Selling pressure increases, outflows grow another $1.4B

Bonds

Municipals were weaker Thursday as mutual fund losses climbed another $1.4 billion, while U.S. Treasuries sold off five years and in and equities ended in the red as ongoing concerns over Fed policy hang over markets.

Municipal triple-A yields rose two to three basis points while UST rose up to eight on the short end to yields not seen in 15 years with the two-year UST hitting 3.865%. The UST curve remains deeply inverted.

Municipal to UST Ratios continue to climb with the long bond settling in above 100%. Two- and three-year muni-UST ratios are around 64% to 65%. The five-year was at 69%, the 10-year at 83% and the 30-year at 104%, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the five at 70%, the 10 at 87% and the 30 at 103% at a 4 p.m. read.

Outflows from municipal bond mutual funds intensified as investors pulled $1.401 billion out of funds in the latest week, versus the $1.090 billion of outflows the prior week, according to Refinitiv Lipper data.

High-yield saw outflows of $266.587 million after $539.623 million of outflows the week prior. Exchange-traded funds saw outflows of $4.236 million after $189.235 million of outflows the previous week.

“Yield erosion remains a primary concern heading into the back half of the month,” said Kim Olsan, senior vice president of municipal bond trading at FHN Financial.

The average 10-year AAA MMD rate is 1.96% over the past decade, resulting from growing bids wanteds totals and lower, but persistent fund outflows, she noted.

Bloomberg reports that bids wanted have risen for four straight days, reaching $1.752 billion on Wednesday and $1.651 billion Tuesday, and above $1 billion since Friday. The daily average figure of $1.3 billion, more than double the average in 2021 through the same period, she said.

“Quarter-end considerations are likely driving that increase, but so too is the net cash outflow from the fund complex,” Olsan said.

As the market balances these inputs, she said “new issues reflect what concessions buyers are demanding outside of AAA credits.”

Craig Brandon, co-director of municipal investments at Eaton Vance, said current rates are attractive, but hesitations remain as volatility continues.

“We spent most of 2021 holding our noses and buying bonds [where] we didn’t love the rates, but the interest rate environment was the interest rate environment” he said.

But the overall market direction is being driven by fund flows.

“Everyone is trying to figure out when the outflow cycle is over,” he said. “When flows turn around a little bit, you see the market really gap up, and people just want to get invested pretty quickly.”

If outflows continue, he said, investors don’t want to sell into a weak market. “They may keep cash sort of available or some initial highly liquid bonds available to meet redemptions,” he said. “However, when the market turns, you want to be fully invested.”

“That’s what drives the volatility in the market, as you see a little bit of sign of inflows, and everybody wants to get invested immediately,” Brandon noted. “And then you start to see outflows come out of the market, and people back up a little bit and don’t want to be invested as much.”

“People are still keeping a little bit of cash set aside for attractive new deals, whereas the secondary market is a little slower,” Brandon said.

For those who have raised money or gotten some flows in, they may be waiting for the new-issue market to try to get invested as it may be more attractive.

“People were waiting until September to see what deals look like,” he said.

In the competitive market, Los Angeles (Aa2/AA/AAA/) sold $389.435 million of taxable social general obligation bonds, Series 2022-A, to Citigroup Global Markets, with 5s of 9/2023 at 3.90%, 5s of 2027 at 4.12%, 4s of 2032 at 4.40%, 4.875s of 2037 at 4.90% and 5s of 2042 at par, callable 9/1/2032.

Informa: Money market muni outflows return
Tax-exempt municipal money market funds saw outflows as $1.46 billion was pulled the week ending Monday, bringing the total assets to $101.88 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 fell to 0.99%.

Taxable money-fund assets added $9.94 billion to end the reporting week at $4.423 trillion of total net assets. The average seven-day simple yield for all taxable reporting funds rose to 1.96%.

Secondary trading
North Carolina 5s of 2023 at 2.42%. NYC 5s of 2024 at 2.51%-2.48%. Georgia 5s of 2026 at 2.49%.

North Carolina 5s of 2028 at 2.63%. Washington 5s of 2029 at 2.75%-2.72%. California 5s of 2030 at 2.79% versus 2.71% on 9/7 and 2.66%-2.68% on 9/1.

Ohio 5s of 2034 at 3.22%. Maryland 5s of 2036 at 3.27% versus 3.28% Wednesday and 3.28% Tuesday. California 5s of 2037 at 3.48% versus 3.52% Wednesday and 3.43%-3.42% Monday.

Washington 5s of 2045 at 3.94%.

AAA scales
Refinitiv MMD’s scale was cut three basis points at 3 p.m. read: the one-year at 2.39% (+3) and 2.44% (+3) in two years. The five-year at 2.53% (+3), the 10-year at 2.85% (+3) and the 30-year at 3.61% (+3).

The ICE AAA yield curve was cut two to three basis points: 2.41% (+2) in 2023 and 2.47% (+3) in 2024. The five-year at 2.54% (+3), the 10-year was at 2.93% (+2) and the 30-year yield was at 3.59% (+2) at a 4 p.m. read.

The IHS Markit municipal curve was cut four basis points: 2.38% (+4) in 2023 and 2.44% (+4) in 2024. The five-year was at 2.54% (+4), the 10-year was at 2.86% (+4) and the 30-year yield was at 3.60% (+4) at a 3 p.m. read.

Bloomberg BVAL was cut up two to three basis points: 2.44% (+3) in 2023 and 2.45% (+2) in 2024. The five-year at 2.49% (+2), the 10-year at 2.82% (+3) and the 30-year at 3.59% (+3) at 3:30 p.m.

Treasuries were weaker.

The two-year UST was yielding 3.863% (+7), the three-year was at 3.852% (+6), the five-year at 3.669% (+7), the seven-year 3.592% (+6), the 10-year yielding 3.454% (+5), the 20-year at 3.757% (+3) and the 30-year Treasury was yielding 3.477% (+2) near the close.

Mutual fund details
Refinitiv Lipper reported $1.401 of outflows for the week ending Wednesday following $1.090 billion of outflows the previous week.

Exchange-traded muni funds reported outflows of $4.236 million after outflows of $189.235 million in the previous week. Ex-ETFs, muni funds saw outflows of $1.397 billion after outflows of $900.604 million in the prior week.

The four-week moving average was at negative $1.771 billion from negative $1.479 billion in the previous week.

Long-term muni bond funds had outflows of $593.748 million in the latest week after outflows of $880.929 million in the previous week. Intermediate-term funds had outflows of $312.242 million after outflows of $81.359 million in the prior week.

National funds had outflows of $1.201 billion after outflows of $1.040 billion the previous week while high-yield muni funds reported outflows of $266.587 million after outflows of $539.623 million the week prior.

Primary on Wednesday:
J.P. Morgan Securities priced for the Omaha Public Power District, Nebraska, (Aa2/AA//) $420.565 million of electric system revenue bonds. The first tranche, $351.540 million, 2022 Series A, saw 5s of 2/2035 at 3.48%, 5s of 2037 at 3.64%, 4s of 2042 at 4.20%, 5s of 2047 at 4.03%, 4.25s of 2047 at 4.43% and 5.25s of 2052 at 4.07%, callable 2/1/2032.

The second tranche, $69.025 million, 2022 Series B, saw 5s of 2/2028 at 2.65%, 5s of 2032 at 2.99% and 5s of 2035 at 3.48%, callable 2/1/2032.

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