Munis extend selloff on front end, calendar rebounds to $6.2B

Bonds

Municipals extended their selloff on the front of the curve Friday following U.S. Treasuries while equities sold off.

Triple-A yields rose 11 to 15 basis points five years and in, depending on the scale, while UST saw smaller losses on the short end and improved slightly out long.

Two- and three-year muni-UST ratios climbed to around 69% to 70%. The five-year on Thursday was at 74%, the 10-year at 84% and the 30-year at 103%, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the five at 74%, the 10 at 87% and the 30 at 18% at a 4 p.m. read.

Investors will be greeted Monday with an increased $6.2 billion new-issue calendar, led by a large deal from the Texas Water Development Board and $700 million of Illinois general obligation bonds.

“Munis didn’t move on Fed day, but for the week, munis’ bear flattening was quite large,” said BofA strategists Yingchen Li and Ian Rogow.

Both the 10- and 30-year triple-A rates moved above their peak levels from March 2020. And “except for the BBB-rated index and muni high yield index, other credit index yields all surpassed their March 2020 levels,” they said.

The more-hawkish Fed stance, together with the $95 billion monthly QT cap, makes them more “guarded in the short term regrading yield curves and AAA rates levels.” 

Although the long UST bond rally on Fed day was encouraging, they said, “it was short-lived and hasn’t led to a long-end muni rally, yet.”

Overall, Barclays strategists Mikhail Foux, Clare Pickering and Mayur Patel said muni yields are continuing to move up higher with USTs, although they noted “this move higher has been largely orderly and MMD-UST ratios have barely increased on the week, although pressures are continuing to build.”

“The curve has changed and definitely gotten flatter. The short end has been the problem for munis this week,” a New York trader said Thursday.

Some participants suggested the hike could actually be good for the municipal market and help stabilize the current conditions.

“Everyone is somewhat relieved that another Fed meeting is behind us and now the market is focusing on the week-to-week data,” the trader said, pointing to a slew of economic indicators releasing next week, such as reports on gross domestic product, durable goods, and consumer confidence.

“[Powell] is not really saying a lot of things he hasn’t been saying the last month since Jackson Hole,” the trader said. “He has signaled what he is doing and is being aggressive in getting inflation back to 2.25%. He has outlined his game plan and is continuing to follow through with it” while the next FOMC meeting is scheduled for Nov. 1 and 2.

Barclays strategists said “fund outflows will also likely continue due to the ongoing rate volatility, and the current outflow cycle is already one of the lengthiest in history. In terms of total outflow magnitude, the current period has already set a record,” they noted.

In general, Barclays strategists said it’s difficult for them to “expect a turnaround until rates stabilize” and “investors should exercise caution … waiting for a better entry point.”

UST yields have “increased more than 100 basis points after reaching their summer lows in early August, and they have continued moving higher as concerns about inflation and an aggressive Fed have been putting pressure on rates.

Tax-exempts, though, have underperformed, with ratios moving up 15-20 percentage points since mid-summer.

With muni yields rising, Barclays said “the low-coupon part of the muni market has remained under pressure, as the vast majority of long bonds have dropped below their de minimis values.”

This, they noted has created a “big issue for market participants, as low-coupon debt has been very popular with investors in the past several years and this part of the market has been among the worst in terms of total performance, with 2% and 3% severely underperforming higher coupon bonds, even more than they did during the pandemic.”

Calendar increases nearly fivefold
Investors will be greeted Monday with a new-issue calendar estimated at $6.176 billion.

There are $4.208 billion of negotiated deals on tap and $1.968 billion on the competitive calendar.

The negotiated calendar is led by the $971 million of revenue bonds from the Texas Water Development Board, followed by $500 million of taxable revenue bonds from the California Earthquake Authority.

The state of Illinois leads the competitive calendar with $700 million of GOs in three deals, followed by $332 million of refunding bonds from the state of Minnesota and $289 million of severance tax bonds from the state of New Mexico.

Secondary trading
Texas 5s of 2023 at 3.00% versus 2.78%-2.74% Thursday and 2.65% Wednesday. Georgia 5s of 2024 at 2.82%-2.75%. NYC 5s of 2025 at 3.17% versus 2.73% Monday and 2.47% on 9/12.

Wake County, North Carolina, 5s of 2031 at 3.07%-3.04%. NY Dorm PIT 5s of 2033 at 3.62%.

NYC Municipal Water Finance Authority 5s of 2039 at 4.03%. California 5s of 2039 at 3.85%-3.84% versus 3.62% original on 9/9.

Triborough Bridge and Tunnel Authority 5s of 2047 at 4.34%-4.40% versus 4.09%-4.07% on 9/13. LA DWP 5s of 2052 at 4.15% versus 4.05%-4.10% Wednesday and 4.08% Monday. California 5s of 2052 at 4.08% versus 3.89%-3.88% on 9/15 and 3.98% original on 9/9.

AAA scales
Refinitiv MMD’s scale was cut five to 13 basis points 10 years and in at 3 p.m. read: the one-year at 2.87% (+13) and 2.92% (+13) in two years. The five-year at 2.95% (+13), the 10-year at 3.11% (+5) and the 30-year at 3.73% (unch).

The ICE AAA yield curve was cut three to 15 basis points: 2.89% (+15) in 2023 and 2.91% (+15) in 2024. The five-year at 2.94% (+13), the 10-year was at 3.19% (+6) and the 30-year yield was at 3.74% (+3) at a 4 p.m. read.

The IHS Markit municipal curve was cut six to 13 basis points 10 years and in: 2.84% (+13) in 2023 and 2.88% (+11) in 2024. The five-year was at 2.94% (+11), the 10-year was at 3.12% (+6) and the 30-year yield was at 3.75% (unch) at a 4 p.m. read.

Bloomberg BVAL was cut 11 basis points five years and in: 2.86% (+11) in 2023 and 2.89% (+11) in 2024. The five-year at 2.93% (+11), the 10-year at 3.08% (+4) and the 30-year at 3.77% (unch) at 4 p.m.

Treasuries were mixed.

The two-year UST was yielding 4.195% (+8), the three-year was at 4.216% (+7), the five-year at 3.969 (+3), the seven-year 3.859% (flat), the 10-year yielding 3.685% (-3), the 20-year at 3.890% (-2) and the 30-year Treasury was yielding 3.609% (-3) at the close.

Primary to come:
The Texas Water Development Board (/AAA/AAA/) is set to price Wednesday $971.935 million of the State Water Implementation Revenue Fund for Texas Master Trust revenue bonds, Series 2022, serials 2023-2033, terms 2034, 2035, 2036, 2037, 2038, 2039, 2040, 2041, 2042, 2047, 2052 and 2057. Citigroup Global Markets.

The California Earthquake Authority (//A-/A+/) is set to price Wednesday $500 million of taxable revenue bonds, Series 2022A. Goldman Sachs & Co.

San Antonio, Texas, (Aa2/AA+/AA/) is set to price Tuesday $245.115 million of water system junior lien revenue bonds, Series 2022. Piper Sandler & Co.

The Cypress-Fairbanks Independent School District, Texas, (Aaa/AAA//) is set to price next week 221.640 million of unlimited tax school building bonds, Series 2022A, insured by Permanent School Fund Guarantee Program. Mesirow Financial.

The Sweetwater Union High School District, California, (A1//AA+/) is set to price Wednesday $212.479 million of dedicated unlimited ad valorem property tax general obligation bonds, consisting of $11.245 million of Election of 2006 Proposition O bonds, Series D-1, serials 2023-2031; $44.390 million of Election of 2006 Proposition O bonds, Series D-3, serials 2031-2047; $1.190 million of Election of 2006 Proposition O bonds, Series D-1, serials 2023; $182.9550 million of Election of 2018 Measure DD bonds, Series A-1, serials 2023-2025 and 2028-2042, terms 2047 and 2052; and Election of 2018 Measure DD bonds, Series A-2, serial 2023. Citigroup Global Markets Inc., New York

The Board of Regents of the Texas A&M University System (Aaa/AAA/AAA/) is set to price Wednesday $202.875 million of revenue financing system bonds, Series 2022, serials 2023-2042, terms 2047 and 2052. Siebert Williams Shank & Co.

The Lower Colorado River Authority (/A/A+/) is set to price Thursday $194.585 million of LCRA Transmission Services Corporation Project transmission contract refunding revenue bonds, Series 2022A. Morgan Stanley & Co.

The Tennessee Housing Development Agency (Aa1/AA+//) is set to price Thursday $185,050 million of non-AMT social residential finance program bonds, Issue 2022-3, serials 2023-2034, terms 2037, 2042, 2047 and 2053. Citigroup Global Markets.

The Florida Housing Finance Corp. (Aaa///) is set to price Wednesday $125 million of non-AMT social homeowner mortgage revenue bonds, 2022 Series 3, serials 2024-2034, terms 2037, 2042, 2047, 2053 and 2054. Citigroup Global Markets.

Competitive:
The City of County of Denver, Colorado, (Aaa/AAA//) is set to sell $193.750 million of water revenue bonds, Series 2022A, at 11:30 a.m. eastern Tuesday.

Minnesota is set to sell $332.350 million of state general fund appropriation refunding bonds, Series 2022A  at 11:30 a.m. Tuesday.

Illinois (Baa1/BBB+/BBB+/) is set to sell $175 million of taxable general obligation bonds, Series of October 2022A, at 10:45 a.m. eastern Wednesday.

The state is also set to sell $245 million of general obligation bonds, Series of October 2022B, at 11:15 a.m. Wednesday.

Additionally, the state is set to sell $280 million of general obligation bonds, Series of October 2022C, at 11:45 a.m. Wednesday.

New Mexico (Aa2/AA-//) is set to sell $288.780 million of severance tax bonds, Series 2022B, at 10:30 a.m. Wednesday.

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