Weakness pervades for munis, particularly on short end

Bonds

Municipals were weaker on Tuesday, most pronounced on the short end again, while U.S. Treasuries pared back some losses but the curve remained inverted while equities rallied after Ukraine and Russia signaled they are open to talks.

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

“A cheaper front-end should be a rather obvious performance buy for reinvestors and opportunistic buyers at present, suggesting some stabilization or strength in valuations is certainly possible,” said Matt Fabian, partner at Municipal Market Analytics. “Although any form of re-rally or more resilient stabilization will only be possible once fund flows reverse.”

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 4 p.m.

With quarter-end approaching, investors are taking a cautious, wait-and-see approach in the municipal market this week.

Lingering fears of an aggressive tightening by the Federal Reserve Board continued to create weakness in the municipal bond market on Tuesday, according to Roberto Roffo, managing director and portfolio manager at SWBC Investment Company.

“New-issues being priced today are going slow as there seems to be little interest at current levels, and the secondary is more active than yesterday but trading at cheaper levels,” Roffo said

In the primary Tuesday, Goldman Sachs priced for the Department of Water and Power of the City of Los Angeles, California (Aa2//AA-/AA/) $360 million of power system revenue bonds, 2022 Series B Bonds in 7/2027 with a 5% coupon yield 2.18%, 5s of 2032 at 2.50%, 5s of 2037 at 2.80%, 5s of 2042 at 2.95%, 5s of 2047 at 2.99% and 5s of 2052 at 3.04%, callable in 7/1/2032.

BofA Securities priced for the Indiana Finance Authority (/AA-/AA/) $100 million of Community Foundation of Northwest Indiana Obligated Group taxable revenue bonds, Series 2022. All bonds are priced at par: 4.214s of 3/2042 and 4.314s of 2052, callable in 9/1/2051.

In the competitive market, Danville, Virginia (Aa3/AA-/AA-/) sold $127 million of general obligation school bonds to BofA Securities. Bonds in 9/2023 with a 4% coupon yield 1.75%, 4s of 2027 at 2.23%, 4s of 2032 at 2.49%, 4s of 2037 at 2.93% and 3.25s of 2041 at 3.27%, callable in 9/1/2032.

Oklahoma City, Oklahoma, (Aaa/AAA//) sold $110 million of general obligation bonds to BofA Securities. Bonds in 3/2024 with a 4% coupon yield 1.87%, 4s of 2027 at 2.11%, 4s of 2032 at 2.42%, 4s of 2037 at 2.88% and 4s of 2042 at 2.96%, short call in 3/1/2030.

Unless Treasury yields decline significantly, which is not expected, the remainder of the week should continue to be relatively slow as April 1 kicks off the start of the second quarter on Friday.

The municipal market seemed “a little better” after the lack of liquidity on both Monday and last Friday, according to John R. Mousseau, president and chief executive officer and director of fixed income at Cumberland Advisors.

Overall, new issues seem to be pricing more on the aggressive side, compared to where the secondary market has been trading, he noted.

“It’s really a deal-by-deal phenomenon,” Mousseau said Tuesday.

“Deep discount bonds are getting 4% handle bids, and may or may not trade, but are mostly not trading,” he said.

Last week, traded par of $70-plus billion was hit, said MMA’s Fabian, but with barely $10 billion of total trading in the primary market, he said much of the action was in the secondary, noting elevated customer sold volumes and bids wanted activity. Bids wanted reached $1.465 billion on Monday, the 27th time this year.

These are all functions of orderly but nevertheless massive mutual fund outflows: Year-to-date flows, according to the Investment Company Institute, are currently negative $23.7 billion. This is worse than the year-to-date flow total in 2020, which began with nine consecutive weeks of mutual fund inflows totaling $23 billion, Fabian noted.

Last week, even exchange-traded fund activity was skewed toward net redemptions, which might be due to tax-related liquidations, he said. Following the Fed rate rise, he said any ETF redemptions are at least partially offset by a second, uncommon, late-March week of inflows into municipal money market funds. And those higher up-front floating rates will dilute demand for the fixed-rate front end, which has fallen swiftly into an oversold valuation in recent days, hastening its cheapening, according to Fabian.

While the federal control board retains control over Puerto Rico’s budget, Fabian said this month’s exchange of old Puerto Rico general obligation, appropriation and assorted other bond securities for packages of cash, new GOs and contingent value instruments presents a favorable opportunity for many municipal high yield — and high yield adjacent — investors to own and trade the refreshed Puerto Rico sub-market.

There are significant concerns regarding Puerto Rico’s long-term desire and capacity to pay its debt contracts, and present securities will not be acceptable for all investors or investing policies, he noted. However, for the time being, he said the presence of the federal control board alleviates realistic repayment concerns, allowing qualified high yield investors to familiarize themselves with Puerto Rico’s assets and their changing market reception.

Secondary trading
Georgia 5s of 2024 at 1.88%-1.86%. District of Columbia 5s of 2024 at 1.93%-1.92%.

Maryland 5s of 2027 at 2.16%. Last traded on 3/16 at 1.84%-1.83%. Baltimore County, Maryland 5s of 2028 at 2.13%-2.12%. NY Dorm PIT 5s of 2028 at 2.18% versus 2.16%-1.91% Monday and 2.11% original.

New York City 5s of 2029 at 2.38%. California 5s of 2029 at 2.40%-2.37%. NY Dorm PIT 5s of 2030 at 2.47% versus 2.36% Thursday.

New York City 5s of 2032 at 2.68%-2.66% versus 2.70% Monday and 2.61% original.

Baltimore County, Maryland 5s of 2036 at 2.47% versus 2.26% original. California 5s of 2037 at 2.67%.

California 5s of 2041 at 2.75% versus 2.59%-2.59% on 3/22 and 2.54%-2.53% on 3/21. New York City 5s of 2044 at 3.22%-3.20% versus 2.88%-2.87% on 3/17. California 5s of 2047 at 2.85%-2.84% versus 2.68%-2.75% on 3/22 and 2.64%-2.61% on 3/21.

Triborough Bridge and Tunnel Authority 5s of 2051 at 3.15% versus 3.13%-3.16% Monday and 3.13% Friday. NYC Municipal Water Finance Authority 5s of 2051 at 3.24%-3.23% versus 2.93%-2.92% on 3/22 and 2.86%-2.87% on 3/17

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 ended in the black.

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. The Dow Jones Industrial Average gained 339 points or 0.97%, the S&P was up 1.23% while the Nasdaq gained 1.84% at the close.

Consumer confidence
“Consumer confidence improved to 107.2 in January. This was in-line with the consensus forecast of 107.0 and suggests the improving U.S. labor market is helping to offset rising inflation concerns,” said Scott Anderson, Ph.D., Chief Economist at Bank of the West.

“The gain was driven by a 10 point jump in the present situation component with the expectations component dropping 4.2 points to 76.6.”

He noted that purchase intentions for big-ticket items like autos and refrigerators have softened in recent months as interest rates have risen.

“Expectations for inflation over the next year increased to 7.9%, the highest rate on record,” Anderson said. “Rising inflation expectations could cool growth in the months ahead if consumers’ pullback on their spending in response to increasing prices.”

Primary to come
New York City Transitional Finance Authority (Aa1/AAA/AAA/) is set to price Wednesday $950 million of tax-exempt future tax-secured subordinate bonds, Fiscal 2022 Series F, Subseries F-1, serials 2024-2026 and 2035-2043, terms 2047 and 2051. Loop Capital Markets.

The Virgin Islands Matching Fund Special Purpose Securitization Corp. (///BBB) is set to price Wednesday $853.025 million of Matching Fund Securitization bonds, consisting of $793.025 million of bonds, Series 2022A, serials 2027-2032, term 2039 and $60 million of taxable bonds, Series 2022B, term 2026. Ramirez & Co.

San Antonio Electric and Gas Systems (Aa2/AA-/AA-/) is set to price Wednesday $109.110 million of revenue refunding bonds, New Series 2022, serials 2023-2025. Siebert Williams Shank & Co.

The Public Finance Authority is set to price Wednesday $411.870 million of Grand Hyatt San Antonio Hotel Acquisition Project hotel revenue bonds, consisting of $225.340 million of Senior Lien Series 2022A (/BBB-//) and $186.530 million of Subordinate Lien Series 2022B. Piper Sandler & Co.

The University of Connecticut (Aa3/A+/A+/) is set to price Wednesday $220 million of general obligation bonds, 2022 Series A, serials 2023-2042. RBC Capital Markets.

The Board of Trustees of the University of Arkansas (Aa2///) is set to price Wednesday $103.300 million of the University of Arkansas for Medical Sciences Northwest various facilities revenue bonds, consisting of $95.145 million of Series 2022A, serials 2029-2042, terms 2047 and 2052 and $8.155 million of Series 2022B, serials 2026-2029. Raymond James & Associates.

Competitive
Louisiana is set to sell $36.960 million of general obligation refunding bonds, Series 2022-B, at 11:15 a.m. eastern Wednesday and $201.415 million of general obligation bonds, Series 2022-A, at 11 a.m. Wednesday.

Boston (Aaa/AAA//) is set to sell $334.315 million of general obligation bonds, 2022 Series A, at 10:30 a.m. Wednesday.

New York City Transitional Finance Authority is set to sell $137.340 million of future tax-secured taxable subordinate bonds, Fiscal 2022 Subseries F-3, at 11:15 a.m. eastern Thursday and $162.660 million of future tax-secured taxable subordinate bonds, Fiscal 2022 Subseries F-2, at 10:45 a.m. Thursday.

Lynne Funk contributed to this report.

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