In roller coaster week, munis close out steady; Supply falls ahead of FOMC

Bonds

Municipals were little changed to a touch firmer out long Friday while U.S. Treasuries sold off on the front end of the curve and the 10-year UST rose back above 4%. Equities rallied buoyed by tech stocks.

Triple-A municipal yields fell up to two basis points, depending on the scale, while UST yields rose eight to 15 basis points 10 years and in.

Ratios closed the week higher. The three-year muni-UST ratio was at 73%, the five-year at 77%, the 10-year at 85% and the 30-year at 101%, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the three at 75%, the five at 79%, the 10 at 88% and the 30 at 103% at a 4 p.m. read.

Late Thursday, Refinitiv Lipper reported $1.798 billion of outflows from municipal bond mutual funds for the week ending Wednesday after $2.611 billion the week prior.

Munis’ resilience during a rapid and large Treasury market selloff last week reversed this week, noted BofA Global Research strategists in a weekly report.

“The muni AAA curve bear steepened this week, pushing the relative richness of munis back to a slightly cheap status,” they said. “The abrupt move in munis reflects low muni/Treasury ratios at the beginning of the week, sizable primary market volumes, hedging difficulties and some doubt as to the sustainability of the Treasury market rally.”

BofA said they advise “discipline” heading into the Fed meeting amid macro uncertainty, “though it is notable that the 30-year AAA rate is currently above 4.0%, and the 10-year AAA rate is closer to 3.5%.”

“Much like Treasury yields a week ago, these current muni AAA rates were last seen in 2013,” the report said. ”The attractiveness of these yields are in an absolute sense, as well as relative to taxable bond markets.”

Next week’s Federal Open Market Committee meeting “remains the focus for most investors, and a 75bp hike has been fully priced in,” according to Barclays PLC.

What comes next is “what investors are concerned about the most, hoping for any signs of a slowdown of the pace of hikes after next week, but they might be disappointed,” said Barclays strategists Mikhail Foux, Clare Pickering and Mayur Patel.

While they expect a fifth 75 basis point hike in December, fed fund futures only imply a 30% probability, which is less than the 75% probability of just a week ago, they said.

Generally, the adjustment in triple-A levels and higher muni yields this week are “forcing issuers to bring deals with higher coupons, as a sizable portion of long 5% [investment grade] bonds is trading below par, and some bonds have actually fallen below de minimus despite their relatively high coupons.”

In the past two months, high-coupon, investment-grade bonds (>5%) are back in fashion, with a 25% share of total supply versus 7% in the first eight months of the year, according to Barclays. The share of 4.75%-5% bonds has also increased unsurprisingly as very few low-coupon bonds are being issued, which is not a surprise, they said.

“The spread premia between 5% coupon bonds and those with higher coupons has increased just slightly for bonds that are still trading above par (close to 4-5bp for every 0.25% of a coupon); but for bonds trading below par, this differential can be much more sizable as we saw this week (10-12bp for each 0.25%), which seems quite high to us,” Barclays strategists said.

Calendar drops
Investors will be greeted Monday with a new-issue calendar estimated at $2.718 billion.

There are $2.462 billion of negotiated deals on tap and $255.8 million on the competitive calendar.

The negotiated calendar is led by $850 million of airport system revenue bonds from the City and County of Denver, Colorado for and on behalf of its Department of Aviation. Other notable deals include $323 million from the New York State Environmental Facilities Corporation and $210 million from the Public Finance Authority, Wisconsin.

The Charles County Commissioners, Maryland, leads the competitive calendar with $50 million of consolidated public improvement bonds of 2022.

Secondary trading
Wisconsin 5s of 2023 at 3.10%-3.14%. Washington 5s of 2024 at 3.20%-3.19%. California 5s of 2024 at 3.20% versus 3.23% Thursday.

Ohio 5s of 2027 at 3.31%. Wake County, North Carolina, 5s of 2028 at 3.32%. City and County of Denver, Colorado, 5s of 2029 at 3.33%-3.34% versus 3.40%-3.33% Tuesday. Georgia 5s of 2030 at 3.32%.

Virginia Public School Authority 5s of 2036 at 3.88%. LA DWP 5s of 2039 at 4.28%-4.27% versus 4.12%-4.10% Thursday.

NY State Urban Development Corp. 5s of 2044 at 4.66%-4.64% versus 4.35% on 10/4. Washington 5s of 2045 at 4.48%-4.43% versus 4.06% on 10/4. NY Dorm PIT 5s of 2056 at 4.71% versus 4.85% Thursday.

AAA scales
Refinitiv MMD’s scale was bumped two basis points out long: the one-year at 3.14% (unch) and 3.18% (unch) in two years. The five-year at 3.24% (unch), the 10-year at 3.41% (unch) and the 30-year at 4.14% (-2).

The ICE AAA yield curve was bumped one to two basis points: 3.17% (unch) in 2023 and 3.21% (-1) in 2024. The five-year at 3.26% (-1), the 10-year was at 3.47% (-1) and the 30-year yield was at 4.25% (-2) at a 4 p.m. read.

The IHS Markit municipal curve was bumped two basis points: 3.14% (-2) in 2023 and 3.18% (-2) in 2024. The five-year was at 3.27% (-2), the 10-year was at 3.41% (-2) and the 30-year yield was at 4.13% (-2) at a 4 p.m. read.

Bloomberg BVAL was little changed: 3.10% (unch) in 2023 and 3.17% (-1) in 2024. The five-year at 3.24% (unch), the 10-year at 3.39% (unch) and the 30-year at 4.12% (unch) at 4 p.m.

Treasuries sold off.

The two-year UST was yielding 4.447% (+15), the three-year was at 4.367% (+12), the five-year at 4.177% (+12), the seven-year 4.093% (+10), the 10-year yielding 4.002% (+8), the 20-year at 4.381% (+6) and the 30-year Treasury was yielding 4.128% (+4) at the close.

Mutual fund details
Refinitiv Lipperon Thursday reported $1.798 billion of outflows for the week ending Wednesday following $2.611 billion the previous week.

Exchange-traded muni funds reported inflows of $444.544 million after outflows of $381.322 million in the previous week. Ex-ETFs, muni funds saw outflows of $2.243 billion after outflows of $2.230 billion in the prior week.

Long-term muni bond funds had outflows of $1.211 billion in the latest week after outflows of $1.468 billion in the previous week. Intermediate-term funds had outflows of $296.872 million after outflows of $246.159 million in the prior week.

National funds had outflows of $1.469 billion after outflows of $2.252 billion the previous week while high-yield muni funds reported outflows of $594.497 million after outflows of $681.903 million the week prior.

Primary to come:
The City and County of Denver, Colorado (Aa3/AA-/AA-/), is set to price Thursday for and on behalf of its Department of Aviation $850 million of fixed rate non-AMT, fixed rate AMT and term rate AMT airport system revenue bonds. Barclays Capital.

The New York State Environmental Facilities Corporation (Aaa/AAA/AAA/) is set to price Tuesday $323.025 million of green state revolving funds revenue bonds, Series 2022 B (2010 Master Financing Program). Jefferies.

The Public Finance Authority, Wisconsin, (Baa2/AA//) is set to price Thursday $210 million of project revenue bonds (CFP3 – Eastern Michigan University Student Housing Project), consisting of $209.250 million of exempts, Series A-1, and $750,000 of taxable, Series A-2, insured by Build America Mutual Assurance. Barclays Capital.

The Kern Community College District Facilities Improvement District No. 1, California, (Aa2/AA-//) is set to price Tuesday $200 million of Election of 2016 general obligation bonds, Series D, serials 2024-2041. Stifel, Nicolaus & Co.

Bexar County, Texas, (Aaa/AAA/AAA/) is set to price Thursday $196 million of combination tax and revenue certificates of obligation, consisting of $46 million of Series 2022A, serials 2023-2048, and $150 million of Series 2022B, serials 2023-2048. HilltopSecurities.

The Colorado Housing and Finance Authority is set to price Tuesday $129.715 million of taxable single family mortgage bonds, consisting of $91.660 million of Class I bonds (Aaa/AAA//), Series H-1, serials 2023-2032, terms 2037 and 2039, and $38.055 million of Class III bonds (Aa3/AA//), Series H-2, terms 2048. RBC Capital Markets.


Competitive:
The Charles County Commissioners, Maryland, (Aaa/AAA/AAA/) is set to sell $50 million of consolidated public improvement bonds of 2022 at 10 a.m. eastern Tuesday.

NYC TFA deal recapped
The New York City Transitional Finance Authority said Thursday its sale of $1.37 billion of future tax-secured subordinate bonds received strong investor demand.

The deals were made up of $1.02 billion of tax-exempt fixed-rate bonds and $350 million of taxable fixed-rate bonds.

During the retail order period for the tax-exempts, the TFA received more than $372 million of orders, of which about $288 million was usable. During the institutional pricing period, about $1.5 billion of orders were received, making the deal almost 2.1 times oversubscribed.

TFA said that given the investor demand, yields were cut two basis points in the 2028 maturity and by three basis points in 2036. Final yields ranged from 3.32% in 2024 to 4.82% in 2046 and 4.80% in 2048.

The tax-exempts were priced by book-running lead manager Wells Fargo Securities with co-managers BofA Securities, Citigroup, Jefferies, J.P. Morgan, Loop Capital Markets, Ramirez & Co., RBC Capital Markets, and Siebert Williams Shank.

The TFA also competitively sold $350 million of taxables.

The first subseries of around $213 million, due 2027 through 2032, attracted 10 bidders, with Morgan Stanley winning with a true interest cost of 5.2379%. The second subseries of about $137 million, due 2033 through 2035, attracted eight bidders, with Wells Fargo winning with a TIC of 5.5370%.

Proceeds from the sales will be used to fund capital projects and to convert certain floating-rate debt to fixed-rate debt.

Chip Barnett contributed to this report.

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