Selling pressure picked up and municipals showed some weakness for the first time since November on Tuesday following two days of rising U.S. Treasuries, but the asset class still outperformed that market’s double-digit moves to higher yields.
Triple-A benchmark yield curves saw two to three basis point cuts, the largest one-day move in either direction since Nov. 30. Secondary trading ticked up with some concessions seen on various high-grade credits, particularly outside of five years.
Municipal to UST ratios hovered near Monday’s levels on the moves. The five-year was at 46%, 63% in 10 and 74% in 30, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the five at 44%, the 10 at 65% and the 30 at 72%.
While Treasury rates have been expected to rise in 2022, Jeff Lipton, managing director of credit research at Oppenheimer Inc., said he expects economic and inflationary prospects to fuel additional Treasury market volatility in 2022, with a rise toward a 1.75% 10-year benchmark rate becoming more likely.
And while munis have shown on Tuesday they might not go unscathed by the increasing volatility in UST, Lipton said the month may bring about a more typical “January Effect” with lighter weekly calendars as extended pent-up supply that came about toward the end of 2021 coupled with growing reinvestment needs from maturing securities and bond redemptions.
Lipton said performance for January is beginning in a good place. Technicals are holding up well and the new-issue muni market should continue to struggle to meet near-term reinvestment demands.
Muni technicals, coupled with a more favorable credit outlook than initially expected, will likely bring continued active buyer interest from separately managed accounts, exchange-traded funds and mutual funds through much of 2022.
“We should, however, reasonably expect to see a reduced pace of inflows at the very least, and a possible return to intermittent outflows with more volatility in 2022 would not be a shock,” Lipton said. “Investors should pay close attention to spread relationships, particularly if periods of extended mutual fund outflows come about with resultant higher ratios, presenting meaningful buying opportunities.
High-yield muni performance should be positive in 2022, but down year-over-year, he said. With a 7.77% return in 2021, muni high-yield outperformed and Lipton said there is little opportunity for additional performance in the high-yield category. They foresee a slowdown in 2022, Lipton said, given estimates that returns for some high-yield sectors may be less generous.
“Although there has been some noted variability in high-yield fund flows, we can expect to see continued strong demand in this space as long as credit spreads remain generally at compressed levels with high-yield fund flows decidedly positive at least through the early months of 2022,” he said. “High-yield investors are willing to take on heavier credit risk in order to book more compelling yield amid improving credit conditions.”
Secondary trades
Maryland 5s of 2023 at 0.23%. Wisconsin 5s of 2025 at 0.53%-0.51%. Georgia 5s of 2025 at 0.40%. Maryland 5s of 2025 at 0.50% versus 0.49%-0.48% Monday.
California 5s of 11/2026 at 0.67%, 5s of 9/2026 at 0.64%, 5s of 12/2026 at 0.65%-0.64%. California 5s of 2027 at 0.83%.
Charleston County, South Carolina 5s of 2029 at 0.96% versus 0.94% Monday. New York City 5s of 2029 at 1.10%. Howard County, Maryland 5s of 2029 at 0.96%-0.94%.
Charlotte, North Carolina 5s of 2030 at 1.03%-1.01%. New York City TFA 5s of 2030 at 1.14%-1.10%. Mecklenburg County, North Carolina 5s of 2031 at 1.02%. Connecticut 5s of 2031 at 1.22%-1.20%. Delaware 5s of 2031 at 1.04%.
New York Dorm PITs 5s of 2032 at 1.25%.
New York Dorm PITs 5s of 2036 at 1.44%. Georgia 4s of 2048 at 1.43% versus 1.38%-1.37% Wednesday. Ohio waters green 4s of 2039 at 1.45%-1.44%. New York City TFA 4s of 2049 at 1.95%-1.88%.
AAA scales
Refinitiv MMD’s scale was cut three basis points across the curve at 3 p.m. read: the one-year at 0.20% and 0.30% in 2023. The 10-year at 1.07% and the 30-year at 1.53%.
The ICE municipal yield curve showed yields rise one to two basis points: 0.17% (+1) in 2022 and 0.32% (+2) in 2023. The 10-year at 1.07% (+2) and the 30-year yield at 1.50% (+2) at 3 p.m. read.
The IHS Markit municipal analytics curve rose three basis points: 0.19% in 2022 and to 0.28% in 2023. The 10-year at 1.04% and the 30-year at 1.52% as of a 3 p.m. read.
Bloomberg BVAL was saw two to three basis point cuts to scales: 0.19% (+2) in 2022 and 0.25% (+2) in 2023. The 10-year at 1.07% (+2) and the 30-year at 1.52% (+2) at 3 p.m. read.
Treasuries saw continued losses while equities were mixed.
The five-year UST was yielding 1.366%, the 10-year yielding 1.662%, the 20-year at 2.107% and the 30-year Treasury was yielding 2.083% near the close. The Dow Jones Industrial Average was up 289 points, or 0.79%, the S&P was up 0.10% while the Nasdaq lost 1.20% near the close.
A lighter 2022 volume forecast
Lipton forecasts volume for 2022 between $450 billion to $460 billion, but the recently passed and signed infrastructure package could buoy muni issuance to some extent in 2022 and beyond as state and local issuers seek to leverage federal support. Oppenheimer’s projections are near the average for the industry.
He said muni volume for 2022 will be heavily influenced by: issuer perceptions of public health policy; the pipeline of critically needed bedrock financing; voter authorized bond referendums; available federal stimulus funding which could obviate the need for bond financing; the outlook for the economy in general and for muni credit specifically; and historically low-interest rates within a tighter monetary policy environment.
Last year, some specific considerations affected issuer attitude, influencing volume patterns, mainly due to pandemic-related factors.
“Now that it appears unlikely that muni-friendly bond provisions and higher tax rates will become available for now, issuers have come in off from the sidelines and have entered the market to take advantage of still – low-interest rates,” Lipton said. “Such activity includes the marketing of taxable advance refundings, which in 2022 should continue to be subject to the direction of market rates and spread relationships.”
In 2022, the availability of taxable munis should increase their appeal to current tax-efficient investments, such as retirement accounts looking for alternative investment proxies, as well as international purchasers looking to diversify their portfolios and add above-average credit quality. This will most likely happen against a backdrop of global sovereign debt with low to negative yields, resulting in a reshaped muni buyer base.
“Taxable issuance has the potential to fall below the 20% threshold with a noted drop in taxable advance refundings as Treasury yields are likely to trend higher given growth prospects and tighter monetary policy and given that the universe of outstanding tax-exempt advance refundable candidates continues to narrow,” Lipton said.
If the supply of taxable munis becomes more limited, certain domestic institutional buyers, such as life insurance firms may perceive a diminished relative value play if taxable spreads narrow as a result.
Lower taxable muni volume can also be attributed to the use of financing alternatives such as forward-delivery bonds, private placements and the marketing of certain debt issued with corporate CUSIPs.
Primary to come
The Los Angeles Department of Airports (Aa3/AA-/AA-/) will price $503.22 million consisting of $346.215 million of private activity AMT subordinate revenue bonds 2022 Series A, serials 2026-2042, terms 2045, 2049, and $157.005 million of non-AMT subordinate revenue bonds 2022 Series B, serials 2026-2042, term 2048. Ramirez & Co., Inc. is lead underwriter.
The Virginia Small Business Financing Authority will price $583.545 million of Elizabeth River Crossing Opco, LLC, project forward delivery senior lien revenue refunding bonds (//BBB/). BofA Securities will run the books.