Munis on a tear, yields plummet 45 bps in a week

Municipals continued their rally Thursday with yields falling by another 12 to 15 basis points while U.S. Treasuries were little changed and equities rallied.

Secondary trading pushed yields lower again. Certain prints showed bonds trading up by more than 65 basis points from Friday’s levels. New York paper, in particular, was rallying in the secondary.

Valuations have fallen as a result of the municipal moves to lower yields. Muni-to-UST ratios fell, with the 30-year dipping below 100%. They were at 81% in five years, 93% in 10 years and 98% in 30, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the five at 79%, the 10 at 92% and the 30 at 98% at a 4 p.m. read.

Investors will be greeted Tuesday with a decrease in supply with the new-issue calendar estimated at $2.691 billion in $1.786 billion of negotiated deals and $904.9 million of competitive loans.

The primary calendar is led by $505 million of green University of Utah general revenue bonds from the Utah Board of Higher Education. Other notable deals include $500 million from the state of Colorado and $465 million from the California Community Housing Agency.

The Iowa Board of Regents is expected to sell $150 million to lead the competitive calendar, along with the Beauford County School District, South Carolina, with $140 million.

“Though inflationary pressures and the current interest rate environment suggest that participants should continue to maintain caution, we believe that some of the dynamics are now signaling ‘green lights’ for individual bond entry points,” Morgan Stanley investment strategists Matthew Gastall and Daryl Helsing said in a report.

“Particularly for those buy-and-hold muni investors who have yet to do so this spring, we believe participants should exercise the current ‘right of way’ to add some pre-summer exposure to short final-maturity and kicker municipals,” they said.

“Healthy supply and laggard fund outflows have caused munis to underperform USTs as inflation and interest rate concerns have surfaced,” they said.

Seasonal transitions tend to be highly consistent throughout the municipal bond market, with investor interest and primary activity usually accelerating in the spring and fall, “which frequently converge with lower reinvestment demand due to the absence of mid-year/year-end coupon and maturity payments,” they said. The opposite typically occurs throughout the summer months and the holidays, they noted.

“Higher supply and weaker reinvestment demand can help create opportunities for investors,” according to Gastall and Helsing.

“The mere expectations of these ‘bearish’ developments can encourage municipal bond prices to temporarily underperform in the short term,” while “investors often have a heightened array of options to choose from when new-issue supply accelerates,” they said.

Overall, they noted, this can lead to more investment options at temporarily lower prices.

And “if the global interest rate backdrop exhibits stability, spring seasonals and +100% ratios often represent a strong pre-summer buy signal,” they said.

Excluding March and April 2020, Morgan Stanley strategists said “recent interest-rate developments have helped some short-end municipal yields to reach the highest levels documented since 2008.”

“These rates may continue to rise and cause volatility, but such price movements are often limited in deviation since most of the bonds’ maturities are set to be redeemed at par in the near future,” they said. “Hence, interim price action is often less of a concern for buy-and-hold investors.”

The “highest federal-bracket taxable equivalent yields in states that offer exemptions for the average income tax rate are now yielding 4.5% and higher” on two-, three-, and four-year single-A-rated munis, they said.

They added nearly 70%, 74% and 75% of the full triple-A municipal yield curve is now captured at the two-, three- and four-year final maturity, respectively.

“Though longer final maturities may help investors looking to ‘lock in’ rates or earn more yield, we believe current short-end levels warrant significant consideration, particularly when noting that the market still confronts the possibility of rising interest rates,” they said.

Secondary trading
Minnesota 5s of 2024 at 1.86%. Columbus, Ohio 5s of 2026 at 2.04%-2.03%.

New York City 5s of 2027 at 2.27% versus 2.97% on 5/16. New York City 5s of 2028 at 2.37% versus 3.00% Friday. Ohio 5s of 2028 at 2.46%-2.45%. Baltimore County, Maryland 5s of 2029 at 2.48%. Maryland 5s of 2030 at 2.50% versus 2.62%-2.61% Wednesday.

Columbus, Ohio, 5s of 2036 at 2.75%-2.76% versus 2.89% Wednesday. Boston 5s of 2035 at 2.66%. Washington 4s of 2037 at 3.11%. Loudoun County 4s of 2041 at 3.18%-3.17% versus 3.42% original. California 5s of 2042 at 3.06%.

New York City TFA 5s of 2047 at 3.35% versus 4.00%-3.92% Friday. Los Angeles DWP 5s of 2047 at 3.10% versus 3.51% Tuesday. Triborough Bridge and Tunnel 5s of 2051 at 3.54%-3.44% versus 3.87%-3.81% Tuesday and 4.15% Friday. LA DWPs 5s of 2052 at 3.16% versus 3.33% Wednesday and 3.80% Friday.

Midday AAA scales
Refinitiv MMD’s scale was bumped 12 to 15 basis points at the 3 p.m. read: the one-year at 1.61% (-15) and 1.93% (-15) in two years. The five-year at 2.19% (-12), the 10-year at 2.57% (-12) and the 30-year at 2.91% (-12).

The ICE municipal yield curve saw 10 to 11 basis point bumps across the curve: 1.60% (-11) in 2023 and 1.94% (-11) in 2024. The five-year at 2.17% (-11), the 10-year was at 2.50% (-11) and the 30-year yield was at 2.94% (-10) at a 4 p.m. read.

The IHS Markit municipal curve saw: 1.61 (-12) in 2023 and 1.91% (-11) in 2024. The five-year at 2.18% (-12), the 10-year was at 2.58% (-12) and the 30-year yield was at 2.92% (-12) at 4 p.m.

Bloomberg BVAL saw 11 to 12 basis point bumps: 1.66% (-11) in 2023 and 1.93% (-12) in 2024. The five-year at 2.25% (-11), the 10-year at 2.57% (-11) and the 30-year at 2.91% (-12) at a 4 p.m. read.

Treasuries were mixed.

The two-year UST was yielding 2.482% (-2), the three-year was at 2.625% (flat), the five-year at 2.706% (-1), the seven-year 2.754% (-1), the 10-year yielding 2.748% (flat), the 20-year at 3.168% (-1) and the 30-year Treasury was yielding 2.950 (-1) at the close.

FOMC redux
Analysts parsed Wednesday’s Federal Open Market Committee meeting minutes and offered differing takes.

“The minutes are perhaps in the early stage of laying the groundwork for an eventual policy pivot,” said Mickey Levy, Berenberg Capital Markets’ chief economist for the U.S. Americas and Asia, and a member of the Shadow Open Market Committee.

“With the Fed acknowledging that risks to real activity are tilted to the downside, the minutes indicate many participants want to raise rates aggressively now to buy policy optionality down the line that ‘would leave the Committee well positioned later this year to assess the effects of policy firming and the extent to which economic developments warranted policy adjustments,’” he said.

While the Fed is intent on bringing down inflation, he said, “if this adversely affects the economy and is associated with a deterioration in labor market conditions, the Fed will move back from its aggressive anti-inflationary rate hikes.”

If unemployment rises above 5%, Levy said, “we would expect FOMC members in public comments to begin emphasizing a balanced approach to the Fed’s dual mandate, with such statements likely preceding either a pause on rate increases or potential easing.”

Compared to market expectations, Jason Brady, president and CEO at Thornburg Investment Management, said the “minutes note a marginally dovish stance.”

The Fed has carved a narrow path, he said, and now they are trying “to maintain credibility on fighting inflation while giving themselves flexibility later in the year.”

The FOMC appeared to be generally in agreement, as per the minutes, Brady said, but “tamping down the inflation juggernaut to the Fed’s medium-term target of 2% is a steep hill to climb.”

Investors still wonder “whether global inflation will continue, and if so, whether the Fed will have the stomach to increase rates in the face of lower asset prices and a slowing economy.”

With the Fed admitting they are behind the curve on inflation, Brady said, “consensus continues to mount that they are riding into the recession danger zone.”

Expect the next dot plot to show higher predictions for inflation, he said.

The minutes allowed for optimism, said Matt Dines, Chief Investment Officer and co-founder of Build Asset Management, “projecting confidence and empathy that the Committee’s shift to a neutral monetary policy framework will be successful at meeting its objective to bring down the elevated growth in price levels back toward its 2% longer-term target.”

This comes despite the Fed seeing downside risk to growth and upside inflation risk, he said, “suggesting the potential path for future policy from the Committee lies toward further tightening, not easing, if deemed necessary to meet its objectives.”

Primary to come:
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 Tuesday.

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

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.