Munis rally to kick off December

Bonds

Municipals rallied on the short end to kick off December with the one-year triple-A muni dropping below 2.50%. U.S. Treasuries rallied across the curve, and equities were mixed.

Triple-A yields fell up to 10 basis points on the short end and made gains across the curve. UST improved with the largest gains out long.

The three-year muni-UST ratio Wednesday was at 62%, the five-year at 69%, the 10-year at 74% and the 30-year at 96%, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the three at 61%, the five at 66%, the 10 at 74% and the 30 at 93% at a 4 p.m. read. 

Outflows continued as Refinitiv Lipper reported $1.394 billion was pulled from municipal bond mutual funds for the week ending Wednesday after $438.381 million of outflows the week prior.

High-yield reported $590.461 million of outflows after $34.610 million of outflows the week prior while exchange-traded funds saw more inflows of $745.970 million after $845.078 million of inflows the previous week.

In the primary market Thursday, Barclays Capital priced for the Texas Department of Housing and Community Affairs (Aaa/AA+//) $190 million of non-AMT single-family mortgage revenue bonds, with 2.7s of 3/2024 at par, 3.25s of 3/2027 at par, 5.5s of 9/2027 at 3.10%, 5.5s of 9/2032 at 3.66%, 5.5s of 9/2032 at 3.71%, 4.4s of 9/2037 at par, 4.65s of 9/2042 at par, 5.125s of 9/2047 at 4.81%, 5.25s of 9/2052 at 4.87% and 6s of 3/2053 at 4.03%, callable 3/1/2032.

BofA Securities priced for the Wisconsin Health and Education Facilities Authority (A2/A+//) $130 million of Bellin Memorial Hospital revenue bonds. The first tranche, $100 million of Series 2022A, saw 5s of 12/2037 at 4.10%, 5s of 2042 at 4.41%, 5s of 2045 at 4.52% and 5.5s of 2052 at 4.52%, callable 12/1/2032.

The second tranche, $30 million of Series 2022B, saw 5s of 12/2048 at 4.57%, callable 12/1/2032.

November performance best in decades
November’s tone was a “fall fury with generic yields falling 60-65 basis points across the curve,” said Kim Olsan, senior vice president of municipal bond trading at FHN Financial.

Munis benefited from limited supply — November volume issuance stood at $19.7 billion, the lowest month of the year — “coupled with favorable redemption figures, but also a UST market finding more reason to be constructive about future rate hikes,” she said.

Munis saw the best performance in November in decades. The Bloomberg Municipal Index was in the positive by 4.68%.

Taxables posted a 4.51% gain last month, “outperforming a comparable UST index by 182 basis points,” Olsan said.

Taxable supply fell 79% year-over-year to $1.7 billion in November.

“A sizable bite has been taken out of the sector due to substantially higher interest rates impacting refunding opportunities,” she said.

MSRB data indicates taxables garnered around 10% of all secondary volume during November.

High-yield was in the positive by 5.82% and Impact at 5.26%. 

“As yields continued to fall, a risk-on theme took hold with revenue categories catching a bid at the expense of GO bonds,” she said.

General obligation bonds returned 4.40% while revenue bonds came in at 4.99% in the black.

“A generic revenue index outperformed GOs by 59 basis points,” Olsan said. “Based on earlier month losses, revenue bonds lag GOs by about 150 basis points for the year.”

Long bonds (22+) came in at 7.83%, recovering about one-third of their 2022 losses, she said.

“Short-dated bonds were up just over 1% and are just negative on the year,” while intermediate bonds gained 4% “but at the expense of the coveted 3% yield in 2030-2032 maturities,” according to Olsan.

In the high-yield indices, the tobacco sector led with a 10.28% return, Puerto Rico came in with 7.40% and special tax at 7.37%.

Within the Impact Indices, green came in at positive 5.08%, social at 5.84% and sustainable at 5.71%. 

Trading volume reaches records
The Municipal Securities Rulemaking Board reported that trading volume “reached another record in November 2022, with 1.29 million municipal bond trades recorded.”

November trades surpassed October’s previous record of 1.25 million trades, the MSRB said. The month’s trades were more than double the volume in November 2021.

Municipal bond trade count is up 63% year-to-date versus the same period last year, “likely fueled by individual investor demand, as customer purchases and inter-dealer trades rose more than customer sales.”

This November was the seventh month out of the last eight with over one million trades reported to the MSRB. This compares to only eight months in the last 15 years with more than one million trades.

December begins with lower yields, light supply
Supply shortages and uncertainty over the levels of absolute yields are among the chief concerns facing municipal investors as December got under way on Thursday, according to Tom Kozlik, managing director and head of municipal research and analytics at Hilltop Securities. 

“Market participants are continuing to right-size their expectations on the supply side in the near term and for the rest of the year,” Kozlik said Thursday. 

He noted that it wasn’t too long ago at the start of September 2021 that analysts were calling for a record or at least a near-record amount of issuance for 2022. 

However, “a record amount of issuance has been an unrealistic expectation since March,” Kozlik said.

And even though Federal Reserve Board chairman Jerome Powell confirmed Wednesday that smaller interest rate increases are likely ahead and could start as early as next month, investors are still somewhat queasy over rates, according to Kozlik.

“Uncertainty still remains about the levels of absolute rates even though the Fed chair is trying to manage this,” he said.

Overall, Kozlik doesn’t expect much in the way of big changes between now and the end of 2022.

“Issuance activity will remain very challenged,” he said. “I am expecting primary market municipal supply to be the lowest in December than we have seen in years.”

At the same time, he said institutional investors may try to put money to work before year-end, but might be at a loss for paper.

“It seems like there is still not going to be relief from outflows so that may be hard,” Kozlik said.

Concerns about the general direction of the U.S. economy, fall-out from crypto activity, and regional housing market shifts are all among the themes likely adding to the weight already on municipal investors’ shoulders at year-end, according to Kozlik. 

Through year-end, investors will be looking for any new or different policy changes from the Federal Reserve and any new guidance on inflation from the economy.

“Investors will continue to prepare for the worst and hope for the best,” Kozlik said.

AAA scales
Refinitiv MMD’s scale was bumped four to 10 basis points: the one-year at 2.39% (-10, no Dec. roll) and 2.43% (-10, no Dec. roll) in two years. The five-year at 2.53% (-10, no Dec. roll), the 10-year at 2.61% (-10) and the 30-year at 3.48% (-4).

The ICE AAA yield curve was bumped five to seven basis points: 2.44% (-7) in 2023 and 2.48% (-7) in 2024. The five-year at 2.56% (-6), the 10-year was at 2.68% (-5) and the 30-year yield was at 3.53% (-5) at 4 p.m.

The IHS Markit municipal curve was bumped up to 10 basis points: 2.39% (-10) in 2023 and 2.45% (-10) in 2024. The five-year was at 2.52% (-10), the 10-year was at 2.61% (-10) and the 30-year yield was at 3.47% (-5) at a 4 p.m. read.

Bloomberg BVAL was bumped up to eight basis points: 2.46% (-8) in 2023 and 2.49% (-8) in 2024. The five-year at 2.54% (-8), the 10-year at 2.60% (-8) and the 30-year at 3.46% (-5) at 4 p.m.

Treasuries rallied.

The two-year UST was yielding 4.238% (-8), the three-year was at 3.974% (-8), the five-year at 3.666% (-7), the seven-year 3.601% (-8), the 10-year yielding 3.515% (-9), the 20-year at 3.816% (-11) and the 30-year Treasury was yielding 3.611% (-13) just before the close.

Mutual fund details
Refinitiv Lipper reported $1.394 billion of outflows for the week ending Wednesday following $438.381 million of outflows the previous week.

Exchange-traded muni funds reported inflows of $745.970 million after inflows of $845.078 million in the previous week. Ex-ETFs, muni funds saw outflows of $2.140 billion after outflows of $1.283 billion in the prior week.

Long-term muni bond funds had outflows of $1.112 billion in the latest week after outflows of $156.260 million in the previous week. Intermediate-term funds had outflows of $247.709 million after outflows of $131.407 million in the prior week.

National funds had outflows of $1.086 billion after outflows of $229.443 million the previous week while high-yield muni funds reported outflows of $590.461 million after outflows of $34.610 million the week prior.

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