Constructive secondary tone emerges leading to first drop in yields since April

Bonds

Municipals saw an uptick in secondary activity that led to a constructive tone, pushing yields lower for the first time since late April, while still underperforming another day of U.S. Treasury market gains on Thursday. Equities ended mixed after experiencing the worst losses in two years on Wednesday.

Investors pulled more from municipal bond mutual funds in the latest week, with Refinitiv Lipper reporting $2.712 billion of outflows, up from $2.446 billion of outflows in the previous week. The outflows now total $65.8 billion so far in 2022, surpassing the last largest annual outflows of $63.5 billion during the Taper Tantrum in 2013.

News of outflows came as secondary trading of high-grades showed two-way flow Thursday, with several prints and recent new issues trading up from recent sessions. Triple-A curves saw yields fall two to five basis points as a result while Treasuries improved by two to six, better on the short end, steepening the curve there as investors continued a flight-to-safety.

Muni to UST ratios landed at 90% in five years, 105% in 10 years and 109% in 30, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the five at 89%, the 10 at 103% and the 30 at 109% at a 4 p.m. read.

The flight-to-quality trade was led by a wrath of U.S. economic data that “painted a gloomy picture of the economy” Thursday, leading investors to continue to be spooked by inflation concerns, said Ed Moya, senior market analyst at OANDA.

“Jobless claims rose, the housing market is clearly cooling, another Fed regional survey showed the weakest print since early in the pandemic and the leading index turned negative,” he said.

In a signal that perhaps the market may be turning a corner, Patrick Brett, managing director, Municipal Debt Capital Markets, at Citigroup, noted he has seen a return of retail investors in recent sessions.

“Even with the mutual fund selling, we’ve had individual investors, retail investors step into the market in a pretty significant way, especially over the last week or so — two to three times the normal rate that we see and that tends to be a sign of a bottom in the market,” Brett said, speaking at Volcker Alliance and Penn Institute for Urban Research’s special briefing on how states and localities are deploying the Infrastructure Investment and Jobs Act funds.

Nonetheless, the market is “undergoing another period of pretty severe stress” and that has a lot to do with the concentrated buyer base for munis, he said.

“We are concentrated with municipal mutual funds, which have seen really sharp outflows” of more than $65 billion this year.

“On the positive side, the market is still open, it hasn’t closed like it did in March 2020” and that’s partly because the credit fears that existed in March 2020 are “no longer on the table,” he said. “State are flush with cash and bonds are still coming to market … we don’t have those kind of credit fears.”

In the primary Thursday, the last of the week’s largest deals priced. J.P. Morgan Securities priced for the Ohio Housing Finance Agency (Aaa///) $130 million of mortgage-backed securities program residential mortgage revenue non-AMT social bonds, 2022 Series B, with 5s of 3/2023 at 2.01%%, 5s of 3/2027 at 3.24%, 5s of 9/2027 at 3.33%, 3.95s of 3/2032 at par, 4.05s of 9/2032 at par, 4.3s of 9/2037 at par, 4.5s of 9/2042 at par, 4.55s of 9/2047 at par and 5s of 3/2052 at 3.75%, callable 9/1/2031.

Citigroup Global Markets priced for the Indiana Finance Authority (Aa3/AA//) $90.725 million of CWA Authority Project first lien wastewater utility refunding revenue forward delivery bonds, Series 2022A, with 5s of 10/2023 at 2.44%, 5s of 2027 at 3.10%, 5s of 2032 at 3.66% and 5s of 2037 at 3.89%, callable 10/1/2032.

Secondary trading
Washington 5s of 2023 at 2.06%-1.90%. New York City TFA 5s of 2023 at 2.01%-1.96%. Maryland 5s of 2024 at 2.35% versus 2.40%-2.36% Tuesday. Forsyth, North Carolina, 5s of 2024 at 2.29%. Charlotte, North Carolina, water 5s of 2024 at 2.35%-2.30%. Montgomery County, Maryland, 5s of 2025 at 2.39%-2.36%.

New York City 5s of 2025 at 2.58%-2.55%. Montgomery County 5s of 2026 at 2.52%-2.51%. Minnesota 5s of 2027 at 2.57%. Prince George’s County, Maryland, 5s of 2028 at 2.81%-2.80%.

New York Dorm PIT 5s of 2031 at 3.30% versus 3.35%-3.33% Wednesday. California 5s of 2031 at 3.20%.

Harvard green 5s of 2032 at 2.94%-2.93%. Princeton 5s of 2032 at 3.04%-3.03% versus 3.09% original.

Anne Arundel, Maryland, 5s of 2037 at 3.28%-3.27%. New York City TFA 5s of 2044 at 4.02%. Washington 5s of 2045 at 3.65%.

Triborough Bridge and Tunnel MTA 5s of 2051 at 4.30% versus 4.41%-4.40% Thursday. Tribes 5s of 2051 at 4.11%.

AAA scales
Refinitiv MMD’s scale was bumped two to three basis points at the 3 p.m. read: the one-year at 1.97% (-2) and 2.29% (-2) in two years. The five-year at 2.57% (-3), the 10-year at 2.99% (-3) and the 30-year at 3.34% (-3).

The ICE municipal yield bumped three to five basis point bumps:1.98% (-3) in 2023 and 2.34% (-3) in 2024. The five-year at 2.57% (-3), the 10-year was at 2.90% (-4) and the 30-year yield was at 3.36% (-5) at a 4 p.m. read.

The IHS Markit municipal curve saw bumps: 2.00% (-2) in 2023 and 2.30% (-2) in 2024. The five-year at 2.61% (-2), the 10-year was at 3.01% (-2) and the 30-year yield was at 3.35% (-2) at 4 p.m.

Bloomberg BVAL saw two to three basis point bumps: 2.00% (-2) in 2023 and 2.28% (-2) in 2024. The five-year at 2.63% (-3), the 10-year at 2.93% (-2) and the 30-year at 3.29% (-2) at a 4 p.m. read.

Treasuries were better.

The two-year UST was yielding 2.622% (-5), the three-year was at 2.784% (-4), five-year at 2.851% (-4), the seven-year 2.376% (-4), the 10-year yielding 2.851% (-4), the 20-year at 3.247% (-2) and the 30-year Treasury was yielding 3.059% (-1) at the close.

Mutual funds see outflows
In the week ended May 18, weekly reporting tax-exempt mutual funds saw investors pull more money out with Refinitiv Lipper reporting $2.712 billion of outflows Thursday, following an outflow of $2.446 billion the previous week.

Exchange-traded muni funds reported inflows of $645.848 million after inflows of $1.600 billion in the previous week. Ex-ETFs, muni funds saw outflows of $3.358 billion after $4.046 billion of outflows in the prior week.

The four-week moving average narrowed to negative $2.676 billion from negative $2.885 from in the previous week.

Long-term muni bond funds had outflows of $1.769 billion in the last week after outflows of $1.522 billion in the previous week. Intermediate-term funds had outflows of $375.040 million after $656.447 million of outflows in the prior week.

National funds had outflows of $2.310 billion after $1.868 billion of outflows the previous week while high-yield muni funds reported $745.392 million of outflows after $824.578 million of outflows the week prior.

New York City officials please with GO deal
New York City said there was good investor demand for its sale of $1.08 billion of general obligation bonds.

During the retail order period for the $950 million of tax-exempt fixed-rate bonds, the city received a little more than $687 million of orders from investors, of which over $360 million was usable. During the institutional pricing, the city received around $4.2 billion of priority orders, which made the exempt deal 7.1 times oversubscribed, officials said.

Given demand for the tax-exempts, yields were lowered in the intermediate- to long-term maturities, by one to four basis points in the 2035 to 2040 maturities, by eight basis points in 2041 to 2043, by 10 basis points in 2044 to 2046, and by two basis points in 2049. Final yields ranged from 2.49% in 2024 to 4.64% in 2049.

For the $130 million of taxable fixed-rate bonds, the city received around $219 million of orders, making the taxable deal almost 1.7 times oversubscribed.

Given investor demand, yields were cut seven basis points in 2026 and four basis points in 2027. Final yields ranged from 3.732% in 2026 to 4.193% in 2030.

Caitlin Devitt and Chip Barnett contributed to this report.

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