Munis close out July in the black

Bonds

Municipals were steady to firmer in spots to close out a week of lackluster supply, while U.S. Treasuries were mixed and equities rallied.

Muni-UST ratios on Friday were at 67% in five years, 84% in 10 years and 98% in 30 years, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the five at 65%, the 10 at 87% and the 30 at 96% at a 3:30 p.m. read.

Municipals will end July in the black with positive returns across all sectors. The Bloomberg Municipal Index shows a 2.49% return in July, moving year-to-date losses lower to 6.71%. High-yield has seen 3.54% positive returns in July and negative 8.64% in 2022. Taxables have returned 1.75% in July, moving losses to 12.46% year to date. Bloomberg’s Impact Index saw 2.86% gains in July and 9.15% losses for the year.

“In our view, the worst for the muni asset class is likely behind us, and we have already likely seen the highs for ratios and yields,” Barclays PLC strategists wrote in a weekly report. “However, because of the likely economic slowdown, we prefer an up-in-quality trade and see the most value in AAs and strong single-As while also expecting investment grade municipals to outperform high yield in 2H22.”

Investors will be greeted Monday with an increase in supply, but not by much from this week’s paltry levels, with the new-issue calendar estimated at $3.915 billion, up from total sales of $1.362 billion.

There are $3.355 billion of negotiated deals on tap and $559.4 million on the competitive calendar.

The primary is led by the $878 million of intermediate lien revenue refunding bonds from the Port of Seattle, Washington, followed by $324 million of Christus Health revenue bonds from Tarrant County Culture Education Facilities Finance Corp., Texas, and $284 million of bonds from the Forney Independent School District, Texas.

Supply continues to disappoint with July’s totals down 32% year over year, led again by a significant drop in taxables and refundings.

Though the lower new-issue supply has helped the market manage through the massive secondary selling pressure that marked the first half of the year.

This week, the 10s30s Treasury curve has steepened 10-plus basis points, and the 5s30s curve has steepened even more due to weaker economic data, Barclays noted. 

“For munis, the belly of the curve has been steadily outperforming, and the 5s10s slope is getting close to its 12-month average,” strategists Mikhail Foux, Clare Pickering and Mayur Patel said.

The long end continues to lag and the 10s20s and 10s30s curves are at their 12-month highs, they said.

“In our view, extending one’s portfolios is still the correct approach, and the muni curve should significantly bull-flatten at some point this year,” they said. 

In the taxable space, Barclays noted the spread differential between taxable munis and corporates has continued to compress, getting close to its 12-month average of six basis points.

Taxable muni spreads have already widened close to 10 basis points, while corporate spreads have actually tightened this month.

“If corporate spreads widen 50-60bp in the next six months, taxables will not be immune, but will likely outperform in a sell-off, especially at current levels, which are close to fair value, versus very rich at the beginning of 2H22,” the report noted. 

BofA strategists expect that 10/30 triple-A muni curve steepening “will be fully retraced once inflation data shows that peak inflation was attained and in the rearview mirror,” noted BofA Global Research strategists Yingchen Li and Ian Rogow. 

Further slowing of the economy or reduced Fed’s quantitative tightening would be other catalysts in their view. 

“For that reason, we believe there is more value in the longer part of the curve for high-grade munis going forward,” Li and Rogow said.

They noted the long end of the curve suffered the most during 1H22, and many 4% or lower-coupon bonds fell below par and some even triggered de minimis thresholds. ”Among them, some are now rising above par, while others are moving from below de minimis to above de minimis,” they said.

Secondary trading
New York City 5s of 2023 at 1.64%. Florida PECO 5s of 2026 at 1.78% versus 1.80% Thursday. California 5s of 2027 at 1.78% versus 2.02%-1.98% on 7/21.

NYC 5s of 2029 at 2.19%-2.20% versus 2.32%-2.31% Thursday. Austin, Texas, electric 5s of 2029 at 2.27%-2.26% versus 2.34% Thursday.

Minnesota 5s of 2030 at 2.11%-2.08%. Triborough Bridge & Tunnel 5s of 2031 at 3.33%-3.31%. Texas waters 5s of 2032 at 2.29% versus 2.36% Thursday.

Clemson University 5s of 2041 at 2.78% versus 2.82% Thursday. District of Columbia 5s of 2047 at 3.15% versus 3.21% Wednesday. California 5s of 2047 at 3.00%.

Los Angeles DWP 5s of 2051 at 3.13%-3.12% versus 3.26%-3.21% Wednesday. LA DWP 5s of 2052 at 3.09%-3.07%.

AAA scales
Refinitiv MMD’s scale was bumped up to two basis points at 3 p.m. read: the one-year at 1.38% (unch) and 1.60% (unch) in two years. The five-year at 1.80% (unch), the 10-year at 2.21% (-2) and the 30-year at 2.89% (-2).

The ICE AAA yield curve was bumped up to four basis points: 1.47% (flat) in 2023 and 1.60% (flat) in 2024. The five-year at 1.79% (-2), the 10-year was at 2.26% (-4) and the 30-year yield was at 2.88% (-2) at 3:30 p.m.

The IHS Markit municipal curve also saw bumps: 1.38% (unch) in 2023 and 1.62% (unch) in 2024. The five-year was at 1.82% (unch), the 10-year was at 2.21% (-2) and the 30-year yield was at 2.89% (-2) at a 3 p.m. read.

Bloomberg BVAL was bumped one to two basis points: 1.33% (-1) in 2023 and 1.58% (-1) in 2024. The five-year at 1.80% (-2), the 10-year at 2.25% (-2) and the 30-year at 2.86% (-2) at 4 p.m.

Treasuries were mixed.

The two-year UST was yielding 2.897% (+3), the three-year was at 2.823% (+2), the five-year at 2.697% (flat), the seven-year 2.695% (-1), the 10-year yielding 2.655% (-2), the 20-year at 3.198% (-4) and the 30-year Treasury was yielding 2.996% (-3) at 3:30 p.m.

Primary to come:
The Port of Seattle, Washington, (A1/AA-/AA-/) is set to price Tuesday $878.750 million, consisting of $211.715 million of non-AMT intermediate lien revenue refunding bonds, Series 2022A, serials 2025-2033, $595.190 million of private activity AMT intermediate lien revenue and refunding bonds, Series 2022B, serials 2023-2042, term 2047 and $70.835 million of taxable intermediate lien revenue and redunding bonds, Series 2022C. Citigroup Global Markets.

The Tarrant County Culture Education Facilities Finance Corporation, Texas, (A1//A+/) is set to price Thursday $323.615 million of Christus Health bonds, consisting of $300 million of revenue bonds, Series 2022A and $23.615 million of revenue refunding bonds, Series 2022B. RBC Capital Markets.

The Forney Independent School District, Texas, is set to price Wednesday $283.785 million of unlimited tax school building bonds (/AAA//), Series 2022B, serials 2033-2042, terms 2047 and 2052, insured by the Permanent School Fund Guarantee Program. Raymond James & Associates.

The Galveston Independent School District, Texas, (Aaa///) is set to price Tuesday $250 million of unlimited tax school building bonds, Series 2022, serials 2023-2042, term 2047, insured by the Permanent School Fund Guarantee Program. HilltopSecurities.

The Aubrey Independent School District, Texas, (Aaa///) is set to price Monday $225 million of unlimited tax school building bonds, Series 2022, serials 2026-2052,  insured by the Permanent School Fund Guarantee Program. Raymond James & Associates.

Midland, Texas, (Aa1//AAA/) is set to price Tuesday $157.050 million of taxable general obligation refunding bonds, Series 2022A, serials 2030-2050. Raymond James & Associates.

The Michigan State Building Authority (Aa2//AA/) is set to price Tuesday $148.710 million of Facilities Program 2022 revenue bonds, Series I. Morgan Stanley & Co.

The Private Colleges and Universities Authority, Georgia, (Aa2/AA//) is set to price Wednesday $101.960 million of Emory University fixed rate revenue bonds, Series 2022A. Goldman Sachs & Co. 

Competitive:
Miami-Dade County, Florida, (Aa3/AA//) is set to sell $89.270 million of capital asses acquisition special obligation bonds, Series 2022A, at 10 a.m. eastern Tuesday.

Lynne Funk contributed to this report.

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