Munis little changed, strong technical picture

Municipals were little changed Thursday as U.S. Treasury yields rose and equities ended down.

This year’s summer technical picture has been stronger than 2023, said AllianceBernstein strategists.

Total returns for June through August last year were –0.04%, with August wiping out June and July gains as UST yields “jumped” and muni yields moved higher, they said.

The 10-year muni rose 36 basis points during August 2023, they said.

Conversely, this year, munis are returning 3.11% from June through Aug. 16 — stronger than its return in 2023 despite the rise in issuance, with issuers frontloading ahead of November to avoid market volatility stemming from the election, they said.

Issuance Thursday slowed on the heels of a busy primary on Tuesday and Wednesday, but still boasted a few large deals.

Even though the breakneck pace of issuance is the highest in years and there has been a slew of mega deals, including $1.8 billion of GOs from New York City on Wednesday, the market has digested issuance “pretty well,” said Catherine Stienstra, head of municipal bond investments at Columbia Threadneedle Investments.

In addition to the influx of supply, the muni market remains “constructive” due to attractive yields, she said.

While yields were little changed Thursday, they remain higher than they have been, providing an attractive opportunity for high-net-worth individuals to lock in these higher yields, Stienstra said.

Due to this, separately managed account growth will continue as long as yields remain elevated, she said.

SMAs have been “gobbling up” most of the supply inside 15 years, as reflected by muni-UST ratios, which are rich, she said.

The two-year muni-to-Treasury ratio Thursday was at 62%, the three-year at 65%, the five-year at 66%, the 10-year at 70% and the 30-year at 87%, according to Refinitiv Municipal Market Data’s 3 p.m. EST read. ICE Data Services had the two-year at 64%, the three-year at 66%, the five-year at 67%, the 10-year at 72% and the 30-year at 88% at 3:30 p.m.

“That’s an indication of shorter-end SMA buyers that are foreseeing those ratios to be lower, which is a paradigm shift that we’re going to continue to see as SMA growth continues,” Stienstra said.

There continue to be inflows into muni mutual funds, though they are slower than expected following two years of massive outflows in 2022 and 2023, she said.

Municipal bond mutual funds saw inflows as investors added $500.4 million to funds after $530.3 million of inflows the week prior, according to LSEG Lipper. This marks eight straight weeks of inflows.

High-yield continued to show strength, with inflows of $354.8 million after $231 million of inflows the previous week.

With a Fed rate cut imminent, “nervousness [about] the volatility in the market, the duration scare, will dissipate once we see the Fed starts to cut, that should bring more inflows into the mutual fund business,” Stienstra said.

The Federal Open Market Committee minutes from its July meeting showed only “several” participants “contemplated cutting 25bps” then, while a “vast majority were ready to cut at the September meeting, and many thought of policy as currently restrictive,” said Abiel Reinhart of J.P. Morgan.

“Whether the FOMC cuts 25bps or 50bps at the September meeting still hinges critically on the next monthly employment report,” he said.

The findings from the minutes “are unsurprising, though they express much more confidence about a September cut than Fedspeak has let on over the last three weeks,” said Will Compernolle, macro strategist at FHN Financial.

“Why the Fed is playing so coy is beyond us, but it does set up the possibility that markets will be disappointed by a lack of dovish emphasis in Chair Powell’s Jackson Hole appearance [Friday], even if the FOMC ends up following through with a cut next month as is widely expected,” he said.

In the primary market Thursday, Wells Fargo priced and repriced for Dallas and Fort Worth, Texas, (A1/AA-/A+/AA/) $723.555 million of non-AMT Dallas Fort Worth International Airport joint revenue refunding and improvement bonds, with yields bumped up to nine basis points from Thursday’s preliminary pricing: 5s of 11/2028 at 2.63% (-9), 5s of 2029 at 2.64% (-9), 5s of 2034 at 3.07% (-4), 5s of 2039 at 3.41% (-3), 5s of 2044 at 3.78% (unch) and 4s of 2049 at 4.28% (unch), callable 11/1/2034.

BofA Securities priced for the Los Angeles County Public Works Financing Authority (/AA+/AA+/) $569.585 million of lease revenue bonds, 2024 Series H, with 5s of 12/2024 at 2.55%, 5s of 2029 at 2.32%, 5s of 2034 at 2.68%, 5s of 2039 at 3.04%, 5.25s of 2049 at 3.76%, 5.5s of 2049 at 3.65%, 4s of 2053 at 4.14%, 5.25s of 2053 at 3.82% and 5.5s of 2053 at 3.75%, callable 12/1/2034.

Wells Fargo priced for Charlotte, North Carolina, (Aaa/AAA//) $181.815 million of stormwater fee revenue refunding bonds, Series 2024, with 5s of 12/2025 at 2.57%, 5s of 2029 at 2.50%, 5s of 2034 at 2.78%, 5s of 2039 at 3.07%, 5s of 2044 at 3.44%, 4s of 2049 at 4.05% and 4s of 2054 at 4.11%, callable 12/1/2034.

AAA scales
Refinitiv MMD’s scale was unchanged: The one-year was at 2.56% and 2.50% in two years. The five-year was at 2.46%, the 10-year at 2.71% and the 30-year at 3.59% at 3 p.m.

The ICE AAA yield curve was cut five years and out: 2.61% (-2) in 2025 and 2.53% (flat) in 2026. The five-year was at 2.46% (+1), the 10-year was at 2.70% (+2) and the 30-year was at 3.58% (+1) at 3:30 p.m.

The S&P Global Market Intelligence municipal curve was unchanged: The one-year was at 2.62% in 2025 and 2.56% in 2026. The five-year was at 2.47%, the 10-year was at 2.68% and the 30-year yield was at 3.56% at 3 p.m.

Bloomberg BVAL was unchanged: 2.57% in 2025 and 2.53% in 2026. The five-year at 2.52%, the 10-year at 2.67% and the 30-year at 3.58% at 3:30 p.m.

Treasuries were firmer.

The two-year UST was yielding 4.009% (+8), the three-year was at 3.813% (+8), the five-year at 3.724% (+8), the 10-year at 3.861% (+7), the 20-year at 4.229% (+7) and the 30-year at 4.134% (+7) at 3:40 p.m.