Munis steady in their own lane amid UST volatility

Bonds

Municipals were mostly steady Wednesday amid a busy primary market, while U.S. Treasuries sold off, paring back gains from the past two trading sessions, and equities ended in the black.

The UST improvements were short-lived and yields rose on Wednesday by as much as 11 basis points. Municipal participants are being less reactive to UST movements as was evidenced by little changed muni yield curves over the past three sessions. Muni to UST ratios on Wednesday fell slightly as a result.

Muni-UST ratios rose and were at 86% in five years, 95% in 10 years and 104% in 30, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the five at 85%, the 10 at 96% and the 30 at 106% at a 4 p.m. read.

Outflows continue with the Investment Company Institute reporting $5.526 billion pulled from muni bond mutual funds in the week ending April 13, down from $7.227 billion of outflows in the previous week. Exchange-traded funds saw inflows at $43 million versus $477 million of inflows the week prior.

In the busy primary market Wednesday, Barclays Capital priced for the Regents of the University of California (Aa3/AA-/AA-/) $1.896 billion of medical center pooled revenue bonds, 2022 Series P. Bonds in 5/2033 with a 5% coupon yield 3.20%, 5s of 2037 at 3.52%, 5s of 2042 at 3.65%, 5s of 2047 at 3.78%, 4s of 2053 at 4.18% and 3.5s of 2054 at 4.18%, callable 5/15/2032.

BofA Securities priced for the Intermountain Power Agency, Utah, (Aa3//AA-/) $800.615 million of power supply revenue bonds. The first tranche, $735.975 million of tax-exempt bonds, 2022 Series A, saw bonds in 7/2026 with a 5% coupon yield 2.57%, 5s of 2027 at 2.66%, 5s of 2032 at 3.09%, 5s of 2037 at 3.37%, 5s of 2042 at 3.75% and 5s of 2045 at 3.53%, callable 7/1/2031.

The second tranche, $64.640 million of taxable bonds, 2022 Series B, saw all bonds 2026-2037 price at par: 3.496s of 7/2026, 3.646s of 2027, 4.155s of 2032 and 4.805s of 2037. Bonds in 2045 with a 5.25% coupon yield 5.01%. Optional call 7/1/2032. Prior to 7/1/2032, subject to make-whole call at T+35 basis points.

Wells Fargo Bank priced for the Hampton Roads Transportation Accountability Commission, Virginia, (Aa2/AA//) $407.875 million of Hampton Roads Transportation Fund senior lien revenue bonds, Series 2022A. Bonds in 7/2027 with a 5% coupon yield 2.58%, 5s of 2032 at 2.93%, 5s of 2037 at 3.22%, 5s of 2042 at 3.35%, 5s of 2047 at 3.45%, 4s of 2052 at 4.08%, 4s of 2057 at 4.18% and 3.75s of 2057 at 4.18%, callable 7/1/2032.

Wells Fargo Bank priced for Gilbert, Arizona, (Aaa/AAA//) $188.910 million of general obligation bonds, Series 2022. Bonds in 7/2023 with a 5% coupon yield 2.01%, 5s of 2027 at 2.48%, 5s of 2032 at 2.87%, 3.5s of 2037 at 3.52% and 3.625s of 2041 at 3.67%, callable 7/15/2032.

In the competitive, Clark County, Nevada, (Aa3/AA-/) sold $200 million of indexed fuel tax and subordinate motor vehicle fuel tax highway revenue bonds, Series 2022, to BofA Securities. Bonds in 7/2024 with a 5% coupon yield 2.45%, 5s of 2027 at 2.65%, 5s of 2032 at 3.05%, 5s of 2036 at 3.28%, 4s of 2040 at 3.77% and 3s of 2042 at 4.00%, callable in 7/1/2032. Bonds in 2031-2034 and 2040 are insured by Assured Guaranty.

Nevada (Aa1/AA+/AA+/) sold $75 million of taxable general obligation bonds to J.P. Morgan Securities LLC. Bonds priced at par at 2.43% in 5/2023 and 3.18% in 2027. Subject to make whole call.

The current value in the municipal market due to higher yields and ratios to Treasuries will be short-lived, according to Gavin Stephens, director of portfolio management at Goelzer Investment Management.

“We’ve been waiting for this for a while,” Stephens said this week. “We’ve been combing the dessert and finally reached an oasis this year.” 

Currently, the market is offering “reasonable valuations coming off of unreasonable valuations, particularly in 2021,” he said.

With the upcoming summer reinvestment season, Stephens expects a negative supply situation heading into June, July and August, so he suggests investors capture the availability of attractively priced bonds while they are available in the current market.

For instance, higher-grade revenue credits — double-A or better — are offering a spread of 30 basis points compared to comparable triple-A scales.

“Last year, the spread was half of that,” Stephens said.

This year, he said, is a good time for investors to “capture the higher-grade liquid names into their portfolios, and take advantage of spread widening.” 

Combined with the relative value, there’s a short opportunity to add value in municipals, Stephens noted. “We would expect yields to find solid footing, if not pushing lower on the longer end” in the near future.

Outflows from mutual funds are heavily impacting and greatly contributing to the current value in the retail-dominated market, where investors fearing the probability of a rate increase have exited funds, Stephens said.

“It’s largely a rate-driven story and we’d rather have that than a credit-driven sell-off,” he said.

April has been characterized by investors selling assets to raise money for tax bills, as well as executing tax-loss harvesting activities, according to Stephens.

A 10-year, high-grade bond issued a year ago was yielding under 1% at issuance, while that same bond is now yielding 2.75%, which Stephens called a “handsome capital loss that gives investors an opportunity to invest at a higher yield and capture that loss and maximize rolling out on the yield curve and increase tax-free income.”

The vast secondary market inventory of bonds issued over two years ago is evidence of the occurrence of heavy tax-loss harvesting, and is allowing his firm to find bonds necessary for their clients’ portfolio needs, he noted.

“It’s a good window of opportunity, but it will be short-lived,” Stephens said. 

“We have been adding longer bonds … in anticipation of curve flattening and longer-term rates reaching their tops,” he said.

In the current market, Stephens is finding the best value in the seven to 12-year universe where ratios are “more compelling” than the short end.

Within that sector of the yield curve, he favors higher-grade bonds relative to the spreads offered a year ago, including liquid names such as New York State personal income tax revenue bonds that are yielding over 3% in that maturity range, he said.

In addition, higher education university system revenue bonds are trading at “reasonable levels with reasonable liquidity.”

“It’s a very good opportunity and it’s likely to be fleeting, especially as we enter the summer doldrums,” he added.

Stephens said overall the municipal market is not only attractive, but default rates remain low and tax collections healthy, especially in states like New York which has seen an increase of 35% relative to 2019, despite losing some population to demographics and migration.

His advice for municipal investors is “view these opportunities as short-lived.”

“We do have compelling valuations because of the mutual fund outflows and tax-related selling,” he said of the current yields on municipal high-grade, double-A bonds on both an absolute and relative basis.

“There’s a good opportunity to lock in attractive after-tax yields via those bonds and get ahead of the seasonal challenges the summer will present,” Stephens said. 

Secondary trading
New Mexico 5s of 2023 at 1.86%-1.88%. Washington 5s of 2023 at 2.02% versus 2.04% on Tuesday. Boston, Massachusetts 5s of 2024 at 2.27%.

California 5s of 2026 at 2.51% versus 2.49% on Tuesday and 2.59% on Monday. Georgia 5s of 2028 at 2.49% versus 2.49% on Tuesday. Maryland 4s of 2028 at 2.60%-2.58%. Maryland 4s of 2029 at 2.67%-2.65%. Georgia 5s of 2030 at 2.69%-2.66%.

Board of Regents of the University of Texas System 5s of 2032 at 2.83% versus 2.80%-2.81% a week ago. California 5s of 2032 at 2.94% versus 2.98% on Tuesday.

The University of North Carolina at Chapel Hill 5s of 2036 at 2.91%.

NYC Municipal Water Finance Authority 5s of 2039 at 3.43% versus 3.44%-3.41% a week ago.

Washington 5s of 2046 at 3.37%-3.34% versus 3.31%-3.30% Friday.

LA DWP 5s of 2051 at 3.45%-3.46%. NYC Municipal Water Finance Authority 5s of 2052 at 3.61%-3.60% versus 3.71%-3.70% on Thursday.

AAA scales
Refinitiv MMD’s scale was unchanged at the 3 p.m. read: the one-year at 1.94% and 2.20% in two years. The five-year at 2.41%, the 10-year at 2.68% and the 30-year at 3.03%.

The ICE municipal yield curve was little changed: 1.94% (unch) in 2023 and 2.26% (+1) in 2024. The five-year at 2.42% (unch), the 10-year was at 2.68% (unch) and the 30-year yield was at 3.10% (unch) at 4 p.m.

The IHS Markit municipal curve was unchanged: 1.96% in 2023 and 2.21% in 2024. The five-year at 2.43%, the 10-year was at 2.65% and the 30-year yield was at 3.03% at 4 p.m.

Bloomberg BVAL was steady: 1.93% in 2023 and 2.18% in 2024. The five-year at 2.44%, the 10-year at 2.66% and the 30-year at 2.98% at the close.

Treasury yields rose.

The two-year UST was yielding 2.590% (+11), the three-year was at 2.753% (+9), five-year at 2.826% (+9), the seven-year 2.852% (+10), the 10-year yielding 2.824% (+10), the 20-year at 3.111% (+10) and the 30-year Treasury was yielding 2.907% (+8) at the close.

Primary to come:
The Michigan Finance Authority (Aa3/AA//) is set to price Thursday $1.181 billion of Beaumont-Spectrum Consolidation hospital revenue refunding bonds, Series 2022, consisting of $1.089 billion of Series 1 and $91.530 million of Series 3. Morgan Stanley.

The Beaumont-Spectrum Consolidation, Michigan, (Aa3/AA/) is set to price Thursday $300 million of taxable corporate CUSIP bonds, Series 2022. Morgan Stanley.

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