Munis weaker in spots, outflows continue

Municipals were weaker in spots Wednesday as mutual funds continued to see more outflows, while U.S. Treasuries and equities were mixed.

Two- and three-year muni-UST ratios are around 64% to 65%. The five-year was at 70%, the 10-year at 83% and the 30-year at 103%, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the five at 69%, the 10 at 86% and the 30 at 102% at a 4 p.m. read.

The Investment Company Institute reported $2.034 billion of outflows from muni bond mutual funds in the week ending Sept. 7 compared to $2.594 billion of outflows the previous week.

Exchange-traded funds saw inflows of $130 million versus $72 million of outflows the week prior, per ICI data.

Uncertainty over supply-demand, interest rates and the economy are all giving investors of the municipal market some pause — highlighted by the ongoing outflow activity — but municipals are currently attractive and outperforming, according to municipal experts.

“Outflows are still dominating headlines, which probably means that yields on munis are close to peaking,” said John Mousseau, president and CEO and director of fixed income at Cumberland Advisors.

“Deals are getting good reception, so that tells you that private accounts are picking up the slack from the funds,” he noted. 

Mousseau said monthly inflation numbers continue to be important because eventually they will go lower “and the market will sense a peak or plateau in the fed funds rate.”

“The next assumption will be cutting and that will start the movement back into bond funds,” Mousseau said. “It’s a little counterintuitive since the short end of the curve is Fed-driven and the longer end is economy driven,” he said, adding, retail investors react to those market signals.

Elsewhere on the economic front, Peter Delahunt, managing director of municipal securities at StoneX, said Tuesday’s CPI number added “angst” over rising rates.

“Outflows from funds most likely continue at a frenzied pace and have reached $84 billion this year to date,” while Fed data revealed that broker-dealer municipal holdings have dropped to $10 billion, he said.

“With such a large mismatch between funds needing liquidity and dealers’ shrinking balance sheets to provide liquidity, the municipal market will need to further adjust to higher rates,” Delahunt said. 

“Investors pulling monies from the funds appear to be running for cover into cash-related securities,” which highlights the 1.39% rate on the SIFMA weekly swap index, representing 57% of the four-week T-bill, he added. Compounding this negative technical scenario, according to Delahunt, will be the expanding supply of issuance as the market heads into the fourth quarter.

“The good news is that municipals — while down 9.50% this year — have outperformed the broader bond market which is down 12%,” he continued. “Municipal yields are at levels that we haven’t seen in over a decade and the increasing rates provide an opportunity,” Delahunt added. 

Both nominal and after-tax rates are “quite attractive,” he said, singling out the New York Thruway revenue bonds with 4% coupons due in 2038 in the secondary market. The bonds are backed by personal income taxes with a double-A-plus rating.

“At 4.10%, these 16-year bonds offer 55 basis points over the 30-year Treasury and yield over 8.20% on a tax-equivalent basis,” Delahunt said.

“This presents a compelling opportunity for some of the hoards of cash to dip their big toe into the muni market, rather than hiding under a near negative 7% yielding floater,” he said.

As yearend nears, others say expecting an overwhelming volume of supply is unrealistic based on current market technicals and economics. “Some are thinking a heavy last four months may occur for various reasons,” said Tom Kozlik, head of municipal research and analytics at HilltopSecurities Inc.

The light supply in the first half or inflation could spur more supply, some believe, he said. 

In Kozlik’s view there is no possibility issuance hits a record. “We would need to see $50 million a month each month for the rest of the year and that type of supply is not going to materialize,” he said.

Kozlik said his revised forecast of $410 billion “could be a tad to the high side.”

In the primary, Siebert Williams Shank & Co. Wednesday priced for the North Texas Tollway Authority $687.400 million of system revenue refunding bonds. The first tranche, $499.985 million of first tier bonds (A1/AA-//), Series 2022A, saw 5s of 1/2024 at 2.58%, 5s of 2026 at 2.70%, 5s of 2037 at 3.87%, 5s of 2040 at 4.05% and 4.125s of 2040 at 4.38%, callable 1/1/2032.

The second tranche, $187.415 million of second tier bonds (A2/A+//), Series 2022B, saw 5s of 1/2024 at 2.63%, 5s of 2027 at 2.86% and 5s of 2029 at 2.99%, noncall.

Secondary trading
California 5s of 2023 at 2.32%. Washington 5s of 2024 at 2.49% versus 2.12% on 8/18 and 1.94% original on 8/15. Maryland 5s of 2024 at 2.46% versus 2.36% on 9/8 and 2.38% on 9/7. North Carolina 5s of 2025 at 2.43%-2.42% versus 2.07%-1.90% on 8/18.

Georgia 5s of 2026 at 2.48%-2.46%. Triborough Bridge and Tunnel Authority 5s of 2028 at 2.86%-2.87% versus 2.79% Tuesday and 2.82% original on 9/9. Massachusetts 5s of 2031 at 2.91%-2.87%. Maryland 5s of 2032 at 2.94%.

Maryland 5s of 2036 at 3.28% versus 3.28% Tuesday and 3.15% Monday. Boston 5s of 2037 at 3.33%.

Los Angeles DWP 5s of 2042 at 3.81%-3.82% versus 3.76% Monday and 3.72% on 9/7.

AAA scales
Refinitiv MMD’s scale was cut two basis points five years and in at 3 p.m. read: the one-year at 2.36% (+2) and 2.41% (+2) in two years. The five-year at 2.50% (+2), the 10-year at 2.82% (unch) and the 30-year at 3.58% (unch).

The ICE AAA yield curve was cut up to four basis points: 2.39% (+4) in 2023 and 2.44% (+4) in 2024. The five-year at 2.52% (+4), the 10-year was at 2.91% (+4) and the 30-year yield was at 3.57% (+3) at a 4 p.m. read.

The IHS Markit municipal curve was cut up to one basis point: 2.32% (unch) in 2023 and 2.40% (unch) in 2024. The five-year was at 2.50% (unch), the 10-year was at 2.82% (+1) and the 30-year yield was at 3.56% (+1) at a 3 p.m. read.

Bloomberg BVAL was cut up to two basis points: 2.41% (+1) in 2023 and 2.43% (+2) in 2024. The five-year at 2.47% (+2), the 10-year at 2.79% (unch) and the 30-year at 3.56% (+1) at 3:30 p.m.

Treasuries were mixed.

The two-year UST was yielding 3.794% (+4), the three-year was at 3.799% (+4), the five-year at 3.606% (+3), the seven-year 3.532% (+1), the 10-year yielding 3.408% (flat), the 20-year at 3.729% (-2) and the 30-year Treasury was yielding 3.462% (-3) at the close.

PPI comes in line with forecasts
The August producer price index fell by 0.1% in the month, in line with estimates, while rising 8.7% year-over-year.

Underlying inflation pressures showed no signs of abating in August, according to the Payden & Rygel Economics Team. Instead, things got worse, they noted.

“The risk that inflation could remain ‘sticky’ or get even worse will prompt central bankers to take preventative measures,” they said. “The fact that underlying inflation trends through August remain too hot means central bankers have plenty more work to do.”

But “August PPI data could be seen as a small reprieve for investors,” said Greg Bassuk, CEO at AXS Investments, “as a decline in producer prices could represent a signal that consumer inflation similarly will abate in the coming months.”

He notes that “PPI data was cooler in August for producers than the CPI data was for consumers,” meaning “investors should continue to focus on other pending economic data points and the upcoming Fed meeting for additional indications on the trajectory of prices and interest rates, which no doubt will impact the markets in the weeks ahead.” 

Mickey Levy, chief economist for Americas and Asia at Berenberg Capital Markets said, “August’s PPI emphasizes the extent to which inflationary pressures have become entrenched while also including some signs of moderating pipeline inflationary pressures.” 

With two-fifths of the August increase attributable to energy retailers, he said, “the data nonetheless suggest that at least thus far, given the strength of nominal consumer demand, businesses continue to command significant flexibility to pass on cost increases to consumers and maintain their margins.”

Although supply chain issues “are easing, labor costs and labor supply shortages are still obstacles that are driving up producer and consumer prices across food and other categories, and will likely contribute to sticky inflation, particularly within the labor-intensive services sector,” Levy said.

Primary to come:
The Utility Debt Securitization Authority, New York, is set to price Thursday $876.200 million of restructuring bonds, consisting of $65.800 million of taxable, Series 2022T; $719.435 million of tax-exempts, Series 2022TE-1; and $90.885 million of green tax-exempts, Series 2022TE-2. Goldman Sachs & Co.

The Port Authority of New York and New Jersey is set to price Thursday $450 million of consolidated bonds, consisting of $250 million, Series 233, and $200 million, Series 234. Citigroup Global Markets.

The issuer is also set to price Thursday $375 million of 2008 Election general obligation bonds, consisting of $200 million of tax-exempts, Series L-2, serials 2025-2037, and $175 million of taxable, Series L-2, serials 2023-2025. Ramirez & Co.

Bon Secours Mercy Health, Ohio, (A1/A+/AA-/) is set to price Thursday $211.565 million, Series 2022B, consisting of $106.740 million, Series B-1, and $104.825 million, Series B-2. J.P. Morgan Securities.

The healthcare system (A1/A+/AA-/) also is set to price Thursday $189.110 million, Series 2022A, consisting of $93.785 million, Series SC, and $95.325 million, Series VA. J.P. Morgan Securities.

The Mississippi Business Finance Corporation is set to price Friday $100 million of green Enviva Inc. Project exempt facilities revenue bonds, Series 2022. Citigroup Global Markets.

Los Angeles (Aa2/AA/AAA/) is set to sell $389.435 million of taxable social general obligation bonds, Series 2022-A, at noon eastern Thursday.


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