Munis rally on a flight-to-safety bid after Russia invaded Ukraine

Bonds

Municipals rallied Thursday on a flight-to-safety bid after Russian troops invaded Ukraine, outperforming U.S. Treasuries while equities reversed major losses to end in the black.

Triple-A yields were bumped from five to 10 basis points across the curves, while UST yields saw earlier double-digit gains fall to single digit basis points at the close. The municipal to UST ratio five-year fell to 72%, 85% in 10 and 85% in 30, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the five at 70%, the 10 at 82% and the 30 at 87% at a 3 p.m. read.

The situation in the Ukraine will intensify inflationary pressures globally and stagflation risks will complicate what central banks do going forward, said Edward Moya, senior market analyst at OANDA.

“Financial conditions are tightening, and the Fed will not want to shock markets,” he said. “As the escalation Russia-Ukraine conflict intensifies expectations for Fed rate hikes will vary as some traders anticipate inflationary shock to trigger aggressive tightening, while others focus on the downside risks to the economy.”

“The developments in the Ukraine are tragic but for now it does not seem like this will be a catalyst that sends the U.S. economy into a recession over the next year or two,” he said.

For municipals on Thursday, secondary trading showed stronger prints out of the gates following the sharp dip in Treasuries and the primary was engaged with issuers pricing deals amid the rally, including triple-A Gwinnett County School District, Georgia, and the Florida Department of Transportation coming through triple-A benchmarks in the competitive market.

Refinitiv Lipper, meanwhile, reported $1.154 billion outflows from municipal bond mutual funds Thursday, following an outflow of $1.293 billion the previous week.

Exchange-traded muni funds reported smaller inflows of $288.247 million after inflows of $493.186 million in the previous week while high-yield saw outflows to the tune of $282.504 million after $775.854 million the week prior.

“I think the move was a bit more impressive than where I thought it would be with the flight to quality trade,” a New York trader said. “I didn’t expect us to follow the way we did.”

Though he expects the flight-to-quality to continue, “people aren’t ultra committed yet.”.

“The volatility has been significant the last few weeks, but it might take a little while before people are comfortable,” he said. “It’s just another cross current the market has to deal with.”

Two large accounts, however, were not wasting any time or opportunity on Thursday as they participated in a big way on the short- and long-end of the municipal market, according to the trader.

“They took a fair amount of high-grade offerings out of the market this morning,” he said, citing long 4% New York paper and high-quality names in the front end of the curve as a few examples of the paper the accounts purchased.

“It all went away in the span of about 10 minutes,” he said. “It was one or two accounts that were hedged aggressively that had to buy, and that think this thing has legs,” he said of the Russian-Ukrainian crisis.

He said some of the purchases will be based on municipals’ recent market technicals.

“We were fairly attractive with percentages and there is a lot of money waiting on the sidelines that missed an opportunity to get involved in the lows a few weeks ago,” he said. “The market has been up since last Wednesday, so they may start jumping in.”

“If they are jumping in today they are jumping in to cheaper rates than a month and a half ago,” the trader said. “There is more value in the market today up as it’s up 10 basis points than two months ago.”

In the primary market, J.P. Morgan Securities priced for Virginia Small Business Financing Authority (Baa1///BBB+) $1.145 billion, Series 2022. The first tranche, $840.69 million of taxable subordinate lien revenue refunding notes, saw bonds in 12/2031 priced at 2% par,callable 5/1/2022.

The second tranche, $304.155 million of tax-exempt alternative minimum tax senior lien revenue and refunding bonds, saw bonds in 6/2038 with a 5% coupon yield 2.68%, 5s of 6/2042 at 2.76%, 5s of 12/2042 at 2.76%, 5s of 12/2047 at 2.90%, 5s of 12/2052 at 2.97% and 5s of 12/2057 at 3.12%, callable 12/31/2032.

Goldman Sachs & Co. priced for District of Columbia Water and Sewer Authority (Aa/AA+/AA/) $288.655 million. The first tranche, $80.18 million of green public utility subordinate lien bonds revenue bonds, Series 2022B, saw bonds in 10/2034 with a 5% coupon yield 1.94%, 5s of 2037 at 2.01%, 5s of 2042 at 2.11% and 5s of 2047 at 2.22%, callable 4/1/2032.

The second tranche, $208.475 million of public utility subordinate lien bonds revenue and revenue refunding bonds. Series 2022C-1, saw bonds in 10/2029 with a 5% coupon yield 1.68%, 5s of 2032 at 1.81%, 4s of 2037 at 2.16%, 4s of 2042 at 2.29%, 4s of 2047 at 2.38% and 4s of 2051 at 2.44%, callable 4/1/2032.

Goldman Sachs & Co. also priced for District of Columbia Water and Sewer Authority (Aa2/AA+/AA/) $148.72 million of federally taxable public utility subordinate lien bonds revenue and revenue refunding bonds. All bonds are priced at par: 1.672% in 10/2023, 2.336% in 2027, 2.788% in 2032, 3.138% in 2035 and 3.526% in 2044, callable 4/1/2032.

In the competitive market, Florida Department of Transportation (Aaa/AAA/AAA/) sold $132.72 million of right-of-way acquisition and bridge construction refunding bonds, Series 2022A, to Jefferies. Bonds in 2023 with a 5% coupon yield 0.88%, 5s of 2027 at 1.41%, 5s of 2032 at 1.61% and 5s of 2034 at 1.67%, noncall.

Gwinnett County School District, Georgia (Aaa/AAA/) sold $230 million of general obligation sales tax bonds, Series 2022B, to Wells Fargo Bank. Bonds in 8/2025 with a 5% coupon yield 1.25% and 5s of 2027 at 1.42%, noncall.

Gwinnett County School District, Georgia (Aaa/AAA/) also sold $35 million of general obligation sales tax bonds, Series 2022A, to Morgan Stanley. Bonds in 2025 with a 1.75% coupon yield 1.625%, callable 3/8/3022 at par.

Oakland, California (Aa1/AA/) sold $212.315 million of general obligation bonds (Measure KK) to BofA Securities. The first tranche, $192.175 million of tax-exempt bonds, Series 2022C-1, saw bonds in 7/2023 with a 5% coupon yield 0.95%, 5s of 2027 at 1.41%, 5s of 2032 at 1.66%, 4s of 2037 at 1.96%, 3s of 2042 at 2.51%, 3s of 2047 at 2.80% and 3s of 2052 at 3.02%, callable 1/15/2032.

The second tranche, $20.14 million of taxable bonds, Series 2022C-2, saw bonds in 7/2022 with a 5% coupon yield 0.82%, noncall.

Flatter yield curves
If history is any guide, munis follow U.S. Treasuries bonds and while not at historic lows, the 2s10s curve slope for Treasuries is marking a return to some of the flattest levels in a few years, said Eric Kazatsky of Bloomberg Intelligence. Municipals, on the other hand, are catching up in terms of direction but not pace.
“The question on investors minds is: ‘What could this mean for municipal returns,’” he said.

He said the present trend resembles that of 2013, when the slope delta was below zero and municipal returns were negative. While the impact on various duration buckets for munis may vary, he said investors should at the very least expect sustained negative overall returns.

Muni-Treasury ratios have been cheaper this year due to rising rates and outflows. The most significant change, however, has occurred at the front end of the curve, with two-year ratios climbing upwards of 70% this week from 49% at the end of August 2021, he said. While the five-year part of the curve moved in a similar manner, Kazatsky said the change was significantly more subdued in absolute terms due to a higher beginning point in August.

“As we approach the end of the first quarter and municipal supply is down almost 13%, technical factors may have more impact,” he said.

Almost $75 billion in principal and interest will be returned to investors over the next few months. He said it’s logical to suppose that most of this cash will re-enter the municipal market, exacerbating the supply-demand mismatch and putting upward pressure on ratios.

Mutual funds see outflows
In the week ended Feb. 23 weekly reporting tax-exempt mutual funds saw investors pull more money out with Refinitiv Lipper reporting $1.154 billion outflows Thursday, following an outflow of $1.293 billion the previous week.

Exchange-traded muni funds reported inflows of $288.247 million after inflows of $493.186 million in the previous week. Ex-ETFs, muni funds saw outflows of $1.443 billion after $1.786 billion of outflows in the prior week.

The four-week moving average rose to negative $1.285 billion from negative $1.354 billion from in the previous week.

Long-term muni bond funds had outflows of $524.743 million in the last week after outflows of $1.176 billion in the previous week. Intermediate-term funds had outflows of $262.040 million after $114.022 million of outflows in the prior week.

National funds had outflows of $909.473 million after $975.591 million of outflows the previous week while high-yield muni funds reported $282.504 million of outflows after $775.854 million of outflows the week prior.

Secondary trading
New York City TFA 5s of 2026 at 1.36%. Minnesota 5s of 2027 at 1.37%. Florida PECO 5s of 2027 at 1.40%. Florida PECO 5s of 2028 at 1.48% versus 1.55%-1.54% Tuesday.

Fairfax 4s of 2030 at 1.60%. California 5s of 2030 at 1.61%-1.60%. California 5s of 2031 at 1.70% versus 1.79%-1.77% Friday.

Washington 5s of 2032 at 1.66%-1.65% versus 1.82%-1.81% a week ago. New York City waters 5s of 2032 at 1.67%. Connecticut 5s of 2034 at 1.85%-1.82%. Ohio 5s of 2039 at 1.83% versus 2.03% on 2/16.

Los Angeles DWP 5s of 2046 at 2.19%-2.15% versus 2.22% Wednesday and 2.34%-2.31% on 2/16.

Triborough Bridge & Tunnel MTA 5s of 2051 at 2.30% versus 2.45%-2.44% Friday. Tribe MTAs 5s of 2057 at 2.45%.

AAA scales
Refinitiv MMD’s scale was bumped six to eight basis points at the 3 p.m. read: the one-year at 0.78% (-6) and 1.05% (-6) in two years. The five-year at 1.33% (-8), the 10-year at 1.57% (-8) and the 30-year at 1.94% (-8).

The ICE municipal yield curve was bumped up to seven basis points: 0.80% (-5) in 2023 and 1.09% (-5) in 2024. The five-year at 1.32% (-6), the 10-year was at 1.62% (-6) and the 30-year yield was at 1.99 (-7) in a 3 p.m. read.

The IHS Markit municipal curve was also bumped: 0.78% (-7) in 2023 and 1.05% (-7) in 2024. The five-year at 1.32% (-10), the 10-year at 1.55% (-10) and the 30-year at 1.94% (-10) at a 3 p.m. read.

Bloomberg BVAL was bumped five to eight basis points: 0.80% (-5) in 2023 and 1.03% (-5) in 2024. The five-year at 1.34% (-7), the 10-year at 1.58% (-7) and the 30-year at 1.95% (-7) at a 4 p.m. read.

Treasuries were stronger while equities ended mixed.

The two-year UST was yielding 1.568% (-4), the five-year was yielding 1.858% (-4), the 10-year yielding 1.966% (-2), and the 30-year Treasury was yielding 2.286% (-1) at the close. The Dow Jones Industrial Average gained 92 points or 0.28%, the S&P was up 1.23% while the Nasdaq gained 3.07% at the close.

Lynne Funk contributed to this report.

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