Bonds

Muni yields rise amid global bond market volatility

Municipal yields climbed again Monday amid elevated secondary selling pressure following a major U.S. Treasury selloff while equities also ended in the red as global bond market uncertainties rattle all markets.

Triple-A municipal yields rose as much as 18 basis points on the short end, with the one-year just below or above 3%, further flattening the curve. The two-year UST hit 4.3% while the 10-year climbed 21 basis points Monday.

Two- and three-year muni-UST ratios climbed to around 69% to 72%. The five-year on Thursday was at 73%, the 10-year at 83% and the 30-year at 102%, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the five at 77%, the 10 at 89% and the 30 at 104% at a 4 p.m. read.

Bids wanteds have been elevated, municipal bond mutual fund outflows large and consistent and the short end of the U.S. Treasury curve continues its march upward, moves that muni investors cannot ignore.

The Treasury yield curve is flat and inverted in some areas, ”suggesting that many investors believe the Fed will show it has inflation contained sooner rather than later,” a report from Nuveen’s John Miller and Anders S. Persson said Monday. “They are betting longer-term bonds — which currently yield less than short-term bonds — will rally once inflation is controlled.”

The municipal bond curve is also very flat, ”suggesting the same thought process,” they said.

“Although munis continue to sell off, they are bid constructively,” Nuveen said. “Institutions continue to trade daily to rework portfolios, and individual investors remain interested. We expect heightened volatility through year end, but anticipate a constructive year for fixed income in 2023.”

Cautiously optimistic is how investors are approaching the market.

A “watch and see kind of tone” clashed with the Rosh Hashanah holiday and low supply in the municipal market on Monday, making for a mixed environment on the buy-side, according to Timothy Barbera, head of underwriting, sales and trading at Rice Financial.

Issuers will test investor sentiments with a larger calendar to close out September, led by Illinois GOs, more than $1 billion of New York state personal income tax bonds and nearly $1 billion of Texas water revenue bonds, among other well-known credits.

The structure and pricing of new deals coming this week will be important to gauge investor demand, market participants said.

“Deals will have to be priced with some concession in order to get done,” Barbera said, as triple-A yields continue to rise.

Those higher yields recently have attracted investor attention, although they are still skittish overall, according to Tom Kozlik, head of municipal research and analytics at Hilltop Securities Inc.

“Investors are generally skeptical at the moment,” Kozlik said on Monday. The severity of that skepticism varies institution to institution and investor to investor, he said.

Kozlik said the retail crowd has begun to participate a little more in recent weeks, as a result of the recent rise in yields to more attractive levels.

“I think technical indicators are among the most attractive they have been all year,” he said, pointing to a Monday Hilltop report.

The report encouraged investors to take a fresh look at municipal bonds in the current climate, which offers “appealing investment opportunities in the sector,” Kozlik said. “Municipal bond market credit and technical indicators are again flashing the appropriate constructive signals.”

The supply and demand picture isn’t expected to be rosy in the fourth quarter due to the expectations for below-average issuance, Kozlik said, however, he said public finance upgrades are expected to outpace downgrades in the current and final quarter of 2022. 

The bad news: “I am expecting more outflows and there is nothing I am seeing that can convince me otherwise at the moment,” Kozlik said.

“Apprehension defines the current state of the municipal bond market as the Fed takes interest rates higher through at least the first quarter of 2023,” Jeff Lipton of Oppenheimer Inc. said Monday.

“A looming holiday season and the fact that there are two remaining FOMC meetings for the year will likely influence 2022 muni issuance to the downside,” he said.

Like Kozlik, Lipton agreed there are opportunities to be had in the current municipal market.

“Value opportunities are available for the patient and resilient long-term municipal bond investor relative to risk assets, and munis can represent a safe haven for risk-off investors seeking to expand portfolio diversification,” he said in the report.

Lipton expects this dynamic to persist for some time, particularly as inflation and a tight labor market have been resistant to higher interest rates, he said. “Now is the time to lock in tax-efficiency, strong credit quality in support of capital preservation, and compelling income streams thanks to higher interest rate conditions,” he said.

Credits and structures that offer less defensive attributes are more likely to see widening spreads leading into a recession, Lipton said.

Outflows, which are running at about $85 billion year to date, continue given the existing liquidity needs from mutual fund complexes, albeit at a reduced pace compared to the heavier withdrawals earlier in the year, according to the report.

Much of that money seems to be moving into cash alternatives, Lipton noted.

“In our view, once muni yields appear to reach their peak, we can expect to see a meaningful repricing of the asset class with a significant easing in bid-wanted activity and a return to an inflow bias as institutional investors put much of this sidelined cash to work,” Lipton wrote.

Lipton said he believes relative value is on display on the long end of the municipal yield curve, with cheap ratios out long.

“At these levels, we watch for signs of greater crossover buyer interest, and this could come from traditional corporate bond investors,” Lipton said.

Secondary trading
Georgia 5s of 2023 at 2.99%-2.98%. California 5s of 2023 at 2.85%-2.84%. Wake County, North Carolina 5s of 2023 at 2.70%. South Carolina 5s of 2023 at 3.06%. Texas 5s of 2023 at 3.09%.

Prince George’s County, Maryland, 5s of 2024 at 3.20%. Mecklenburg County, North Carolina, 5s of 2025 at 3.09%. Ohio 5s of 2026 at 3.09%. Charlotte, North Carolina, 5s of 2028 at 3.10%. Maryland 5s of 2028 at 3.17%. North Carolina 5s of 2028 at 3.15%.

Washington 5s of 2032 at 3.45%. California Central Valley water 5s of 2034 at 3.22% versus 3.08% Friday. New York City waters 5s of 2039 at 4.01%.

New York MTA 5s of 2046 at 4.33% and 5s of 2047 at 4.35%-4.34%.

AAA scales
Refinitiv MMD’s scale was cut five to 10 basis points at a 3 p.m. read: the one-year at 2.97% (+10) and 3.02% (+10) in two years. The five-year at 3.05% (+10), the 10-year at 3.21% (+10) and the 30-year at 3.79% (+6).

The ICE AAA yield curve was cut five to 18 basis points: 3.04% (+18) in 2023 and 3.04% (+14) in 2024. The five-year at 3.07% (+13), the 10-year was at 3.27% (+8) and the 30-year yield was at 3.79% (+5) at a 4 p.m. read.

The IHS Markit municipal curve was cut six to 12 basis points: 2.94% (+10) in 2023 and 3.00% (+12) in 2024. The five-year was at 3.06% (+12), the 10-year was at 3.22% (+10) and the 30-year yield was at 3.81% (+6) at a 4 p.m. read.

Bloomberg BVAL was cut four to 10 basis points: 2.95% (+9) in 2023 and 2.98% (+10) in 2024. The five-year at 3.02% (+10), the 10-year at 3.16% (+8) and the 30-year at 3.81% (+4) at 4 p.m.

Treasuries were mixed.

The two-year UST was yielding 4.318% (+11), the three-year was at 4.393% (+16), the five-year at 4.169% (+19), the seven-year 4.081% (+21), the 10-year yielding 3.904% (+21), the 20-year at 4.037% (+15) and the 30-year Treasury was yielding 3.719% (+11) 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.

The New York Urban Development Corp. is set to sell $1.443 billion of tax-exempt personal income tax revenue bonds in multiple series Thursday.

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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