Municipals were steady to weaker in spots Tuesday, while U.S. Treasuries were mixed and equities ended down.
The two- and three-year muni-UST ratios are around 65% to 67%. The five-year was at 71%, 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 71%, the 10 at 87% and the 30 at 101% at a 4 p.m. read.
After underperforming USTs last week, “munis have given up their earlier performance advantage for August with both asset classes currently earning virtually the same negative returns,” said Jeff Lipton, managing director of credit research at Oppenheimer Inc.
Money pulled from “municipal bond mutual funds last week surpassed the prior period by over five-fold and represented the third consecutive week of outflows,” he noted.
“While UST remains fully committed to curve inversion with greater punctuation, the muni curve has corrected its front-end inversion with a presently tighter flattening bias,” Lipton said. The front-end inversion, he noted, “came about due to the historically rich ratios along that part of the curve and so very logical adjustments were needed to be made.”
In advance of Fed Chair Jerome Powell’s Jackson Hole speech, yields started to rise, with munis lagging in the taxable market, said Jeff MacDonald, head of fixed-income strategies at Fiduciary Trust International.
Following Powell’s comments that the Fed will continue to raise interest rates as long as necessary to combat inflation, there was a meaningful selloff in taxable rates moving into this week. Munis, he said, have begun to catch up with that.
Market volatility continues to run rampant, with MacDonald saying investors tend to be a little cautious, especially in the municipal market, where it’s predominantly a retail market.
“That said, this move higher in rates that we’ve seen started before Jackson Hole but were certainly exacerbated by the comments at Jackson Hole,” he said.
“The yields that we’re moving into are becoming a bit more attractive,” with the “front of the yield curve a bit more attractive relative to longer-term yields than we’ve seen,” MacDonald said. The flatter yield curve, he noted, may encourage some investors to look toward shorter maturities, because “you can just take less interest rate risk and capture the same amount of yield.”
The muni curve, Lipton said, “could grow flatter, particularly for short tenors, as the Fed moves to more restrictive ground, yet prospects for another inversion are low given the more compelling ratios and we could expect to see some dilution in relative value for long-dated tenors throughout the tightening cycle.”
Bid-wanted activity moves “hand-in-hand with fund outflows,” he said, and “the sharp volatility has driven trading activity to a decade high.”
And as the month comes to a close, “August will be turning in heavy disappointment as the blissful positive returns of July quickly faded into negative performance throughout this month,” according to Lipton.
“Seasonally, we’re in an interesting part of the calendar where we’re in between the higher reinvestment period during the summer and then after the Labor Day holiday, you generally see issuance kick up a little bit,” MacDonald said. “So we’re a little bit of no man’s land in terms of primary market activity.”
Looking at the forward calendar, there are some bigger deals on the horizon, and he expects investors to re-enter the market next week.
“As we get past the holiday, and into September, we should see volumes in the secondary and primary side starting to pick up,” MacDonald said.
In the primary, RBC Capital Markets priced for the Oklahoma Development Finance Authority (/AAA/AAA/) $696.920 million of taxable Public Service Company of Oklahoma ratepayer-backed bonds, Series 2022. The first tranche, $244 million, Series A-1, saw 4.135s of 12/2033 priced at par, noncall. The second tranche, $452.920 million, Series A-2, saw 4.623s of 6/2044 priced at par, noncall.
Wells Fargo Bank priced for Manatee County, Florida, (Aa1//AA+/) $221.845 million of revenue improvement and refunding bonds, Series 2022, with 5s of 10/2023 at 2.30%, 5s of 2027 at 2.52%, 5s of 2032 at 2.93%, 5.25s of 2037 at 3.44%, 4s of 2042 at 4.20%, 5.25s of 2047 at 4.00% and 4s of 2052 at 4.46%.
Citigroup Global Markets priced for the South Carolina State Housing Finance and Development Authority (Aaa///) $206.190 million of mortgage revenue notes, Series 2022C, at par to yield 2.6%in 9/2023, callable 4/1/2023 and 2.75%in 3/2024, callable 8/1/2023.
Citigroup Global Markets priced for the Palm Beach County School Board, Florida, (Aa3//AA-/) $187.130 million of certificates of participation, Series 2022B, with 5s of 8/2023 at 2.35%, 5s of 2027 at 2.62%, 5s of 2029 at 2.76%, 5.25s of 2037 at 3.61% and 5.25s of 2040 at 3.78%, callable 8/1/2032.
Secondary trading
Wake County, North Carolina, 5s of 2023 at 2.20%-2.19%. Washington 5s of 2024 at 2.29%. Montgomery County, Maryland, 5s of 2025 at 2.29%.
District of Columbia 5s of 2029 at 3.59%. California 5s of 2029 at 2.53%.
Indiana Finance Authority 5s of 2034 at 2.98% versus 2.90% Wednesday. University of California 5s of 2034 at 2.78%-2.79% versus 2.69% on 8/22 and 2.48% on 8/10.
City and County of Denver, Colorado, 5s of 2039 at 3.25%. Los Angeles Department of Water and Power 5s of 2042 at 3.41% versus 3.39% Monday and 3.00% on 8/8.
AAA scales
Refinitiv MMD’s scale was cut up to three basis points at the 3 p.m. read: the one-year at 2.19% (unch) and 2.26% (unch) in two years. The five-year at 2.32% (unch), the 10-year at 2.59% (unch) and the 30-year at 3.29% (+3).
The ICE AAA yield curve was cut outside five years: 2.26% (flat) in 2023 and 2.30% (flat) in 2024. The five-year at 2.35% (flat), the 10-year was at 2.69% (+1) and the 30-year yield was at 3.30% (+4) at a 4 p.m. read.
The IHS Markit municipal curve was cut two basis points 10 years and out: 2.19% (unch) in 2023 and 2.27% (unch) in 2024. The five-year was at 2.31% (unch), the 10-year was at 2.60% (+2) and the 30-year yield was at 3.28% (+2) at a 3 p.m. read.
Bloomberg BVAL was cut up to two basis points: 2.26% (+1) in 2023 and 2.27% (unch) in 2024. The five-year at 2.29% (+1), the 10-year at 2.59% (+2) and the 30-year at 3.28% (+2) at 4 p.m.
Treasuries were mixed.
The two-year UST was yielding 3.458% (+3), the three-year was at 3.465% (+2), the five-year at 3.267% (+1), the seven-year 3.212% (flat), the 10-year yielding 3.106% (flat), the 20-year at 3.490% (-1) and the 30-year Treasury was yielding 3.222% (-2) at 4 p.m.
Primary to come:
The New Jersey Housing and Mortgage Finance Agency (Aa2/AA//) is set to price Wednesday $315.730 million of non-AMT social single family housing revenue bonds, 2022 Series I, serials 2023-2034, terms 2037, 2042, 2046 and 2053. Citigroup Global Markets.
The South Jersey Transportation Authority (Baa2/BBB+/BBB+/) is set to price Wednesday $225 million of transportation system revenue bonds, 2022 Series A, serials 2036-2042, terms 2047 and 2052. Citigroup Global Markets.
The Las Vegas Convention and Visitors Authority, Nevada, (Aa3/A//) is set to price Wednesday $150 million of convention center expansion and renovation revenue bonds, consisting of $135.460 million of tax-exempts, Series 2022B, serials 2026-2038, term 2049 and $14.540 million of taxables, Series 2022C, serials 2023-2025. RBC Capital Markets.