Munis weaker as investors digest larger supply, economic data, Fitch downgrade

Bonds

Municipals were weaker Wednesday as investors digested another larger new-issue slate, August redemption dollars, better-than expected economic data and the Fitch downgrade to the United States’ rating. U.S. Treasury yields rose slightly out long and equities sold off.

The weakness in munis and UST resulted partly from the ADP Employment Report that showed 324,000 jobs were added in July, well above the 175,000 forecast. That coupled with the Fitch downgrade to the United States’ credit rating to AA-plus from AAA sparked a selloff in equities.

Triple-A yields rose by four to seven basis points across the curve while U.S. Treasuries were better on the short end but saw losses out long.

Despite the cuts to muni scales, Kara South, a municipal bond portfolio manager at GW&K Investment Management, said overall munis are holding up well and being supported by a favorable technical environment.

The lack of supply has been one factor that’s been in place all year, she noted. Through the end of July, issuance is down 16% year-over-year.

That is being coupled with a strong reinvestment period in the muni market in terms of coupons and redemptions, she said.

This week’s issuance was large, but it is “bifurcated,” with heavy supply from several Texas school districts, with some of those deals pricing at wider spreads.

There have also been larger New York issuers in the market this week, including the $1.65 billion DASNY deal. These issues, she said, are seeing good demand.

Technicals are “very good,” said Jim Noble, a municipal portfolio manager at Principal Asset Management.

This summer has seen negative supply, and this will continue into August. Bond Buyer 30-day visible supply is $7.26 billion. The 30-day net supply sits at negative $4.69 billion, according to Bloomberg.

Noble said the supply-demand imbalance should reverse in September.

Fund flows have disappointed, he said, noting “they’re not where they should be.”

The Investment Company Institute reported investors added $427 million to municipal bond mutual funds in the week ending July 26, after $453 million of inflows the previous week. Exchange-traded funds saw inflows of $406 million after $1.125 billion of inflows the week prior.

“There’s a lot of money on the sidelines, but that’s all asset classes in fixed-income, not just [munis],” he said.

For the first time in a long time, he said investors are getting attractive yields by being conservative, without having to delve into lower-rated or riskier assets.

“So why take the risk if you’re not going to get paid for it,” he said.

Just as the Fitch downgrade brought up the large federal debt load, analysts note the robust balance sheets of U.S. states.

Fundamentals are solid, “supported by the double-digit revenue growth that we saw over the last couple of years and has given states the ability to build up rainy day reserves,” South said.

States have done a good job budgeting for a potential slowdown, and then “if there are to be any shortfalls, they have these rainy day funds that can fill in any holes if they pop up,” she said.

Noble concurred, saying fundamentals are “fantastic,” with upgrades outstripping downgrades.

Muni-UST ratios are on the richer side, South noted.

The two-year muni-to-Treasury ratio Wednesday was at 63%, the three-year at 64%, the five-year at 65%, the 10-year at 65% and the 30-year at 87%, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the two-year at 63%, the three-year at 64%, the five-year at 64%, the 10-year at 66% and the 30-year at 89% at 4 p.m.

She said much of that has been driven by the technical environment within the muni market this year.

“The lack of supply within the market and stabilization of demand support the richer muni-UST ratios,” she said.

For the remainder of the year, munis will be rangebound, similar to where the asset class is now, Noble said.

Furthermore, he expects to see issuance tick up a little.

South said the muni market is in a “good spot as we go into the third quarter.”

Yields are a “little off of their highs of the year but still attractive, especially in a tax equivalent basis,” she said.

“Our overall view for the muni market is supportive and in a favorable outlook,” she said.

In the primary market Wednesday, J.P. Morgan preliminarily priced for institutions $1.654 billion of tax-exempt state sales tax revenue bonds, Series 2023A, from the Dormitory Authority of the State of New York (Aa1/AA+//), with yields cut up to nine basis points.

The first tranche, $1.339 million of Series 2023A-1, saw 5s of 3/2027 at 2.85% (unch), 5s of 2028 at 2.86% (+2), 5s of 2033 at 2.99% (+9), 5s of 2038 at 3.53% (+9), 4s of 2043 at 4.14% (+9), 4s of 2049 at 4.25% (+5) and 5s of 2053 at 4.07% (+8), callable 3/15/2033.

The second tranche, The second tranche, $314.900 million of Series 2023A-2, saw 5s of 23/2030 at 2.90% (+9) and 5s of 2033 at 2.99% (+9), callable 9/15/2029.

Barclays priced for San Antonio, Texas (Aa2/AA+/AA/), $288.830 million of water system junior lien revenue and refunding bonds, Series 2023A, with 5s of 5/2024 at 3.35%, 5s of 2028 at 3.02%, 5s of 2033 at 3.03%, 5s of 2038 at 3.48%, 5s of 2043 at 3.87%, 5.25s of 2048 at 4.04% and 4.375s of 2053 at par, callable 5/15/2033. 

Wells Fargo priced for the Spring Branch Independent School District, Texas (Aaa/AAA//), $165.405 million of PSF-insured unlimited tax schoolhouse bonds, Series 2023, with 5s of 2/2025 at 3.31%, 5s of 2028 at 3%, 5s of 2033 at 3.06%, 5s of 2038 at 3.44%, 4s of 2043 at 4.24% and 4s of 2048 at 4.39%, callable 2/1/2033.

Secondary trading
California 5s of 2024 at 3.10%-3.08% versus 2.98%-2.94% on 7/10. Maryland 5s of 2024 at  3.31%-3.31%. NYC 5s of 2024 at 3.26%-3.24%.

Georgia 5s of 2028 at 2.77% versus 2.64% on 7/11. Connecticut 5s of 2028 at 2.88% versus 2.87% Tuesday. NYC TFA 5s of 2029 at 2.86%-2.84%.

Maryland 5s of 2032 at 2.60%. Washington 5s of 2033 at 2.79% versus 2.65% Friday and 2.63% original on Thursday. Board of Regents of the University of Texas System 5s of 2034 at 2.90%-2.92% versus 2.74% Thursday and 2.73% on 7/25.

Washington 5s of 2045 at 3.65%-3.67%. NYC TFA 5s of 2048 at 4.02%-4.03% versus 3.83%-3.81% on 7/21 and 3.84% original on 7/20. Metropolitan Water District of Southern California 5s of 2053 at 3.65% versus 3.55% Thursday and 3.61%-3.60% on 7/13.

AAA scales
Refinitiv MMD’s scale was cut six to seven basis points: The one-year was at 3.27% (+6) and 3.09% (+6) in two years. The five-year was at 2.76% (+6) , the 10-year at 2.67% (+6) and the 30-year at 3.61% (+7) at 3 p.m.

The ICE AAA yield curve was cut four to six basis points: 3.23% (+4) in 2024 and 3.11% (+5) in 2025. The five-year was at 2.73% (+6), the 10-year was at 2.65% (+6) and the 30-year was at 3.64% (+6) at 4 p.m.

The S&P Global Market Intelligence (formerly IHS Markit) municipal curve was cut six to seven basis points: 3.26% (+6) in 2024 and 3.09% (+6) in 2025. The five-year was at 2.76% (+6), the 10-year was at 2.67% (+6) and the 30-year yield was at 3.60% (+7), according to a 3 p.m. read.

Bloomberg BVAL was cut up seven basis points: 3.15% (+7) in 2024 and 3.04% (+7) in 2025. The five-year at 2.70% (+7), the 10-year at 2.63% (+7) and the 30-year at 3.62% (+7) at 4 p.m.

Treasuries were weaker out long.

The two-year UST was yielding 4.880% (-2), the three-year was at 4.546% (-2), the five-year at 4.229% (+1), the 10-year at 4.072% (+4), the 20-year at 4.356% (+5) and the 30-year Treasury was yielding 4.164% (+6) near the close.

Primary on Tuesday
Wells Fargo priced for the Long Island Power Authority, New York (A2/A/A/), $579.310 million of electric system general revenue bonds. The first tranche, $400 million of green bonds, Series 2023E, saw 5s of 9/2024 at 3.17%, 5s of 2028 at 2.87%, 5s of 2033 at 2.90%, 5s of 2038 at 3.41%, 5s of 2043 at 3.81%, 5s of 2048 at 4.02%, uninsured 5s of 2053 at 4.07% and Assured Guaranty-insured 5s of 2053 at 4%, callable 9/1/2033. 

RBC Capital Markets priced for the Northwest Independent School District, Texas (Aaa//AAA/), $377.455 million of PSF-insured unlimited tax school building bonds, Series 2023, with 5s of 2/2024 at 3.34%, 5s of 2033 at 3.05%, 5s of 2038 at 3.44%, 4s of 2043 at 4.15%, 5s of 2048 at 4.01% and 4s of 2048 at 4.33%, callable 2/15/2032.

Primary to come
The Crowley Independent School District, Texas, (Aaa//AAA/) is set to price Thursday $425.775 million of PSF-insured unlimited tax school building bonds, Series 2023, serials 2024-2043, terms 2048, 2053. Siebert Williams Shank & Co. 

The Texas Private Activity Bond Surface Transportation Corp. is set to price Thursday on behalf of the North Tarrant Express Mobility Partners’ North Tarrant Express project $406.540 million of senior lien revenue bonds, Series 2023. J.P. Morgan Securities.

The Oklahoma Water Resources Board (/AAA//) is set to price Tuesday $176.805 million of state loan program revenue bonds, Series 2023B, serials 2024-2038, terms 2043, 2048, 2053. BOK Financial Securities. 

The Birdville Independent School District, Texas, (/AAA/AAA/) is set to price Thursday $145.985 million of PSF-insured unlimited tax school building bonds, Series 2023-A. FHN Financial Capital Markets.

The Pennsylvania Economic Development Financing Authority (//BBB+/) is set to price Thursday $128.850 million of Presbyterian senior living refunding revenue bonds, consisting of $35.180 million of Series 2023B-1 and $93.670 million of Series 2023B-2. Piper Sandler & Co. 

The Nebraska Investment Finance Authority (/AAA//) is set to price $109.630 million of single-family housing revenue bonds, consisting of non-AMT social bonds, Series 2023E, and taxables, Series 2023F. J.P. Morgan Securities.

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