Municipals were firmer Thursday as the primary market slowed and muni mutual fund inflows returned. U.S. Treasury yields were little changed and equities ended mixed.
Triple-A yields fell another three to eight basis points, depending on the scale.
The two-year muni-to-Treasury ratio Thursday was at 67%, the three-year at 67%, the five-year at 69%, the 10-year at 68% and the 30-year at 85%, according to Refinitiv Municipal Market Data’s 3 p.m. EST read. ICE Data Services had the two-year at 67%, the three-year at 67%, the five-year at 68%, the 10-year at 68% and the 30-year at 85% at 3:30 p.m.
Municipal bond mutual funds saw inflows as investors added $549.2 million to the funds after $94.9 million of outflows the week prior, according to LSEG Lipper. The inflows were led almost entirely by long-term funds at $561 million.
High-yield continued to show strength, with inflows of $154.3 million after $70.2 million of inflows the previous week.
This week, a whopping $16 billion of issuance came to market, the largest weekly new-issue calendar since December 2021.
Ahead of the massive new-issue calendar, “the prevailing thought might have been for generic benchmarks to weaken, but the opposite has occurred with an apparent pre-June/June 1 cash build-in play,” said Kim Olsan, senior vice president of municipals at FHN Financial.
Given the strength, indicative six- to 12-year spot levels are through 3% once more and “could test buyers’ resolve in the general market space, in particular,” she said.
“The state of the states is just fine where investors are concerned,” Olsan said.
Connecticut, Massachusetts and Maryland each came to market with GOs this week.
Massachusetts’ $807 million deal drew an order book with yields bumped four to eight basis points upon repricing, she said.
“In a sign of where generic yields have moved since the state’s February sale and how the curve has shifted, the current 10-year yielded 3.06% against the prior 10-year yield of 2.63%; however, the new 20-year 5% [coupon] was priced at 3.60%, or only six basis points above the February 20-year maturity,” she said.
Maryland sold three tax-exempt series due 2025-2039 in the competitive market, with spreads “in the two shorter issues came in as tight as -7/MMD, leading to subsequent strength in similar credits,” Olsan said.
After a heavy slate Tuesday and Wednesday, issuance slowed Thursday.
Muni issuance is at $197.476 billion, up 35.5% year-over-year, LSEG reports.
This increase is due to “attractive ratios, the election year (H1 supply is generally higher in election years), and increased sector supply in the healthcare, GOs, pre-pay gas, and higher education sectors,” said Vikram Rai, head of municipal markets strategy at Wells Fargo.
Volume will remain “robust” over the next few months and “elevated” through October before dropping off in November and December, he noted.
During this summer, the “net cash available to investors for potential reinvestment into municipals will be positive, which is typical for this season, though it will be less vs. averages witnessed over the last three summers,” Rai said.
Summer technical tailwinds may be “overwhelmed” if fund flows “take a turn for the worse,” such as outflows continuing at the pace seen during the first eight weeks of 2024, when they averaged around negative $700 million per week, Rai noted.
If this happens, “they would exceed the net cash available for reinvestment after accounting for net issuance, coupon payments and bond maturations,” he said.
That said, “it does not mean that the seasonal spike in coupon payments and redemptions is not positive — it is a definite tailwind for municipal performance though it might get overshadowed by headwinds (such as outflows).”
Rate volatility has “spooked” retail investors rather than inflation, meaning it is unlikely they would put the cash they received from coupon payments and bond maturations back into munis, according to Rai.
Retail investors will put some cash to work but will need a “compelling reason,” he said, noting the upcoming Federal Open Market Committee meeting and the possible rate rally after “helps shake off their reticence,” he said.
In the primary market Thursday, J.P. Morgan priced for Riverside County $425 million of 2024 tax and revenue anticipation notes, with 5s of 6/2025 at 3.25%, noncall.
BofA Securities priced for the Lower Colorado River Authority (/A/AA-/) $256.86 million of revenue refunding bonds, serials with 5s of 5/2025 at 3.35%, 5s of 2029 at 3.13%, 5s of 2034 at 3.24%, 5s of 2039 at 3.47%, 5s of 2044 at 3.83% and 5s of 2045 at 3.87%, callable 5/15/2033.
Morgan Stanley priced for the Essex County Improvement Authority $177.02 million of Essex County Family Court Building Project county guaranteed lease revenue project notes, with 5s of 8/2025 at 3.50%, noncall.
In the competitive market, the Sacramento City Unified School District, California, sold $262.5 million of Election of 2020 (Measure H) GOs, 2024 Series B, to BofA Securities, with 8s of 8/2025 at 3.30%, 6s of 2034 at 3.05%, 5s of 2039 at 3.30%, 5s of 2044 at 3.67%, 4s of 2049 at 4.15% and 4s of 2054 at 4.20%, callable 8/1/2034.
The Horry County School District, South Carolina, (Aa1///) sold $225 million of GOs to BofA Securities, with 5s of 3/2025 at 3.20%, 5s of 2029 at 2.93% and 5s of 2030 at 2.92%, noncall.
AAA scales
Refinitiv MMD’s scale was bumped four to five basis points: The one-year was at 3.20% (-4) and 3.14% (-5) in two years. The five-year was at 2.95% (-5), the 10-year at 2.90% (-5) and the 30-year at 3.76% (-4) at 3 p.m.
The ICE AAA yield curve was bumped five to eight basis points: 3.23% (-7) in 2025 and 3.16% (-7) in 2026. The five-year was at 2.92% (-7), the 10-year was at 2.89% (-7) and the 30-year was at 3.75% (-5) at 3:30 p.m.
The S&P Global Market Intelligence municipal curve was bumped four to five basis points: The one-year was at 3.23% (-5) in 2025 and 3.15% (-5) in 2026. The five-year was at 2.95% (-4), the 10-year was at 2.91% (-4) and the 30-year yield was at 3.75% (-4), according to a 3 p.m. read.
Bloomberg BVAL was bumped three to five basis points: 3.24% (-4) in 2025 and 3.19% (-4) in 2026. The five-year at 2.95% (-4), the 10-year at 2.90% (-4) and the 30-year at 3.77% (-4) at 3:30 p.m.
Treasuries were little changed.
The two-year UST was yielding 4.723% (-1), the three-year was at 4.503% (-1), the five-year at 4.295% (-1), the 10-year at 4.282% (-1), the 20-year at 4.513% (-1) and the 30-year at 4.432% (-1) at 3:45 p.m.