Another day of pressure on short end, 2nd week of outflows

Municipals were weaker again Thursday led by continued pressure on the short end while municipal bond mutual funds saw outflows for the second consecutive week.

Triple-A yield curves saw cuts of up to nine basis points on bonds five years and in, depending on the curve, while U.S. Treasuries made small gains to close out the session.

Investors pulled $229.263 million out of municipal bond mutual funds in the latest week, versus the $635.177 million of outflows the prior week, according to Refinitiv Lipper.

High-yield saw larger inflows of $258.761 million after $23.788 million of inflows the week prior. Exchange-traded funds saw outflows to the tune of $279.321 million after $414.847 million of outflows the previous week.

“Today what we’re seeing, the cuts along the curve — certainly the front end — are somewhat tempered in all likelihood because of the favorable tone in the Treasury market,” said Jeffrey Lipton, managing director of credit research at Oppenheimer Inc.. “If Treasuries were selling off today, cuts in the muni market would be more significant.”

Despite this, the short end of the muni curve continues to feel downward pressure, with a more pronounced two-handle in those spots, even as USTs are exhibiting strength, Lipton said.

Short muni-UST ratios were simply too expensive for too long, and he said the market is now seeing some long-awaited adjustments.

Short muni-UST ratios rose with the two- and three-year ratios, reaching around 66%. The five-year was at 70%, the 10-year at 84% and the 30-year at 98%, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the five at 70%, the 10 at 87% and the 30 at 96% at a 3:30 p.m. read.

The variable-rate market has also pushed short high-grade debt to higher yields. The SIFMA 7-day rate fell four basis points to 1.79% on Wednesday from 1.83% the previous week. Tax-exempt municipal money market funds gained $1.39 billion the week ending Wednesday while the seven-day simple yield for all tax-free and municipal money-market funds rose to 1.34%.

Throughout much of the summer there were compelling technicals given the reinvestment demand and wider supply conditions, Lipton noted.

“So that reinvestment demand, while not completely going away, has retrenched to some extent,” he said. “And we have to wait to see what the [new-issue] calendar looks like heading into September and October.”

He noted that “in many respects, muni technicals in the overall demand dynamics will help to support muni performance through the remaining months of the year.”

“We are still anticipating significantly better performance during the second half than we saw than we saw during the first half of the year,” he added.

July was a very good month for bonds, while August is negative returns and is shaping up to be more challenging.

“It’s highly unlikely that muni returns will end the year in positive territory,” he said.

But while he does not believe the returns will end the year in positive territory, he does expect meaningfully better performance between now and the end of December.

“There’s a possibility the second half of the year could still wind up being much better than the first half of the year,” he said. “Municipals continue to benefit from a favorable credit backdrop, and that’s not going to go away anytime soon.”

In the primary Thursday, Goldman Sachs & Co. priced for the Regents of the University of California (Aa2/AA/AA/) $315.220 million of forward-delivery general revenue bonds, 2023 Series BM, with 5s of 5/2024 at 2.38%, 5s of 2027 at 2.47%, 5s of 2032 at 2.90%, 5s of 2037 at 3.37% and 5s of 2039 at 3.53%, forward delivery date 2/22/2023, callable 5/15/2033. The deal followed exempt and taxable pricings on Wednesday.

In the competitive market, Montgomery County, Maryland, (Aaa/AAA/AAA/) sold $280 million of general obligation consolidated public improvement bonds, 2022 Series A, to J.P. Morgan Securities, with 5s of 8/2023 at 2.15%, 5s of 2027 at 2.16%, 5s of 2032 at 2.49%, 5s of 2037 at 2.86% and 4s of 2042 at 3.62%, callable 8/1/2032.

Informa: Money market muni assets rise
Tax-exempt municipal money market funds saw inflows return as $1.39 billion was added the week ending Wednesday, bringing the total assets to $97.43 billion, according to the Money Fund Report, a publication of Informa Financial Intelligence.

The average seven-day simple yield for all tax-free and municipal money-market funds rose to 1.34%.
Taxable money-fund assets lost $19.93 billion to end the reporting week at $4.409 trillion of total net assets. The average seven-day simple yield for all taxable reporting funds rose to 1.83%.

Muni CUSIP requests decline
Municipal request volume declined in July, following an increase in June, according to CUSIP Global Services. For muni bonds specifically, there was a decrease of 30% month-over-month and 19.7% year-over-year.

The aggregate total of identifier requests for new municipal securities, including municipal bonds, long-term and short-term notes, and commercial paper, fell 23.6% versus June totals. On a year-over-year basis, overall municipal volumes were down 17.3%.

Secondary trading
California 5s of 2023 at 2.16%-2.15%. Georgia 5s of 2024 at 2.07% versus 1.98% Monday. North Carolina 5s of 2025 at 2.07%-1.90%. DC 5s of 2025 at 2.20% versus 1.91% Monday and 1.86% Friday.

NYC 5s of 2027 at 2.28%. Georgia 5s of 2027 at 2.11%-2.10%. California 5s of 2031 at 2.44%.

Maryland 5s of 2036 at 2.81% versus 2.65% on 8/11. Washington 5s of 2039 at 3.16%-3.15%. 

Triborough Bridge and Tunnel Authority 5s of 2045 at 3.67% versus 3.55% Friday. Washington 5s of 2046 at 3.43% versus 3.23% on 8/8.

AAA scales
Refinitiv MMD’s scale was cut five to nine basis points five years and in at a 3 p.m. read: the one-year at 2.15% (+5) and 2.10% (+9) in two years. The five-year at 2.12% (+8), the 10-year at 2.41% (+2) and the 30-year at 3.06% (unch).

The ICE AAA yield curve was cut one to six basis points: 2.15% (+1) in 2023 and 2.09% (+4) in 2024. The five-year at 2.13% (+6), the 10-year was at 2.45% (+3) and the 30-year yield was at 3.02% (+2) at 4 p.m.

The IHS Markit municipal curve was cut four to nine basis points 10 years and in: 2.13% (+5) in 2023 and 2.09% (+9) in 2024. The five-year was at 2.12% (+8), the 10-year was at 2.41% (+4) and the 30-year yield was at 3.06% (unch) at a 3 p.m. read.

Bloomberg BVAL was cut up to six basis points: 2.12% (+6) in 2023 and 2.11% (+6) in 2024. The five-year at 2.10% (+7), the 10-year at 2.40% (+3) and the 30-year at 3.09% (+3) at 4 p.m.

Treasuries were firmer.

The two-year UST was yielding 3.212% (-8), the three-year was at 3.231% (-5), the five-year at 3.025% (-2), the seven-year 2.967% (-2), the 10-year yielding 2.878% (-2), the 20-year at 3.358% (-3) and the 30-year Treasury was yielding 3.138% (-1) at the close.

Mutual fund details

Refinitiv Lipper reported $229.263 million of outflows for the week ending Wednesday following $635.177 million of outflows the previous week.

Exchange-traded muni funds reported outflows of $279.321 million after outflows of $414.847 million in the previous week. Ex-ETFs, muni funds saw inflows of $50.058 million after outflows of $220.330 million in the prior week.

The four-week moving average was at positive $116.502 million from negative $878,000 in the previous week.

Long-term muni bond funds had outflows of $45.929 million in the latest week after outflows of $322.342 million in the previous week. Intermediate-term funds had inflows of $96.987 million after outflows of $81.512 million in the prior week.

National funds had outflows of $282.062 million after outflows of $594.449 million the previous week while high-yield muni funds reported inflows of $258.761 million after inflows of $23.788 million the week prior.

FOMC redux
The minutes “still shows a Fed determined to bring inflation down, but even just an acknowledgment of risks to the other side of the mandate (via over-hiking) read to us as slightly dovish,” said Blake Gwinn, head of U.S. Rates Strategies at RBC Capital Markets.

Mickey Levy and Mahmoud Abu Ghzalah of Berenberg Capital Markets said the FOMC reaffirmed “the Fed’s inflation-fighting resolve, while simultaneously stressing uncertainties over the economic outlook and disagreement among economic data that will complicate the Fed’s new mantra of ‘data dependence.’ ”

The minutes suggest that “with inflation ‘unacceptably high’ and liable to ‘stay uncomfortably high,’ participants will look to move rates into restrictive territory in the near term,” they said.

But even as participants pointed to signs of a “broad-based softening in economic activity” and “slowing growth in consumer spending,” the decision to implement a 75 basis point rate hike in July was unanimous, “underscoring the Fed’s anti-inflation resolve,” they said.

Moreover, the July FOMC meeting happened before the release of July’s employment report, indicating “nominal wage growth reaccelerated,” and July’s consumer price index report, pointing to “broad-based core inflationary pressures that tilts inflationary risks to the upside.”

“Together these are likely to prompt the Fed to maintain its current hawkish stance,” Levy and Ghzalah said.

But due to the downside risks to economic activity, FOMC participants are cautious, ”noting that long and variable lags associated with monetary policy transmission raise the ‘risk that the committee could tighten the stance of policy by more than necessary to restore price stability,’ and that the full impact of rate hikes on consumer prices was ‘not yet apparent,’ setting the stage for an eventual pause,” they said.

While they don’t believe a Fed “pause” or “pivot” is forthcoming, the minutes indicate FOMC participants “think it will likely be ‘appropriate at some point to slow the pace of policy rate increases to assess the cumulative effects of policy tightening.”

“Broad core inflationary pressures, robust nominal wage gains, and solid payroll employment gains as factors that would tilt the Fed toward a 75bp rate hike in September, but thereafter expect the pace of policy rate increases will step down to 25bp at the November and December FOMC meetings,” they said.

This, they noted, “would lift the Fed funds rate to 3.50%-3.75% by year-end.

Gwinn doesn’t see July’s meeting minutes as “delivering any meaningful shift in Fed expectations.” Additionally, the minutes underlined the Fed’s dependence on data, which he thinks “will be riding on the slew of top-tier data” into the September FOMC meeting.

He said he sees a 50 basis points rate hike in September and November, followed by 25 basis points in December as the base case, “with the upcoming data having to show a retrenchment in inflation and/or very robust job gains or activity to clear the bar for 75bp.”

Stifel Chief Economist Lindsey Piegza concurred with Gwinn, saying “as long as the market maintains expectations for a 50bp hike, currently at 60% probability, the Fed is likely to capitulate to a reduced increase while still emphasizing its commitment to controlling inflation.”

But, if the “August inflation report comes in hotter than expected, redirecting market expectations to a larger hike,” she said this will most likely result in a “third-round 75bp hike.”


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