Munis face large losses while outflows hit $1.2B

Municipals sold off Thursday, despite a stronger U.S. Treasury market, while mutual funds reported large outflows. Equities ended up.

Muni triple-A yields rose nine to 12 basis points, depending on the scale, while UST yields fell two to eight basis points.

Municipal to UST ratios were higher again as a result. The two-year muni-to-Treasury ratio Thursday was at 73%, the three-year was at 73%, the five-year at 74%, the 10-year at 75% and the 30-year at 92%, according to Refinitiv Municipal Market Data’s 3 p.m., ET, read. ICE Data Services had the two-year at 71%, the three-year at 72%, the five-year at 71%, the 10-year at 74% and the 30-year at 92% at 4 p.m.

Municipal mutual fund outflows continued Thursday, with investors pulling $1.24 billion, led by national funds, while exchange-traded funds saw small inflows.

Refinitiv Lipper reported $1.24 billion of outflows from municipal bond mutual funds for the week ending Wednesday after $27.44 million of outflows from the funds the previous week. The last time muni mutual funds saw outflows top $1 billion was the week ending May 31 when outflows from mutual funds were $1.345 billion.

High-yield muni funds reported outflows of $365.224 million versus$85.488 million of inflows the prior week. ETFs reported inflows of $25.654 million of inflows versus $525.396 million of inflows in the previous week.

“Rates markets continue to respond to a heatwave of better-than-anticipated economic data, which have added to inflationary concerns, and more broadly, the ‘higher for longer’ interest rate narrative,” said Matthew Gastall, head of WM Municipal Research at Morgan Stanley.

Household ownership of munis — which includes direct ownership of individual bonds in brokerage accounts, fee-based advisory accounts or separately managed accounts — is 43% in Q2 2023, according to the latest data from the Federal Reserve.

“They tend to exhibit generally more laggard responses to what happens in the more globally traded Treasury arena,” he said.

Recently, the market has seen “a notable backup in rates and municipals are broadly attempting to ‘catch up’ with that rate weakness,” Gastall said.

The market is in a period where seasonals, for the most part, are transitioning, he said.

Last week’s Fed meeting saw reduced new-issue supply, as per usual during weeks when the Federal Open Market Committee meets. Due to this, he said the new-issue supply was either pulled forward or pushed back.

As the end of September approaches with October just days away, the market is seeing an influx and acceleration of new-issue supply.

This week saw several large deals price, including $1 billion of state water implementation revenue fund bonds from the Texas Water Development Board and $770 million of AMT Brightline Florida Passenger Rail Expansion Project revenue bonds from the Florida Development Finance Corp. Heavier supply is expected in the coming weeks, he said.

And “those timeframes tend to also coincide with a decline in redemption-driven reinvestment demand,” he said.

During the fall, late winter and spring periods, primary market issuance tends to be “healthy,” he said.

That also coincides with fewer coupons and maturities being paid and coming due, or less reinvestment-driven reinvestment demand.

“We’re at a period where a number of these dynamics are coming together with a more broadly higher interest rate environment, due to a ‘heatwave’ of economic data that we’ve seen,” Gastall said.

In the primary market Thursday, PNC Capital Markets priced for Durham, North Carolina, (Aa1/AA+/AA+/) $129.725 million of limited obligation bonds, Series 2023, with 5s of 10/2024 at 3.64%, 5s of 2028 at 3.46%, 5s of 2033 at 3.57%, 5s of 2038 at 4.12% and 4.5s of 2043 at 4.65%, callable 10/1/2033.

Compelling TEY yields heading into Q4
“Yield momentum late in the month and concluding Q3 is presenting inquiry with higher rates options but still in a quandary just where to position along the curve,” said Kim Olsan, senior vice president of municipal bond trading at FHN Financial.

Several considerations are in play with Q4 about to start, she said.

“Elevated money-market rates at 4.00%+, intermediate yields above 3.50% and long-term levels well above 4% offer adjusted alternatives well higher from a month ago,” she said.

Despite a continuing inversion between 2024 and 2025, she said “absolute rates compare favorably to recent average annual returns of equity indices.”

In the last five years, the S&P 500 index annual is 7.49%, while “AAA-rated munis yielding 3.75% offer a TEY of 6.25% (top bracket individual) and longer high grades trading at 4.50% throw off a 7.50% TEY — and with much less beta,” she said.

If 2023 follows the market’s historical past, Olsan said “October’s trade may continue to be soft but into December and year-end rates may be positioned to perform,” she said.

The average annual combined market return for November and December is 0.51% over the last decade, she noted.

“Secondary flows suggest slightly more active customer buying out the curve,” she said.

In the latest week, Olsan said “54% of all trades were dealer-to-customer sells from 2030 and longer,” while “maturities between 2024 and 2029 recorded 52% customer buys (fixed coupons),” she said.

Those ratios “reflect a more balanced shift from the prior month when 61% of customer buys were in one-year maturities and 59% of trades were customer buys past 12 years on the curve,” according to Olsan.

Primary market results are “a reflection of constrained distribution,” she said.

Texas water 5s due 2044 were “finalized at 4.51%, or +48/AAA BVAL and +25/AAA Utility BVAL spot level,” she said.

Meanwhile, New York City’s water issue “offered a 20-year maturity to yield 4.48%, a 7 basis point discount to the AA+ Utility BVAL spot levels, despite strong in-state demand,” she said.

“The slope in the 20s10s BVAL curve is 66 basis points and while flatter from the 80 basis point slope range earlier in the year, higher yields appear to be resonating with certain inquiry,” Olsan said.

Secondary market
Maryland 5s of 2024 at 3.82% versus 3.56%-3.52% on 9/22. DC 5s of 2025 at 3.81%. NYC 5s of 2025 at 3.84%.

NYC TFA 5s of 2028 at 3.56% versus 3.33% on 9/22 and 3.13% on 9/14. Oregon 5s of 2029 at 3.56% versus 3.20% on 9/15. California 5s of 2030 at 3.47%.

Virginia College Building Authority 5s of 2032 at 3.58% versus 3.17% on 9/18 and 3.10% on 9/11. NY Dorm PIT 5s of 2033 at 3.74%-3.73% versus 3.71% Wednesday and 3.53% on 9/22. NYC TFA 5s of 2033 at 3.80%.

Massachusetts 5s of 2048 at 4.52% versus 4.53%-4.23% Wednesday and 4.54% Tuesday. Battery Park City Authority 5s of 2053 at 4.55%-4.56%.

AAA scales
Refinitiv MMD’s scale was cut 10 to 12 basis points: The one-year was at 3.72% (+10) and 3.68% (+10) in two years. The five-year was at 3.43% (+12), the 10-year at 3.47% (+12) and the 30-year at 4.36% (+10) at 3 p.m.

The ICE AAA yield curve was cut nine to 10 basis points: 3.72% (+9) in 2024 and 3.65% (+9) in 2025. The five-year was at 3.37% (+10), the 10-year was at 3.39% (+10) and the 30-year was at 4.35% (+9) at 4 p.m.

The S&P Global Market Intelligence municipal curve was cut up to four basis points: The one-year was at 3.73% (+10) in 2024 and 3.68% (+10) in 2025. The five-year was at 3.45% (+12), the 10-year was at 3.47% (+12) and the 30-year yield was at 4.36% (+10), according to a 3 p.m. read.

Bloomberg BVAL was cut nine to 11 basis points: 3.73% (+9) in 2024 and 3.66% (+10) in 2025. The five-year at 3.39% (+11), the 10-year at 3.47% (+11) and the 30-year at 4.41% (+10) at 4 p.m.

Treasuries were firmer.

The two-year UST was yielding 5.063% (-7), the three-year was at 4.823% (-8), the five-year at 4.628% (-6), the 10-year at 4.578% (-4), the 20-year at 4.904% (-2) and the 30-year Treasury was yielding 4.707% (-2).

Mutual fund details
Refinitiv Lipper reported $1.24 billion of outflows from municipal bond mutual funds in the week ending Wednesday $27.444 million of outflows the week prior.

Exchange-traded muni funds reported inflows of $24.654 million following $525.396 million of inflows in the previous week. Ex-ETFs muni funds saw outflows of $1.265 billion versus $552.840 million of outflows in the prior week.

Long-term muni bond funds had $459.064 million of outflows after $336.748 million of inflows in the previous week. Intermediate-term funds had $262.006 million of outflows versus $75.353 million of outflows in the prior week.

National funds had outflows of $1.109 billion versus $58.457 million of outflows the previous week while high-yield muni funds reported outflows of $365.224 million versus inflows of $85.488 million the week prior.

Primary on Wednesday
BofA Securities priced for New York State (Aa1/AA+/AA+/) $571.010 million of GOs. The first tranche, $215.415 million of tax-exempts, Series 2023A, saw 5s of 3/2025 at 3.62%, 5s of 2028 at 3.36%, 5s of 2033 at 3.45%, 5s of 2038 at 4.00% and 5s of 2041 at 4.19%, callable 3/15/2033.

The second tranche, $241.380 million of tax-exempts, Series 2023B, saw 5s of 3/2025 at 3.62%, 5s of 2028 at 3.36%, 5s of 2033 at 3.45%, 5s of 2038 at 4.00% and 5s of 2041 at 4.19%, callable 3/15/2033.

The third tranche, $104.055 million of tax-exempt refunding bonds, Series 2023C, saw 5s of 3/2024 at 3.60%, 5s of 2027 at 3.40%, 5s of 2033 at 3.45% and 5s of 2038 at 3.88%, callable 3/15/2033.

The fourth tranche, $10.160 million of taxables, Series 2023D, saw 5.5s of 9/2024 price at par, noncall.

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