College District, California, (Aa2/Aa//), set to price Tuesday $291.535 million of exempt and taxable general obligation bonds.

The market is likely to see an influx of taxable refundings in the last few weeks of the year as issuers who have been sidelined awaiting tax-exempt advance refundings are likely to jump into the market to refund debt now that it is nearly impossible the reinstatement of tax-exempt refundings will make it into the Build Back Better plan. Already issuers are lining up various taxable refunding deals posted on MuniOS for December.

The story lately has been how muni technicals have outweighed UST volatility.

“Tax-exempts have continued outperforming, which is hardly a surprise in late Q4,” said Barclays strategists in a weekly report. “Muni market technicals are supportive: fund flows are well over $1 billion on a weekly basis; supply likely has just a couple of active weeks left this year the 30-day visible pipeline is rather subdued, especially for tax-exempts; investors will get more than $30 billion in redemptions in January; it seems that on the policy front muni investors should not expect too many negative surprises; and, finally, in December dealers might become more aggressive getting set up for next year.”

The Thanksgiving holiday-shortened week, next-to-no supply and few economic data releases should keep munis steady. Thirty-day visible supply sits at $4.62 billion while net negative supply is at $12.715 billion, per Bloomberg data.

“Tax-exempts are far from being cheap at current levels, but they might have still some room to marginally improve, in our view,” Barclays strategists Mikhail Foux, Clare Pickering and Mayur Patel said in the report.

On the policy front, Treasury Secretary Janet Yellen told congress that the government will run out of money on Dec. 15, and two days after that Senate Majority Leader Chuck Schumer and Minority Leader Mitch McConnell met to discuss the need to boost the nation’s debt ceiling in an orderly manner, they said in the report.

Moody’s said it is planning to keep the U.S. credit rating under review until the debt ceiling situation is resolved, they noted, adding that the ratings agency’s stable outlook for the U.S. Aaa rating reflects a view that the debt limit will ultimately be raised or suspended with all interest payments made on time and in full.

Turning the municipal credit, Barclays said the current municipal credit backdrop is “quite strong, as most sectors continue to develop healthy fundamental cushions that have resulted in elevated credit ratings and outlooks, evidenced by the strongest upgrade/downgrade trend in almost 15 years.”

“In general, we expect continued budget outperformance in 2022 albeit at a slower pace,” they said. “Unsubsidized operating results will begin to emerge, potentially obscuring the stimulus effect in our view, leaving issuers to manage structural deficiencies and nascent exogenous factors.”

Secondary trading
California 5s of 2022 at 0.17%. Loudoun County, Virginia 5s of 2022 at 0.17%. Georgia 5s of 2022 at 0.11%. North Carolina 5s of 2022 at 0.14%. King County, Washington 5s of 2023 at 0.25%.

Howard County, Maryland, 5s of 2025 at 0.43% versus 0.45% Thursday. New York Dorm Columbia Univ. 5s of 2026 at 0.61%-0.59%.

Washington 5s of 2027 at 0.69%. California 5s of 2028 at 0.94%.

District of Columbia 5s of 2033 at 1.22%. Maryland 5s of 2033 at 1.17%. Denver City & County 5s of 2035 at 1.26%-1.25%. New York City TFA 5s of 2035 at 1.44%-1.43%.

New York City TFA 4s of 2039 at 1.73%-1.27% versus 1.78% Wednesday. New York EFC green 5s of 2040 at 1.59%-1.58% versus 1.63% original.

Los Angeles DWP 5s of 2045 at 1.53%. New York City 5s of 2047 at 1.81%-1.78% versus 1.84% Thursday.

Katy Texas ISD 3s of 2051 at 2.09%-2.07% versus 2.13% original. Triborough 5s of 2051 at 1.81% versus 1.86%-1.85% Thursday.

AAA scales
Refinitiv MMD’s scale was bumped one basis point on bonds in 2025-2029 with a two basis point bump 10 years and out: the one-year at 0.15% in 2022 and at 0.25% in 2023. The 10-year at 1.09% and at 1.54% in 30.

The ICE municipal yield curve showed steady at 0.17% in 2022 and steady at 0.27% in 2023. The 10-year maturity fell one basis point to 1.10% and the 30-year yield fell two to 1.57%.

The IHS Markit municipal analytics curve was unchanged at 0.17% in 2022 and at 0.25% in 2023. The 10-year yield fell two to 1.06% and the 30-year yield down two to 1.54%.

The Bloomberg BVAL curve was at 0.17% in 2022 and 0.23% in 2023. The 10-year yield fell two to 1.09% and the 30-year yield down three to 1.55%.

Treasuries rallied with bigger moves out longer and equities were mixed.

The five-year UST was yielding 1.212%, the 10-year at yielding 1.537%, the 20-year at 1.936% and the 30-year Treasury was yielding 1.905% at the close. The Dow Jones Industrial Average lost 268 points or 0.75%, the S&P was down 0.14% while the Nasdaq rose 0.40% at the close.

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