Large redemptions, smaller supply to begin June

Municipals were slightly firmer in light trading Tuesday with the asset class ignoring a large selloff in U.S. Treasuries while equities ended the session with losses.

Triple-A yield curves saw up to two basis point bumps, continuing to outperform U.S. Treasuries, moving ratios lower again.

Muni-to-UST ratios were at 74% in five years, 87% in 10 years and 92% in 30, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the five at 74%, the 10 at 86% and the 30 at 93% at a 4 p.m. read.

Kim Olsan, senior vice president at FHN Financial, said the municipal performance leading into month-end “has been nothing short of extraordinary.”

Olsan said despite a powerful rally into month-end, yield moves still have the 10-year spot of around 2.48% trading well above the last decade’s average of 1.79% for June. 

The lows of 2020 and 2021 — less than 1% on the 10-year — “forced long-end commitments to reach reasonable taxable equivalent yields, but the current range has fair value at shorter points on the curve,” she said.

Recent demand has been partially stimulated “by the underperformance of munis relative to corporates,” which have “made tax-exempt yields compelling when compared to corporate bond after-tax yields,” said CreditSights strategists Pat Luby and John Ceffalio.

However, “last week’s strong outperformance of munis relative to corporates has erased most of the advantage that tax-exempt yields had offered, effectively closing the window of opportunity for corporate investors subject to the 21% federal tax rate to buy munis at yields higher than corporate bond after-tax yields,” they said.

Luby and Ceffalio expect the urgency of reinvesting this week’s maturing and called bond proceeds will continue to fuel market enthusiasm.

But, with banks and insurance companies now priced out of tax-exempts, they said, “that leaves the market once again dependent primarily on direct and indirect demand from individual investors.”

They noted June redemptions will be the highest of the year at $50.6 billion. Additionally, investors will also be receiving the largest monthly total interest payments of $14.2 billion, they said.

“The enormous wave of cash starts flowing on Wednesday when issuers will be paying out $37 billion of principal and interest,” Luby and Ceffalio said.

Compared to June, July and August redemptions, which will be $38 billion and $39 billion, respectively, may not look to be as significant but are still well above this year’s monthly average of $29 billion, they said.

The turn of the calendar into early June brings syndicate business that will struggle to approach the first round of called and matured bond volume, Olsan said.

While May’s total volume was down 9% year over year, coming in at about $32.2 billion, June’s average supply figure in the last 10 years is $40 billion, she notes.

“Near-term supply could be curtailed by taxable muni refundings that have moved out of the money for many outstanding issues,” Olsan said. 

May’s smaller figures were led by a 70% drop in refunding volumes and a 31% drop in taxables.

Bond Buyer 30-day visible supply sits at $15.5 billion while net negative supply is at $18.489 billion, per Bloomberg.

Return figures for June show that the month has produced a near-flat result historically since 2012 but the start of upcoming month would appear on a better footing after the selloff of the last four months has been tempered, Olsan said. 

“Although the market has recovered nearly 25% of the 2022 weakness, absolute yields still hold value levels over a wide timeframe,” she said, adding that muni to UST ratios are holding steady enough in the major spots.  

Taxable equivalent yields on the short end are in the 3% area and intermediate yields offer TEYs over 4% (for a 21% bracket buyer and 50 to 75 basis points higher for a top-bracket individual), Olsan said.

Secondary trading
North Carolina 5s of 2023 at 1.44%. Loudoun County 5s of 2025 at 2.01%-2.00%. Washington Suburban Sanitation District, Maryland, 5s of 2025 at 2.00%-1.99%.

Connecticut 5s of 2027 at 2.40%-2.38%. Georgia 5s of 2028 at 2.18%. New York Dorm PIT 5s of 2029 at 2.48%-2.46%.

Gilbert, Arizona, green waters 5s of 2030 at 2.45% versus 2.87% a week ago. Oregon 5s of 2031 at 2.51%. Baltimore County, Maryland, 5s of 2032 2.61%-2.60%. California 5s of 2032 at 2.58%-2.56%. Minnesota 5s of 2032 at 2.52%-2.51%.

Maryland 5s of 2034 at 2.48%. Georgia 4s of 2034 at 2.77%-2.75%. Washington 5s of 2034 at 2.67%-2.66%. Prince George’s County 5s of 2037 at 2.65%-2.59%. Triborough Bridge and Tunnel 5s of 2047 at 3.27%. New York City waters 5s of 2051 at 3.27%-3.25%.

AAA scales
Refinitiv MMD’s scale was bumped two basis points at the 3 p.m. read: the one-year at 1.51% (-2) and 1.83% (-2) in two years. The five-year at 2.09% (-2), the 10-year at 2.47% (-2) and the 30-year at 2.81% (-2).

The ICE municipal yield curve saw one to two basis point bumps across the curve: 1.53% (-2) in 2023 and 1.86% (-2) in 2024. The five-year at 2.09% (-2), the 10-year was at 2.43% (-2) and the 30-year yield was at 2.86% (-1) at a 4 p.m. read.

The IHS Markit municipal curve saw two basis point bumps: 1.51% (-2) in 2023 and 1.81% (-2) in 2024. The five-year at 2.08% (-2), the 10-year was at 2.48% (-2) and the 30-year yield was at 2.82% (-2) at 4 p.m.

Bloomberg BVAL saw up to two basis point bumps: 1.56% (-2) in 2023 and 1.85% (-1) in 2024. The five-year at 2.16% (-2), the 10-year at 2.48% (-2) and the 30-year at 2.83% (unch) at a 4 p.m. read.

Treasuries sold off.

The two-year UST was yielding 2.571% (+9), the three-year was at 2.734% (+10), the five-year at 2.828% (+11), the seven-year 2.883% (+12), the 10-year yielding 2.861% (+12), the 20-year at 3.277% (+12) and the 30-year Treasury was yielding 3.067 (+10) at the close.

Primary to come:
Atlanta, Georgia, (Aa3//AA-/) is set to bring a total of $578 million of AMT and non-AMT airport general revenue bonds consisting of $179.51 million of exempts, $118.145 million of exempts, $218.765 million and $61.95 million of AMT bonds. Goldman Sachs & Co.

The Utah Board of Higher Education (Aa1/AA+//) is set to price Thursday $505.450 million of green University of Utah general revenue bonds, Series 2022B, serials 2024-2042, term 2047. Barclays Capital.

Colorado (Aa2/AA-//) is set to price Wednesday $500 million of Rural Colorado certificates of participation, Series 2022, serials 2022-2041. UBS Financial Services.

The California Community Housing Agency is set to price Tuesday $465 million of 321 W. Ocean Development essential housing revenue bonds, consisting of $297.585 million of senior convertible capital appreciation bonds, Series A-1, terms 2062 and 2066; $52.256 million of senior capital appreciation bonds, Series A-2, term 2072; and $115.160 million of green climate-certified bonds, Series B, term 2042. Jefferies.

The Massachusetts Educational Financing Authority is set to price Thursday $394.700 million of education loan revenue bonds, Issue M, consisting of: $143.350 million of taxable senior bonds (/AA//), Series 2022A, serials 2024-2031, term 2038; $52.370 million of AMT senior bonds (/AA//), Series 2022B, serials 2024-2031, term 2038; and $28.500 million of AMT subordinate bonds (/BBB//), Series 2022C, serial 2052. RBC Capital Markets.

The New York State Housing Finance Agency (Aa2///) is set to price Thursday $394.210 million of affordable housing revenue bonds, consisting of: $68.660 million of climate bond certified/sustainability bonds, 2022 Series D-1; $209.985 million of climate bond certified/sustainability bonds, 2022 Series D-2; $24.785 million of sustainability bonds, 2022 Series E-1; and $90.780 million of sustainability bonds, 2022 Series E-2. Morgan Stanley & Co.

The Department of Water and Power of the City of Los Angeles (Aa2//AA/AA+/) is set to price Thursday $346.685 million of water system revenue bonds, 2022 Series C, serials 2023-2025 and 2034-2043, terms 2047 and 2052. Siebert Williams Shank & Co.

UMass Memorial Health Care (/BBB+/A-//) is set to price Wednesday $300 million of taxable corporate CUSIPs, 2022 Series M. Morgan Stanley & Co.

The Michigan State Housing Development Authority (Aa2/AA+//) is set to price Wednesday $199.855 million of non-AMT social single-family mortgage revenue bonds, 2022 Series A, serials 2022-2032, terms 2037, 2043 and 2053. Barclays Capital.

The Iowa Board of Regents is set to sell $150.320 million of University of Iowa Hospitals and Clinics hospital revenue refunding bonds, Series S.U.I. 2022C, at 11 a.m. eastern Wednesday.

Jersey City is set to sell $125.870 million of general improvement bonds at 11 a.m. Wednesday.

Beaufort County School District, South Carolina, (Aa1/AA//) is set to sell $139.610 million of general obligation bonds, Series 2022C at 11 a.m. eastern Thursday.

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