Munis end the day mixed, USTs rally out long

Bonds

Municipals were mixed Tuesday, while U.S. Treasuries were better and equities ended mixed.

The three-year muni-UST ratio was at 54%, the five-year at 58%, the 10-year at 64% and the 30-year at 88%, according to Refinitiv MMD’s 3 p.m. ET read. ICE Data Services had the three at 53%, the five at 57%, the 10 at 63% and the 30 at 87% at 4 p.m.

“As we mark the closing days of January, we recognize the sharp decline in muni bond yields with the 10 and 30-year benchmarks” down 43 basis points and 39 basis points respectively, said Jeff Lipton, managing director of credit research at Oppenheimer Inc.

Month-to-date, munis may be moving in sync with USTs, but “tax-exempts are outperforming and they tend to especially outperform when UST prices are selling off,” he said.

The 2023 “January effect” seems to be “displaying typical behavior given relatively thin issuance this month and demand patterns that have been buoyed by four of six reinvestment needs,” he said.

If not for the supportive technicals, Lipton said, the performance spread would likely be tighter. “Until muni technicals shift, muni performance is likely to hold firm, yet we have to believe that there are limitations to just how much lower muni yields can fall as a resistance level is probably not far away,” he said.

“In our view, it is the strength of muni technicals that can often lead to outperformance over other fixed income asset classes but should UST fall into an extended sell-off cycle, munis would likely follow suit with their strong technical bias, if still in place, having a visibly diluted impact upon performance,” he said.

“While we began the new year with a favorable outlook for the muni market, we are somewhat concerned over the velocity of the January rate declines and while the [Federal Reserve] appears to be taming the inflationary beast, we do not think it wise to become complacent and allow ourselves to be caught off guard,” he noted.

“Munis are, as expected, having some difficulty harnessing the demand of even temporarily renewed mutual fund inflows versus skimpy available supply,” said Matt Fabian, a partner at Municipal Market Analytics. Trade data, he noted, shows a “meaningful jump in customer buying while selling is not close to 4Q22 peaks.”

“The SIFMA 7-day index — a likely spot even for longer duration managers wanting to maximize near term cash should flows reverse — is back down to 43% of SOFR and is 264 bps below the Fed’s target rate,” he said. That outperformance “is likely to end quite soon, but the fixed rate curve may not follow,” Fabian said.

Mutual funds’ two-week inflow streak is “sufficient to set the 2023 YTD to a gain and to set off a strong movement in HY (+5% YTD) that may well attract fresh dollars in the coming weeks,” he said.

“With the new issue supply calendar still tame, and with no realistic reason at this point to expect anything more than an average full year of tax-exempt bond production, ratios and spreads will remain downward biased,” Fabian said.

Ratios have become rich, not to the levels of 2021, but rich nonetheless, Lipton said, and “while institutional investors have cash to deploy and a protracted period of outflows seems to have concluded with renewed deposits into municipal mutual funds, flows remain sensitive to a number of conditions and events and the individual retail investor realizes just how expensive munis have become in such a fairly short period of time.”

With ratios at such low levels, “we have to question just how much more outperformance for munis there is to unlock,” he said.

He suspects “the current technical backdrop is likely having distortive effects on performance, and if demand holds firm and supply remains low, then performance for munis could have staying power despite tight ratios.”

Yield and income opportunities remain compelling and “the more recent mutual fund outflows were heavily attributed to year-end tax-loss harvesting, leaving investors to now focus on the quality, tax efficiency, diversification and defensive portfolio attributes of the muni asset class,” according to Lipton.

He anticipates a “pick-up in issuance later in the quarter as better marketing levels are available and proximity to refunding opportunities incentivizes capital market access,” which may “bring about cheaper ratios and better, but not fair, value.”

In the primary market Tuesday, Siebert Williams Shank priced for the Pflugerville Independent School District, Texas, (/AA+//AA+/) $287.420 million of unlimited tax school building bonds, Series 2023A, with 5s of 2/2024 at 2.36%, 5s of 2028 at 2.15%, 5s of 2033 at 2.36%, 5s of 2038 at 3.10%, 4s of 2043 at 3.85% and 5s of 2048 at 3.55%, callable 2/15/2032.

In competitive market, the Florida Board of Education (Aaa/AAA/AAA/) sold $168.330 million of full faith and credit public education capital outlay refunding bonds, Series 2023A, to BofA Securities, with 5s of 6/2024 at 2.25%, 5s of 2028 at 2.09%, 5s of 2033 at 2.27% and 5s of 2034 at 2.40%, noncall.

Secondary trading
Ohio 5s of 2024 at 2.21%. DC 5s of 2025 at 2.36%. Connecticut 5s of 2025 at 2.21% versus 2.37% Monday. Maryland 5s of 2027 at 2.11%.

California 5s of 2031 at 2.12%-2.13% versus 2.23%-2.18% on 1/13. Massachusetts 5s of 2032 at 2.19%. NY Dorm PIT 5s of 2033 at 2.34% versus 2.51% on 1/10.

LA DWP 5s of 2037 at 2.68%-2.62%. NYC 5s of 2038 at 3.05%-3.07%. Austin ISD, Texas, 5s of 2040 at 3.19%-3.18% versus 3.18% Friday and 3.18% original on Thursday.

Washington 5s of 2048 at 3.45%. LA DWP 5s of 2052 at 3.37% versus 3.62%-3.60% on 1/9 and 3.87%-3.85% on 1/3. San Jose Financing Authority, California, 5s of 2052 at 3.31%-3.30% versus 3.27% Monday and 3.42%-3.41% on 1/17.

AAA scales
Refinitiv MMD’s scale was unchanged. The one-year was at 2.33% and 2.17% in two years. The five-year was at 2.07%, the 10-year at 2.21% and the 30-year at 3.18% at 3 p.m.

The ICE AAA yield curve was firmer: at 2.29% (-10) in 2024 and 2.22% (-4) in 2025. The five-year was at 2.08% (-1), the 10-year was at 2.19% (-2) and the 30-year yield was at 3.21% (-1) at 4 p.m.

The IHS Markit municipal curve was unchanged: 2.32% in 2024 and 2.15% in 2025. The five-year was at 2.08%, the 10-year was at 2.20% and the 30-year yield was at 3.18% at a 4 p.m. read.

Bloomberg BVAL was little changed: 2.32% (unch) in 2024 and 2.16% (unch) in 2025. The five-year at 2.10% (unch), the 10-year at 2.22% (unch) and the 30-year at 3.21% (-1).

Treasuries were firmer.

The two-year UST was yielding 4.210% (-3), the three-year was at 3.858% (-4), the five-year at 3.577% (-5), the seven-year at 3.516% (-6), the 10-year at 3.460% (-7), the 20-year at 3.729% (-8) and the 30-year Treasury was yielding 3.615% (-8) at 4 p.m.

Primary to come:
The Triborough Bridge and Tunnel Authority is set to price $1 billion of general revenue refunding bonds, Series 2023A. Jefferies.

The Lake Travis Independent School District, Texas, (/AA+/AA+/) is set to price Thursday $300 million of unlimited tax school building bonds, Series 2023, serials 2024-2053. BOK Financial Securities.

The Spring Independent School District, Texas, (Aa2/AA-//) is set to price Thursday $297.945 million of unlimited tax school building bonds, Series 2023, serials 2024-2052. Siebert Williams Shank.

The Nebraska Investment Finance Authority (/AA+//) is set to price Wednesday $114.850 million of single-family housing revenue bonds, consisting of $85 million of non-AMT social bonds, Series 2023A, and $29.850 million of taxable bonds, Series 2023B. J.P. Morgan.

Competitive:
The Kansas Development Finance Authority (//AAA/) is set to sell $157.540 million of revolving fund revenue bonds, Series 2023SRF (Kansas Department of Health and Environment), at 11:15 a.m. Eastern Wednesday.

The Spartanburg County School District 5, South Carolina, (Aa1/AA//) is set to sell $100 million of GOs, Series 2023 (South Carolina School District Credit Enhancement Program) at 11 a.m. Eastern Thursday.

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