Bonds

Municipals strengthened Wednesday for the sixth consecutive session while U.S. Treasury yields fell throughout most of the curve with the largest gains seen out long. Equities ended mixed.

Triple-A yield curves were bumped four to nine basis points, depending on the curve, while USTs saw some weakness on the front end while yields fell up to 10 basis points at 30 years ahead of a $24 billion 30-year UST sale Thursday.

Municipal to UST ratios have fallen in recent sessions inside of 10 years. The two-year muni-to-Treasury ratio Wednesday was at 67%, the three-year at 68%, the five-year at 69%, the 10-year at 71% and the 30-year at 90%, according to Refinitiv Municipal Market Data’s 3 p.m., ET, read. ICE Data Services had the two-year at 68%, the three-year at 69%, the five-year at 69%, the 10-year at 71% and the 30-year at 88% at 4 p.m.

A constructive trading session in the secondary aided a busy primary once again as investors appear to be more engaged in the asset class.

In the primary market Wednesday, J.P. Morgan priced for the Community Development Administration of the Maryland Department of Housing and Community Development (Aa1//AA+/) $400 million of social residential revenue bonds. The first tranche, $75 million of non-AMT bonds, 2023 Series E, saw all bonds price at par — 3.6s of 9/2024, 3.9s of 3/2028, 3.95s of 9/2028, 4.3s of 3/2033, 4.35s of 9/2033, 4.7s s of 9/2038, 4.9s of 9/2043 and 5.1s of 2048 – except for 6.25s of 3/2048 at 4.72%, callable 9/1/2032.

The second tranche, $325 million of taxables, 2023 Series F, saw all bonds price at par: 5.432s of 9/2024, 5.542s of 3/2028, 5.592s of 9/2028, 5.975s of 3/2033, 5.975s of 9/2033, 6.145s of 9/2038, 6.232s of 9/2043, 6.282s of 9/2048 and 6.362s of 9/2053, callable 9/1/2032.

Citigroup Global Markets priced for the Massachusetts Clean Water Trust (Aaa/AAA/AAA/) $397.220 million of state revolving fund bonds. The first tranche, $145.980 million of green bonds, Series 25A, saw 5s of 2/2025 at 3.37%, 5s of 2028 at 3.20%, 5s of 2033 at 3.29%, 5s of 2038 at 3.81% and 5s of 2040 at 3.98%, callable 2/1/2033.

The second tranche, $113.110 million of sustainability bonds, Series 25B, saw 5s of 2/2036 at 3.59%, 5s of 2028 at 3.81%, 5s of 2043 at 4.12% and 5s of 2044 at 4.15%, callable 2/1/2033.

The third tranche, $138.130 million of green refunding bonds, Series 2023, saw 5s of 2/2025 at 3.37%, 5s of 2028 at 3.20%, 5s of 2033 at 3.29% and 5s of 2038 at 3.81%, callable 2/1/2033.

Jefferies priced for Miami (Aa2/AA//) $242.165 million of special obligation non-ad valorem revenue bonds, Series 2023A, with 5s of 3/2025 at 3.51%, 5s of 2028 at 3.35%, 5s of 2034 at 3.57%, 5s of 2038 at 4.04%, 5s of 2043 at 4.41%, 5s of 2048 at 4.60% and 5.25s of 2053 at 4.65%, callable 3/1/2033.

A positive shift
“Market stability has been scarce throughout 2023 and we have grown increasingly concerned over the accelerated back-up in yields of significant proportion during October that had the potential to bring on recessionary pressure,” said Jeff Lipton, managing director of credit research at Oppenheimer Inc.

With October muni performance now in the “rear-view mirror,” he said the focus has “shifted to November where favorable returns defined the second-to-last month of the year over the past five years.”

Lipton said “we are living through a period where conventional wisdom loses ground thanks to a market backdrop of disproportionate volatility and so, we should not be surprised if there are sharp deviations from otherwise anticipated scenarios.”

“Unless inflation surprises to the upside, and/or growth holds or exceeds its current course,” Lipton said monetary policy should “more decidedly be viewed as sufficiently restrictive with the bond market becoming less reactionary to rate expectations.”

A key driver of muni performance in November should be technical factors, with “new-issue supply typically on the lighter side and reinvestment demand at active levels,” he said.

Over the next 30 days, around $23 billion of muni bond calls and maturing securities will be available for reinvestment, according to Bloomberg. New issuance over the same period is around $12.6 billion, resulting in net supply of negative $10.4 billion.

Bond Buyer 30-day visible supply sits at $8.33 billion.

“While cash allocations into the municipal asset class are appropriate given the yield and income opportunities, we are mindful that tax loss harvesting could offset the accretive benefits to fund flows and pressure secondary bid-wanted activity,” Lipton said.

Upcoming data will “reveal a further slowing of economic conditions with more disinflationary progress taking hold,” he said.

As 2024 approaches, there will be “contained market volatility with yield curve normalization taking on a more visible presence for UST and munis,” he said.

“The days of near-zero interest rates have been relegated to the history books and investors will grow into new fixed-income trading ranges as the Fed takes its tightening bow,” he noted.

Munis are outperforming UST month-to-date and Lipton anticipates “constructive muni technicals to do what they are supposed to do — drive tax-exempt returns to higher ground.”

Through the end of the year, issuance “should remain well-received and dealers should continue to appropriately manage their inventory balances,” he said.

Most of the earlier part of 2023 saw ratios “stuck in expensive ground, yet we have been seeing better relative value opportunities,” he said.

While ratios have yet to offer fair value, the market has moved closer to it throughout the second half of 2023, according to Lipton.

Periods of muni underperformance “give rise to value opportunities as the asset class cheapens and when the underperformance is followed up with spread tightening circumstance,” he said.

Even with ratios below their long-run averages, he noted “a better value proposition coupled with attendant yield and income opportunities present a compelling argument for the deployment of capital into municipal securities.”

The muni market has “experienced mostly outflows from mutual funds since January of 2022, except for a spate of inflows,” said Patricia Healy, senior vice president of research and a portfolio manager at Cumberland Advisors.

Municipal mutual fund losses intensified last week as the Investment Company Institute Wednesday reported investors pulled $3.136 billion from the funds in the week ending Nov. 1 after $2.280 million of outflows the previous week.

“Many investors these days are investing in short-term funds or bank deposits yielding 5% and are cautious about moving into longer maturities, especially with the recent rhetoric of higher rates for longer,” she said.

However, she noted the “tide could turn” now that the Fed has indicated it may be nearing the end of its hiking cycle.

Exchange-traded funds, though, saw another week of inflows to the tune of $929 million after inflows of $666 million the week prior, according to ICI.

Meanwhile, tax-exempt municipal money market funds saw their fifth inflow of the past six weeks as $4.68 billion was added the week ending Tuesday, bringing the total assets to $120.34 billion, according to the Money Fund Report. The seven-day simple yield reset fell to 3.25%.

Taxable money-fund assets saw $56.66 billion added to end the reporting week.

The average seven-day simple yield for all taxable reporting funds fell to 5.05%.

Secondary trading Wednesday showed: California 5s of 2024 at 3.55%-3.42%. North Carolina 5s of 2024 at 3.44% versus 3.65% on 11/2 and 3.76% on 10/31. Texas 5s of 2025 at 3.45%.

Ohio 5s of 2028 at 3.33%-3.32%. NYC TFA 5s of 2029 at 3.28%. Maryland 5s of 2030 at 3.22%-3.21% versus 3.66% on 10/30.

California 5s of 2033 at 3.26%-3.25% versus 3.31% Friday and 3.57%-3.54% on 11/2. NYC TFA 5s of 2034 at 3.47% versus 3.85%-3.86% on 11/2. Iowa Finance Authority 5s of 2036 at 3.60%.

Pierce County, Washington, 5s of 2048 at 4.45%-4.56%. NYC 5s of 2051 at 4.60% versus 4.65% Tuesday and 4.67%-4.48% Monday.

AAA scales
Refinitiv MMD’s scale was bumped five to eight basis points: The one-year was at 3.42% (-5) and 3.29% (-7) in two years. The five-year was at 3.12% (-7), the 10-year at 3.20% (-8) and the 30-year at 4.20% (-8) at 3 p.m.

The ICE AAA yield curve was bumped four to eight basis points: 3.42% (-5) in 2024 and 3.37% (-5) in 2025. The five-year was at 3.15% (-4), the 10-year was at 3.23% (-4) and the 30-year was at 4.19% (-7) at 4 p.m.

The S&P Global Market Intelligence municipal curve was bumped five to eight basis points: The one-year was at 3.43% (-5) in 2024 and 3.30% (-8) in 2025. The five-year was at 3.15% (-8), the 10-year was at 3.21% (-8) and the 30-year yield was at 4.20% (-8), according to a 3 p.m. read.

Bloomberg BVAL was cut bumped seven to nine basis points: 3.44% (-7) in 2024 and 3.37% (-7) in 2025. The five-year at 3.15% (-7), the 10-year at 3.23% (-8) and the 30-year at 4.19% (-9) at 4 p.m.

Treasuries improved outside of two years.

The two-year UST was yielding 4.932% (+2), the three-year was at 4.680% (-1), the five-year at 4.514% (-2), the 10-year at 4.512% (-6), the 20-year at 4.832% (-9) and the 30-year Treasury was yielding 4.638% (-10) at the close.

Primary yet to come
The Black Belt Energy Gas District, Alabama, (A2///) is set to price $432.9 million of gas project revenue bonds, Series 2023 C. Goldman Sachs & Co.

The Westchester County Local Development Corp. (/AA//AA+) is set to price Thursday $298.47 million of revenue bonds (Westchester Medical Center Obligated Group Project) insured by Assured Guaranty Municipal Corp. Serials 2031-2034, 2050, terms 2048, 2053. BofA Securities.

The Oakland Unified School District (A1///) is set to price Thursday $192.08 million of general obligation bonds and GO refunding bonds. Siebert Williams Shank & Co.

The Dripping Springs Independent School District, Texas, (/AAA//) is set to price Thursday $175.4 million of unlimited tax school building and refunding bonds. Permanent School Fund Guarantee Program, serials 2024-2053. Raymond James & Associates.

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