Munis weaker, USTs mixed, ICI reports small outflows

Bonds

Municipals were weaker Wednesday, U.S. Treasuries were mixed and equities rallied.

Muni-UST ratios were at 61% in five years, 79% in 10 years and 96% in 30 years, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the five at 61%, the 10 at 83% and the 30 at 95% at a 3:30 p.m. read.

The Investment Company Institute reported investors pulled $246 million out of muni bond mutual funds in the week ending July 27 compared to the $602 million of outflows in the previous week.

Exchange-traded funds saw inflows at $879 million versus $923 million of outflows the week prior, per ICI data. Year-to-date, ICI has reported $89.1 billion of outflows from the fund complex, while Refinitv Lipper has reported $47.6 billion of outflows.
“Although the technical headwinds began to dissipate in May as ETF inflows spurred managers to come back into the market, market dynamics have once again shifted,” said Jason Appleson, head of municipal bonds at PGIM Fixed Income said.

But while there are a lot of positive technical tailwinds from munis, this year “has been one of the toughest years on record,” Appleson said. This has been primarily driven by the outflows.

The Federal Reserve has an increasingly hawkish posture, which could prolong municipal bond mutual fund outflows, but at the same time the seasonal factors could help prop the municipal market up, Applesonsaid.

“Though there are no signs of an immediate relief in outflows from tax-exempt municipal bond funds in light of ongoing rate volatility, favorable reinvestment and lighter issuance should be somewhat supportive of the market,” he added.

However, over the past few weeks fund flows have stabilized somewhat with both inflows and outflows clocking under $1 billion.

“People are starting to believe in some sort of rate stabilization, meaning they don’t think that rates are continuing to climb higher and higher,” he said.

Appleson said if the U.S. is headed toward a recession, the market has already priced it in.

“This is really a thing for rates, as they’re not going to continue to march higher,” Appleson said. “The Fed is going to ease on the accelerator a little bit and let back on some of the rate tightening that we had forecasted initially when we first saw these very high inflation prices.”

This leads to the retail-dominated holders of munis to say, “I don’t have to be concerned about holding a fixed-income instrument, that’s just going to be depreciating in value going forward,” he said.

Appleson said this has been the key technical driving positive performance.

A recession doesn’t spell an immediate risk to muni credit quality, according to Cooper Howard, fixed income strategist.

“Most state and local governments are already in strong fiscal condition because of substantial fiscal aid and surging tax revenues,” he said.

He noted that historically, revenues “started to slow after the start of a recession which allows for ample time to adjust.” During the 2007/2008 credit crises, he said, “revenues didn’t start substantially declining until 2010.”

In the primary market Wednesday, Goldman Sachs & Co. priced for the Private Colleges and Universities Authority, Georgia, (Aa2/AA//) $212.410 million of Emory University fixed-rate revenue bonds, Series 2022A, with 5s of 9/2029 at 2.16% and 5s of 2032 at 2.39%, noncall.

Informa: Money market muni assets drop again
Tax-exempt municipal money market funds lost $1.68 billion the week ending Aug. 2, bringing the total assets to $97.1 billion, according to the Money Fund Report, a publication of Informa Financial Intelligence.

The average seven-day simple yield for all tax-free and municipal money-market funds rose by 0.48% to 0.86%.

Taxable money-fund assets lost $9.48 billion to end the reporting week at $4.438 trillion of total net assets. The average seven-day simple yield for all taxable reporting funds rose by 0.41% to 1.65%.

Secondary trading
Maryland 5s of 2023 at 1.62%-1.60%. California 5s of 2024 at 1.65%. Washington 5s of 2025 at 1.65% versus 1.66% Tuesday.

Triborough Bridge and Tunnel Authority 5s of 2029 at 2.13%-2.14% versus 2.07% Tuesday. NYC 5s of 2030 at 2.33%. Loudoun County, Virginia, 5s of 2030 at 2.07% versus 2.05%-2.02% Tuesday.

Georgia 5s of 2034 at 2.40% versus 2.32% Tuesday and 2.37% Monday. NYC TFA 5s of 2034 at 2.78% versus 2.73% Tuesday. NY Dorm PIT 5s of 2036 at 2.88%.

Washington 5s of 2040 at 3.01%-3.00% versus 3.14%-3.12% on 7/25. DC 5s of 2041 at 2.97% versus 2.88% Tuesday and 2.94% Monday.

DC 5s of 2047 at 3.11%-3.10% versus 3.07%-3.14% Tuesday and 3/15% on 7/29. NYC TFA 5s of 2051 at 3,46% versus 3.48% Tuesday and 3.53%-3.52% Monday.

AAA scales
Refinitiv MMD’s scale was cut up to five basis points at the 3 p.m. read: the one-year at 1.49% (+5) and 1.61% (unch) in two years. The five-year at 1.76% (unch), the 10-year at 2.18% (+4) and the 30-year at 2.85% (+2).

The ICE AAA yield curve was cut three to four basis points: 1.52% (+4) in 2023 and 1.60% (+4) in 2024. The five-year at 1.77% (+4), the 10-year was at 2.24% (+3) and the 30-year yield was at 2.86% (+3) at 3:30 p.m.

The IHS Markit municipal curve saw cuts up to five basis points: 1.46% (+5) in 2023 and 1.62% (unch) in 2024. The five-year was at 1.75% (unch), the 10-year was at 2.17% (+3) and the 30-year yield was at 2.85% (+3) at a 3 p.m. read.

Bloomberg BVAL was cut two to three basis points: 1.34% (+2) in 2023 and 1.58% (+2) in 2024. The five-year at 1.77% (+2), the 10-year at 2.19% (+3) and the 30-year at 2.84% (+3) at 3:30 p.m.

Treasuries were mixed near the close.

The two-year UST was yielding 3.092% (+4), the three-year was at 3.037% (+3), the five-year at 2.853% (-1), the seven-year 2.806% (-1), the 10-year yielding 2.727% (-2), the 20-year at 3.176% (-5) and the 30-year Treasury was yielding 2.959% (-5) near the close.

Inflation unstoppable?
Rate hikes and recession won’t stop inflation, according to Vincent Deluard, Global Macro Strategist at StoneX.

Current inflation results from a shortage of workers, energy and trust, he said. The labor force is 12% smaller than pre-COVID, he noted. The energy issues are related to transitioning to green energy, which “requires moving down the energy density ladder for the first time in history. The price elasticity of energy supply has durably declined.”

As for trust, Deluard said, “The general level of trust [of citizens of the ] U.S. and Europe was slowly eroding in the past two decades and that it collapsed with COVID. Opinion polls confirm this unravelling. Just 18% of Americans think the country is headed in the right direction.

“While inflation may slow in the coming months, he said, “rate hikes and quantitative tightening have caused a broad bear market and a reversal of the red-hot real estate market. Just as swallowing plenty of Tylenol pills will eventually break a fever, a negative credit impulse and central bank tightening may cause widespread recessions and price declines in 2023.”

While the symptoms of inflation are being addressed with rate hike, he said, they will not rein in “structural inflation. Destroying demand may cause a temporary slowdown in inflation, but it does nothing to address the shortages of workers, energy, and trust which plague the post-COVID economy.”

Primary to come:
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.

Gary Siegel contributed to this report.

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