Selling pressure hits munis hard, long USTs reach three-year highs

Bonds

Triple-A benchmarks were cut up to nine basis points to start the holiday-shortened week ahead of a smaller new-issue calendar, while long U.S. Treasuries hit three-year highs and equities sold off on inflation concerns.

Triple-A yields continue to rise, with the two-year muni just below 2%, the five well above and the 10-year approaching 2.5%.

Secondary selling pressure was evident out of the gates, trading flows were high for a Monday and pressure was felt across the curve.

Utah general obligation 5s of 2025 traded at 2.16% versus 2.08% Friday. California GOs in five years traded at 2.44%. Wisconsin GOs in five years at 2.38%. Cornell green bonds exchanged hands at 2.60%-2.49% in 10 years. New York City Transitional Finance Authority 5s of 2051 cleared at 3.49%-3.48% versus 3.30% Friday.

Muni to UST ratios were at 79% in five years, 87% in 10 years and 98% in 30, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the five at 78%, the 10 at 88% and the 30 at 99% at 4 p.m.

Municipal underperformance is being driven by curve positioning, with longer-dated bonds underperforming, noted Nuveen in a Monday report.

While yields have increased, municipal-to-Treasury yield ratios are the highest since October 2020, they said. The 10-year ratio ended the quarter at 94% (67% historical average) and 30-year ratio moved to 104% (vs. 93%).

“Rising rates do not necessarily correlate to losses in bond portfolios, and attempting to time markets can negatively impact performance,” Nuveen said.

Historically, they said, remaining invested has benefited investors over longer periods.

“In five periods where municipal yields increased by at least 100 basis points in less than one year, the principle value of a hypothetical portfolio based on Bloomberg Municipal Bond Index returns was higher 12 months after the rise in rates,” the report said.

Barclays strategists are getting more confident on the market for the rest of the year after being apprehensive heading into 2022 and for most of the first quarter. Municipals have recovered in the past and total returns in the following three quarters have often been positive, according to strategists Mikhail Foux, Clare Pickering and Mayer Patel.

Furthermore, Treasury rates are often the key driving force behind tax-exempt performance. Despite volatile rates, they believe, the balance sheet run-off can no longer be a catalyst for higher rates; forward real rates appear to be too high given low estimates of the neutral rate and the risk of a hard landing; and upcoming data should support a long-duration bias.

CreditSights senior municipal strategists Pat Luby and John Ceffalio said after last week’s outperformance of munis relative to corporates, the advantage of tax-exempts over comparably rated corporate bond after-tax yields has practically vanished.

They said outperformance of munis had left tax-exempt yields richer than corporate after-tax yields by last Friday. The 10-year double-A muni yield fell to 15 basis points behind the corporate after-tax yield, while the single-A muni yield fell to eight basis points below the corporate after-tax yield.

However, they said, there may still be opportunities for investors subject to the 21% federal corporate income tax to pick up improved yields in the tax-exempt market. For example, double-A tax-exempt yields in 22-years and longer closed Friday higher than the after-tax yields for double-A corporate or taxable muni benchmarks.

CreditSights said most muni credit indices saw their spreads widen last week, although they are still substantially tighter than they were at the end of February. The triple-B index was the lone holdout, finishing the week unchanged at +49 basis points.

“Given the volatile market conditions, we view the spread changes for the muni indices to be descriptive of broad relative movements in the market, but we expect that tenor-specific fluctuations may not be fully captured in the day-to-day movement of the indices,” they said.

The benchmark yields on double-A revenue bonds, for example, tightened in five and 10 years but widened in 30 years.

Secondary trading
Charlotte, North Carolina, 5s of 2023 at 1.84%-1.78%. NY Dorm PIT 5s of 2024 at 2.10%-2.09%. Georgia 5s of 2025 at 2.05%-1.90% versus 1.99% Thursday. New York State Urban Development Corp. 5s of 2025 at 2.32%-2.30%. NYC TFA 5s of 2025 at 2.31%.

Howard County, Maryland, 5s of 2026 at 2.22%. California 5s of 2026 at 2.35%-2.37%.

Florida 5s of 2028 at 2.32%. Connecticut Health and Educational Facilities Authority 5s of 2029 at 2.35%-2.34%.

NY Dorm PIT 5s of 2032 at 2.60%-2.59%. New York City 5s of 2032 at 2.82%-2.81% versus 2.73%-2.74% Wednesday. Ohio 5s of 2034 at 2.67%.

NYC TFA 5s of 2044 at 3.31%.

NYC TFA 5s of 2051 at 3.49%-3.48% versus 3.30% Thursday, 3.30%-3.27% Wednesday, 3.14% Tuesday, 3.11%-3.02% on 4/4, 3.24%-3.15% on 4/1 and 3.31% original.

AAA scales
Refinitiv MMD’s scale was cut six to eight basis points at the 3 p.m. read: the one-year at 1.75% (+6) and 1.99% in two years (+8). The five-year at 2.20% (+8), the 10-year at 2.42% (+8) and the 30-year at 2.77% (+8).

The ICE municipal yield curve was cut seven to nine basis points: 1.73% (+9) in 2023 and 2.02% (+8) in 2024. The five-year at 2.19% (+8), the 10-year was at 2.44% (+7) and the 30-year yield was at 2.81% (+7) near the close.

The IHS Markit municipal curve was cut seven basis points: 1.74% (+7) in 2023 and 1.89% (+7) in 2024. The five-year at 2.21% (+7), the 10-year at 2.40% (+7) and the 30-year at 2.78% (+7) at a 4 p.m. read.

Bloomberg BVAL was cut five to six basis points: 1.73% (+5) in 2023 and 1.98% (+6) in 2024. The five-year at 2.22% (+6), the 10-year at 2.44% (+6) and the 30-year at 2.77% (+6) at a 4 p.m. read.

Treasury yields rose outside of three years.

The two-year UST was yielding 2.509% (-1), the three-year was at 2.736% (+1), five-year at 2.796% (+4), the seven-year 2.836% (+6), the 10-year yielding 2.783% (+7), the 20-year at 3.012% (+10) and the 30-year Treasury was yielding 2.831% (+10) near the close.

Primary to come:
The Regents of the University of Minnesota (Aa1/AA//) is set to price $500 million of taxable general obligation bonds, Series 2022. Barclays Capital.

The President and Fellows of Harvard College, Massachusetts, (Aaa/AAA//) is set to price Tuesday $500 million of taxable bonds, Series 2022A. Goldman Sachs.

Anaheim Housing and Public Improvements Authority, California, (/AA-/AA-/) is set to price Wednesday $383.410 million of bonds, consisting of $45.285 million of Electric Utility Distribution System Improvements revenue bonds, Series 2022-A, serials 2023-2042, terms 2047 and 2052; $67.685 million of Electric Utility Generation System Improvements revenue bonds, Series 2022-B, serials 2023-2032; $223.285 million of taxable Electric Utility Distribution System Refunding revenue refunding bonds, Series 2022-D, serials 2022-2035; and $47.155 million of forward-delivery Electric Utility Distribution System Refunding revenue refunding bonds, serials 2022 and 2028-2031. Wells Fargo Bank.

Memphis, Tennessee, (Aa2/AA/) is set to price Wednesday $229.605 million of taxable general improvement refunding bonds, Series 2022B. J.P. Morgan Securities.

Kansas City, Missouri, (A2/AA-//) is set to price Wednesday $220.440 million of special obligation bonds, consisting of $2.875 million of Series A, serials 2023-2042; $34.445 million of Series B, serials 2023-2042; and $183.120 million of Series C, serials 2022-2049. Stifel, Nicolaus & Co.

The District of Columbia (A3/) is set to price Tuesday $154.535 million of green DC Smart Street Lighting Project bonds consisting of $140.185 million of tax-exempt, alternative minimum tax private activity revenue bonds, Series 2022A, serials 2025-2037 and $14.350 million of taxable revenue bonds, Series 2022B, serial 2025. Wells Fargo Bank.

Jersey City Municipal Utilities Authority, New Jersey, is set to price Wednesday $130 million of municipal notes, consisting of $80 million of Series A, serial 2023 and $50 million of Series B, serial 2023. Stifel, Nicolaus & Co.

Oregon Department of Administrative Services (Aa2/AAA//) is set to price Tuesday $123.005 million of taxable Oregon State lottery revenue bonds, 2022 Series B. Goldman Sachs.

The Georgia Housing and Finance Authority (/AAA//) is set to price Monday $112.110 million of non-alternative minimum tax single family mortgage bonds, 2022 Series A, serials 2022-2034, terms 2037, 2042, 2044 and 2049. Raymond James & Associates.

Mississippi Business Finance Corp. is set to price Monday $100 million of Mississippi Power Company solid waste disposal facility and wastewater revenue bonds, First Series 2022. PNC Capital Markets.

Minnesota Housing Finance Agency (Aa1/AA+//) is set to price Tuesday $100 million of taxable social residential housing finance bonds, 2022 Series E, serials 2023-2033, terms 2037 and 2041. RBC Capital Markets.

Competitive:
Fremont United School District, California, (Aa2/) is set to sell $126.500 million of Election of 2014 general obligation bonds, Series E, at noon eastern Tuesday.

California Public Works Board (Aa3/A+/AA-/) is set to sell $293.345 million of green/climate-certified California Air Resources Board lease revenue bonds, 2022 Series D, at 11:45 a.m. eastern Wednesday.

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