Municipals faced more selling pressure Friday but outperformed U.S. Treasuries ahead of a much lighter supply picture, which should buoy the asset class in the final weeks of the year. This week’s accumulated losses have pushed returns into the red for the month, but municipals are still faring better than USTs and corporates.
Triple-A scales saw yields rise three to eight basis points Friday, according to reads of ICE and Bloomberg’s BVAL, but were unchanged according to MMD and S&P. USTs saw losses of six to eight basis points.
Muni to UST ratios moved accordingly. The two-year municipal to UST ratio Friday was at 61%, the five-year at 63%, the 10-year at 65% and the 30-year at 80%, according to Municipal Market Data’s 3 p.m. EST read. ICE Data Services had the two-year at 63%, the five-year at 64%, the 10-year at 67% and the 30-year at 81% at 4 p.m.
“Tax-exempts outperformed in the sell-off, proving the market’s underlying strength, more so as this solid performance came on the back of yet another heavy supply week (likely the last one of the year),” said Mikhail Foux, head of municipal strategy at Barclays. “In the end the market has started to feel tired again, and investors have begun trimming their exposure, with bid-wanteds spiking to their highest level in more than a year.”
As of Friday morning, the Bloomberg Municipal Index was at -0.40% and +2.14% year-to-date while the High-Yield Index was at -0.41% and +7.67% in 2024. Taxable munis saw more pressure and are returning -1.01% in December and +3.08% so far in 2024. USTs are in the red at -0.60% in December while corporates are returning -0.51% this month.
“After the 40 basis point or so rally since the election, [the muni market] is again in a waiting mode as new issuance turns out to be not so small for December so far and muni/Treasury ratios richened significantly,” noted BofA Global Research strategists led by Yingchen Li and Ian Rogow.
They believe a muni rally “is more likely to resume next week after the Fed meeting when new issuance volume truly enters the holiday pattern.”
The stronger post-election rally in munis ”is driving their outperformance relative to taxable sectors, both since the election and for the MTD,” BofA noted.
For the month-to-date, tax-exempt IG is performing ”more-or-less in line” with muni high-yield, but continues to lag muni high-yield in 2024 by almost 600 basis points.
“Among the exempt IG rating brackets, BBB returns are strongest MTD, outperforming single-A, which has the weakest return MTD, by 12 basis points,” BofA said. ”Note that GOs are modestly outperforming revenue bonds MTD, though for the YTD are underperforming by almost 80bp.” The belly maturities are outperforming the wing maturities MTD, they said, adding the longest maturities have the strongest performance year-to-date.
Year-to-date issuance as of Wednesday totals $493 billion, up 32% year-over-year, per BofA, already reaching a new record high.
“We see 2024 finishing with around $418 billion of principal redemptions and $158 billion of coupon payments against gross issuance of $503 billion,” they added.
The calendar falls to an estimated $2.5 billion for the week of Dec. 16, led by the only sizeable transaction of the week, high-grade New York City Transitional Finance Authority’s (Aa1/AAA/AAA/) $1.5 billion of future tax-secured subordinate bonds. There are several lower-rated housing and nonrated deals on the calendar and no competitive sales of size.
While the municipal market
Broker and dealer muni holdings fell the most quarter-over-quarter, declining by 10.5% to $16.2 billion, according to the latest Fed data.
BofA noted that bank holdings versus the fourth quarter of 2017, the last quarter pre-Tax Cuts and Jobs Act, are down more than 13%, and banks’ holdings are also down more than 18% since the Fed began its tightening cycle in the first quarter of 2022, but a lesser 12% since the regional bank problems emerged in first quarter 2023.
Looking ahead, “at this point, the Fed futures market is currently pricing in a December rate cut, a January 2025 pause, and then two more rate cuts later in the 1H25,” Li and Rogow said. “If these expectations work out, the bond market rally should extend through 1Q25 and yield curves would flatten further over the next few months.”
For the muni market specifically, Foux said it has “come a long way in 2H24, and got quite pricey, especially its long end.”
Even though the tax-exempt market “does not have much upside, in our view, we would not be surprised if munis still get richer in the next several weeks, as supply should be largely non-existent, although a lot will depend on the rates market given the FOMC meeting next week,” Foux said.
“Looking ahead and taking into account all muni-related uncertainties next year, we would not chase performance here, and think better to lighten holdings into late December, waiting for better opportunities next year,” he added.
Primary to come:
The New York City Transitional Finance Authority (Aa1/AAA/AAA/) is set to price Tuesday $1.5 billion of future tax-secured subordinate bonds, Fiscal 2025 Series E, serials 2026-2049, terms 2051, 2053. Jefferies LLC, New York
The National Finance Authority is set to price Thursday $68.831 million of nonrated River Ranch Project special revenue capital appreciation bonds, terms 2031. D.A. Davidson & Co.
The Hazelden Betty Ford Foundation Project (Baa1///) is set to price $66.945 million of revenue bonds, consisting of $31.79 million of Series A and $35.155 million of Series 2025B. Ziegler.
The Public Finance Authority is set to price $61.29 million of CFC-LSH-Amplify Lubbock Project multifamily housing revenue bonds (//BB-/). Ziegler.
The Finance Authority of Maine is set to price Tuesday $45 million of Casella Waste Systems, Inc. Project solid waste disposal revenue bonds (B1/B+//), serials 2047. BofA Securities.
The Health and Educational Facilities Authority, Missouri, (//BBB/) is set to price $41.61 million of Lutheran Senior Services Projects senior living facilities revenue bonds, Series 2025A. Ziegler.