Muni yields fall as retail pops its head in

Bonds

Municipals were steady to firmer in spots with triple-A benchmark yields falling for the first time since March 17 and large new issues saw bumps in repricings as conditions improved. U.S. Treasuries strengthened, but parts of the yield curve remained inverted, while equities sold off.

Triple-A municipal yield curves saw bumps up to five basis points on the short end while the three-year UST ended higher than the 30-year.

Muni to UST ratios were at 81% in five years, 92% in 10 years and 102% in 30, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the five at 80%, the 10 at 96% and the 30 at 105% at 3 p.m.

Investors pulled more from municipal bond mutual funds as the Investment Company Institute on Wednesday reported $2.728 billion of outflows in the week ending March 23, down from $3.615 billion of outflows in the previous week.

Exchange-traded funds saw inflows at $237 million versus $438 million of inflows the week prior.

In the primary Wednesday, Loop Capital Markets priced and repriced for New York City Transitional Finance Authority (Aa1/AAA/AAA/) $950 million of tax-exempt future tax secured subordinate bonds, Fiscal 2022 Series F, Subseries F-1, with up to five basis point bumps. Bonds in 2/2024 with a 5% coupon yield 1.94%, 5s of 2026 at 2.22%, 5s of 2035 at 2.93% (-2), 5s of 2037 at 3.06% (-5), 5s of 2042 at 3.14% (-5), 5s of 2047 at 3.27% (-5), 4s of 2051 at 3.56% (-5) and 5s of 2051 at 3.31% (-5), callable 2/1/2032.

BofA Securities priced for Lake Oswego School District No. 7J, Oregon, (/AA+/AA+/) $152.905 million of general obligation bonds, Series 2022. Bonds in 6/2023 with a 5% coupon yield 1.68%, 5s of 2027 at 2.15%, 5s of 2032 at 2.45%, 4s of 2037 at 2.86%, 3.25s of 2042 at 3.34% and 4s of 2047 at 3.10%, callable 6/1/2032.

In the competitive market, Boston (Aaa/AAA/) sold $334.315 million of general obligation bonds, 2022 Series A, to BofA Securities. Bonds in 11/2022 with a 5% coupon yield 1.35%, 5s of 2027 at 2.00%, 5s of 2032 at 2.24%, 5s of 2037 at 2.45% and 5s of 2041 at 2.51%, callable 11/1/2032.

Louisiana (Aa3//AA-/) sold $205.625 million of general obligation bonds, Series 2022-A, to Wells Fargo Bank. Bonds in 4/2023 with a 5% coupon yield 1.70%, 5s of 2027 at 2.17%, 5s of 2034 at 2.50%, 5s of 2037 at 2.67% and 4s of 2042 at 3.04%, callable 4/1/2032.

New York City Transitional Finance Authority (Aa1/AAA/AAA/) sold $158.645 million of future tax-secured taxable subordinate bonds, Fiscal 2022 Subseries F-2, to J.P. Morgan Securities. Bonds in 2/2027 with a 3.15% coupon yield at par and 3.60s of 2031 at 3.57%, noncall.

The authority also sold $141.335 million of future tax-secured taxable subordinate bonds, Fiscal 2022 Subseries F-3, to Morgan Stanley. Bonds in 2/2032 with a 4% coupon yield 3.65% and 4s of 2035 at 4.10%

In the primary market Tuesday, Raymond James & Associates priced for the California Health Facilities Financing Authority (Aa3/AA-/AA-/) $1.050 billion of taxable social No Place Like Home Program senior revenue bonds. The bonds priced at par: 2.67% in 6/2024, 3.244% in 2027, 3.79% in 2032, 4.19% in 2037 and 4.353% in 2041, subject to a make-whole redemption.

Municipal bonds were firmer on Wednesday and retail appetite started to come back after weakness permeated the last few sessions, a Midwest trader said.

The Treasury weakness that started last week caused retail to retreat and remain on the sidelines, he noted.

The firmness brought with it some confidence among the retail crowd.

“With Treasuries seeming to have caught a little balance here the last couple of days, the runaway train of falling muni prices has stabilized,” the trader noted.

The stability is affording investors an opportunity to buy bonds at new levels. “They are finding value where no one wanted to buy anything a week ago, the new levels are getting attention and drawing interest,” after the retail market was hit emotionally and psychologically hard due to the low rates, he said.

“It’s been tough for retail the last year with decimal and fractional yields inside of five years,” he added. With “the ability to get 2% in three to four years, we are starting to see retail show some good interest.”

Overall, the Federal Reserve Board’s planned rate hikes haven’t helped the situation.

“The uncertainty has not helped our weekly flows, but the new levels have brought people back in,” he said. “Retail is certainly starting to pick up that slack.”

The primary market, he said, has been very difficult.

“If you have to underwrite any bonds over the last four weeks a day or two later you are offering them below your cost,” he said.

Larger transactions in the billion-dollar range, however, are widely perceived to come much wider than normal spreads, so those trade up initially and investors can buy them now behind where they came originally, he said.

“It has been a challenge to get new issues priced and sold especially if they’re a smaller rural credit or a weaker credit,” he said. “Those have certainly had more challenges with their liquidity at levels that underwriters and FAs think are correct, but it’s hard to know the correct level when it keeps moving around.”

For now, the new levels are boosting retail demand.

“We are seeing an increase in mom and pop based on much more attractive levels,” he said.

“If we have a few more days where the market doesn’t go down or snap up much we should start seeing much more participation from institutional and retail investors,” the trader said.

In the middle of outsized bid lists and fresh issue supplies, bidders are still figuring where fair value should be, said Kim Olsan, senior vice president at FHN Financial.

Since the end of 2021, she said short-term bonds have snagged a handle and then surged to another one over 2%. The 10- and 30-year spots are both more than 100 basis points higher, with sub-5% coupons far wider on risk rates.

“It isn’t quite the exaggerated moves of March 2020 but that timeframe wound up being short-lived,” she said.

Final issue pricing is fading from preliminary indications, necessitating wider spreads for distribution, she said.

Olsan noted the Broward County, Florida, (Aa1/AAA//) Convention Center revenue bond deal on Tuesday concluded the day with the 10-year yielding 2.79% (+57/AAA) and 4s of 2051 at 3.61% (+105/AAA) — both roughly 25 basis points higher than premarketing levels.

Secondary trading suggests concern, she said, not only because of bad muni fundamentals, but also because of an inflation theme: New York City Water 4s of 2052, which were issued in February at 2.38% (+53/AAA), are currently trading around 3.50% at +86/AAA.

“Recent early-year selloffs have been followed by a rally — in 2018, 2020 and 2021 the 10-year benchmark bounced off yield highs to end with a gain by the end of the second quarter,” she said.

A fundamental feature in the reinvestment and supply cycle — where June’s redemptions might exceed incoming supply, supporting up yields — is part of that performance. This time, Olsan said, the recovery phase may be longer, but there will be a tipping point where relative value will triumph.

Secondary trading
Minnesota 5s of 2023 at 1.70%-1.69%. Anne Arundel County, Maryland, 5s of 2025 at 1.96% versus 1.99% original. NY Dorm PIT 5s of 2026 at 2.14%-2.12%.

Maryland 5s of 2028 at 2.13%-2.12% versus 1.99%-1.98% Thursday. Montgomery County, Maryland, 4s of 2028 at 2.15%. New York City 5s of 2029 at 2.42% versus 2.45% Tuesday and 2.38% original. California 5s of 2029 at 2.28%-2.27% versus 2.33% Monday, 2.15% on 3/23 and 2.18%-2.15% on 3/16. California 5s of 2030 at 2.38%-2.37%.

New York City 5s of 2031 at 2.58% versus 2.62% Monday and 2.56% original. NYC TFA 5s of 2031 at 2.62% versus 2.62% Friday. NY Dorm PIT 5s of 2032 at 2.55% versus 2.44% on 3/23 and 2.45% original. Georgia 5s of 2033 at 2.31%-2.32%.

California 5s of 2042 at 2.70% versus 2.76% Tuesday and 2.44% original. Triborough Bridge and Tunnel Authority 5s of 2043 at 3.04% versus 3.06%-3.04% Tuesday.

San Jose, California, 5s of 2047 at 2.78%-2.75%.

AAA scales
Refinitiv MMD’s scale saw up to two basis point cuts at the 3 p.m. read: the one-year at 1.58% (+2) and 1.79% in two years (+2). The five-year at 2.01% (unch), the 10-year at 2.22% (unch) and the 30-year at 2.57% (unch).

The ICE municipal yield curve was cut three to five basis points: 1.57% (+4) in 2023 and 1.84% (+5) in 2024. The five-year at 2.01% (+3), the 10-year was at 2.29% (+3) and the 30-year yield was at 2.65% (+3) in a 3:45 p.m. read.

The IHS Markit municipal curve was cut up to two basis points: 1.55% (+2) in 2023 and 1.77% (+2) in 2024. The five-year at 2.02% (unch), the 10-year at 2.22% (unch) and the 30-year at 2.62% (unch) at a 4 p.m. read.

Bloomberg BVAL saw up to two basis point cuts: 1.54% (+2) in 2023 and 1.78% (+2) in 2024. The five-year at 2.03% (+2), the 10-year at 2.25% (+2) and the 30-year at 2.57% (unch) at a 4 p.m. read.

Treasury yields fell on the long end and equities were down.

The two-year UST was yielding 2.362%, the three-year was at 2.540%, five-year at 2.489%, the seven-year 2.477%, the 10-year yielding 2.389%, and the 30-year Treasury was yielding 2.504% at the close.

Watching the yield curve
Economists look to the yield curve, and inversion thereof, for signals of a recession on the horizon. But every analyst seems to look at different portions of the curve for warnings.

“An inverted yield curve is a reliable recession indicator,” wrote Ryan Swift, U.S. bond strategist at BCA Research, and Doug Peta, chief U.S. investment strategist at BCA, in a report. “Inversions of the 3-month/10-year Treasury slope and the 3-month/3-month, 18-months forward slope both provide more timely recession signals than inversion of the 2-year/10-year Treasury slope.”

Currently, the yield curve suggests the economic recovery progressed beyond the early stages, but “it is premature to talk about a recession,” they said.

The three-month/10-year Treasury has predicted the last eight recessions, with no “false signals,” they said, while the two-year/10-year Treasury inverted before all but one of those recessions also with no wrong calls.

While financial market prices give earlier clues about coming recessions, Swift and Peta said, they often offer false signals, while macroeconomic data-related signals tend to come closer to a recession but with fewer false signals.

“Typically, the most useful recession indicators involve some combination of financial market and economic data,” they said. “For example, a 2018 report from our U.S. Investment Strategy service showed that a useful recession indicator can be created by combining the three-month/10-year Treasury slope and the Conference Board’s Leading Economic Indicator.”

They conclude the three-month/10-year Treasury curve and the Fed Slope reliable predict downturns, with sufficient warning to allow investors to prepare.

While the two-year/10-year curve has flattened but inverted only for a short while, they said, three-month/10-year Treasury and “the Fed slope are both elevated at 195 bps and 255 bps, respectively. We can conclude from this that recession warnings are premature.”

Wednesday’s data suggested the labor market is still tight, while the final read of fourth quarter GDP was revised down a tick. First quarter growth will take a hit as a result of inflation and the Russian invasion of Ukraine.

The ADP employment report suggested 455,000 private sector jobs were added in March, while the February number was raised to a 486,000 gain from the initially reported 475,000 climb.

As for Friday’s employment report, “it will be a challenge to match the 678,000 jobs added in February,” said Mark Hamrick, senior economic analyst at Bankrate. “Even so, the expectation is that payrolls growth was still solid in March with the consensus north of 400,000 jobs. That should help the unemployment rate to remain at or slightly below the previous month’s reading of 3.8%.”

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