Munis better but still on track for worst year on record

Municipals strengthened ahead of a light new-issue calendar, while a U.S. Treasury sell-off saw cuts up to nine basis points, and equities ended up.

Triple-A benchmark yields were bumped two to seven basis points, depending on the scale, while UST yields rose seven to nine basis points five years and out.

As a result, muni-to-UST ratios fell. Muni-to-UST ratios were at 87% in five years, 101% in 10 years and 106% in 30, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the five at 86%, the 10 at 99% and the 30 at 105% at a 4 p.m. read.

The primary was relatively light Monday. Siebert Williams Shank & Co. priced for Tarrant County, Texas, (Aaa/AAA//) $214.905 million of limited tax bonds, with 5s of 7/2023 at 2.00%, 5s of 2027 at 2.67%, 5s of 2032 at 3.13%, 5s of 2037 at 3.46%, 4s of 2042 at 4.01% and 4s of 2047 at 4.11%, callable 7/15/2031.

“Fixed-income markets have had a tough 2022 but municipal bonds have been one of the ones that have struggled the most,” with munis losing about 10.4% year-to-date while UST have lost only 8.4% in the same period, said Jason Wong, vice president of municipals at AmeriVet Securities.

Munis are on pace “to have their worst year on record amid soaring inflation and the Federal Reserve’s policy tightening,” he said. And as the Fed continues on its hiking path, expect muni returns to remain negative for the rest of 200, Wong said.

“Anytime an asset class loses $66 billion to start the year, the results will be losses for both retail and institutional investors,” said Eric Kazatsky, head of municipal strategy at Bloomberg Intelligence.

One positive, though, he said, is the continued loss of funds for munis “has played out over 22 weeks vs. just half the amount of time in which munis lost about $40 billion in 2020.”

While “the continued weekly outflows have caused fatigue among market participants, the prolonged outflow cycle has allowed funds to raise cash as needed and hasn’t completely choked off market liquidity,” according to Kazatsky.

However, he said, there’s a sharp contrast in fund flows for exchange-traded funds. “There’s some noise in these flows due to creation and redemption mechanics and wholesale portfolio shifts,” Kazatsky said. “Yet what can’t be ignored is that municipals are showing positive flows [year-to-date] and have outpaced equities as well as all other areas of fixed income.”

And with a 200-basis-point selloff in rates this year, “it’s not surprising that investors are opting to hide out in the shortest portions of the yield curve,” he said.

But “unlike the front end of the municipal curve, which has shown positive month-to-date returns,” Kazatsky said, “many other tenors are still in the red, with the longest-duration munis flashing losses of over 3% in May.”

With long munis seemingly ignoring the recent move in Treasuries, muni-UST ratios have appeared to cheapen, with 30-year ratios increasing to finish today at 106% from 103% on May 1, while the 10-year portion of the curve saw ratios cheapen to 101% from 92%.

“Due to the lagging performance of the tax-exempt market, the ratios of muni versus taxable bond yields increased last week,” said CreditSights strategists Pat Luby, John Ceffalio and Sam Berzok.

The underperformance of munis, they said, “also widened the window for investors subject to the 21% federal corporate income tax to add tax-exempt munis at yields that are higher than the after-tax yields on corporates.”

Risk sentiment and equities have increasingly driven bond yields, according to Subadra Rajappa, head of U.S. rates strategy at Societe Generale. “Markets worry about deteriorating financial conditions and recession risks, while central banks are determined to normalize monetary stance,” she said.

The situation is similar to the “negative feedback loops between equities and rates in 2018,” she said.

“Central banks are set to deliver intended rate hikes over the summer, no matter what risk sentiment suggests,” Rajappa said. “How risky assets react will likely drive bonds’ reactions. Yields should revisit highs provided market and economic sentiments stabilize.”

Secondary trading
New York City Transitional Finance Authority 5s of 2024 at 2.35%-2.31% versus 2.37% on 5/15 and 2.41%-2.20% on 5/11. North Carolina 5s of 2025 at 2.43%-2.45% versus 2.53%-3.54% on 5/19 and 2.55% on 5/17. Georgia 5s of 2026 at 2.40%. New York City 5s of 2026 at 2.59%. Maryland 5s of 2028 at 2.66% versus 2.83% on 5/16.

Prince George’s County, Maryland, 5s of 2033 at 2.92%-2.94% versus 3.25% original (on 5/18). Santa Clara County, California, 5s of 2034 at 3.09%-3.01% versus 3.09% on 5/20 and 2.77% original (on 5/5).

Washington 5s of 2039 at 3.33% versus 3.69%-2.68% on 5/18.

Triborough Bridge and Tunnel Authority 5s of 2047 at 3.94%-3.85% versus 4.16%-4.15% on 5/16 and 3.99% original (on 5/6). Los Angeles Department of Water and Power 5s of 2047 at 3.61% versus 3.76% on 5/19 and 3.59% on 5/4. New York City 5s of 2047 at 3.96%-3.93% versus 4.41%-4.40% on 5/17 and 3.99%-4.01% on 5/10.

NYC TFA 5s of 2051 at 3.93%-3.90% versus 4.40%-4.38% on 5/17 and 3.93%-3.91% on 5/9.

AAA scales
Refinitiv MMD’s scale was bumped three to four basis points at the 3 p.m. read: the one-year at 1.90% (-3) and 2.22% (-3) in two years. The five-year at 2.50% (-3), the 10-year at 2.89% (-4) and the 30-year at 3.25% (-4).

The ICE municipal yield bumped four to seven basis points: 1.91% (-4) in 2023 and 2.26% (-4) in 2024. The five-year at 2.49% (-5), the 10-year was at 2.81% (-6) and the 30-year yield was at 3.25% (-7) at a 4 p.m. read.

The IHS Markit municipal curve saw bumps: 1.91 (-4) in 2023 and 2.21% (-4) in 2024. The five-year at 2.52% (-4), the 10-year was at 2.92% (-4) and the 30-year yield was at 3.26% (-4) at 4 p.m.

Bloomberg BVAL saw two to three basis point bumps: 1.94% (-2) in 2023 and 2.22% (-2) in 2024. The five-year at 2.56% (-3), the 10-year at 2.86% (-3) and the 30-year at 3.22% (-3) at a 4 p.m. read.

Treasuries were weaker.

The two-year UST was yielding 2.620% (+4), the three-year was at 2.797% (+6), the five-year at 2.874% (+7), the seven-year 2.896% (+8), the 10-year yielding 2.861% (+8), the 20-year at 3.265% (+9) and the 30-year Treasury was yielding 3.072% (+8) just before the close.

Primary to come:
Connecticut is set to price Wednesday $1.075 billion of GOs, consisting of $150 million of general obligation bonds, 2022 Series C, serials 2023-2042; $575 million of general obligation refunding bonds, 2022 Series D, serials 2022-2028 and 2030-2032; $350 million of taxable general obligation bonds, 2022 Series A, serials 2023-2032. Ramirez & Co.

The Katy Independent School District, Texas, (Aaa/AAA//) is set to price Tuesday $268.035 million of unlimited tax school building Bonds, Series 2022, serials 2023-2042, terms 2047 and 2052, Permanent School Fund Guarantee Program. Siebert Williams Shank & Co

The Metropolitan Washington Airports Authority, District of Columbia, (Aa3//AA-/) is set to price Wednesday $209.410 million of AMT airport system revenue refunding bonds, Series 2022A. J.P. Morgan Securities.

Midland, Texas, (Aa1//AAA/) is set to price Wednesday $173.705 million of taxable general obligation refunding bonds, Series 2022A, serials 2022 and 2030-2050. Raymond James & Associates.

The Tennessee Housing Development Agency (Aa1/AA+//) is set to price Thursday $149.990 million of non-AMT social residential finance program bonds, serials 2023-2034, terms 2037, 2042, 2048 and 2053. RBC Capital Markets.

Allentown Neighborhood Improvement Zone Development Authority, Pennsylvania, is set to price Tuesday $116 million of City Center Project subordinate tax revenue bonds, Series 2022, term 2042. Citigroup Global Markets.

Long Beach, California, (A3//A-/) is set to price Tuesday $111.875 million of senior airport revenue bonds, consisting of $48.175 million of governmental/non-AMT senior airport revenue refunding bonds, Series 2022A; $33.275 million of private activity/non-AMT senior airport revenue refunding bonds, Series 2022B; and $30.425 million of private activity/non-AMT senior airport revenue bonds, Series 2022C. Morgan Stanley & Co.

Loudoun County, Virginia, (Aaa/AAA/AAA/) is set to sell $165.685 million of general obligation public improvement bonds, Series 2022A, at 11 a.m. eastern Tuesday.

Fort Worth, Texas, (Aa1//AA/) is set to sell $150 million of water and sewer system revenue bonds, Series 2022, at 10:30 a.m. Tuesday.