Bonds

Munis on a tear as yields fall further

Municipal yields dropped up to another seven basis points led by strong secondary trading Tuesday while an $875 million competitive general obligation deal from Illinois took focus in the primary. U.S. Treasuries made gains and equities ended mixed.

Municipal triple-A curves saw yields fall four to seven basis points, depending on the curve while USTs saw the biggest gains 10 years and in.

The two-year muni-to-Treasury ratio Tuesday was at 63%, the three-year at 64%, the five-year at 64%, the 10-year at 65% and the 30-year at 86%, according to Refinitiv Municipal Market Data’s 3 p.m., ET, read. ICE Data Services had the two-year at 62%, the three-year at 62%, the five-year at 63%, the 10-year at 66% and the 30-year at 86% at 4 p.m.

While the muni market faces some near-term headwinds, such as rich relative yields, near-term returns “are likely to be favorable for munis,” said Cooper Howard, a fixed-income strategist at Charles Schwab.

Howard expects several favorable attributes will benefit the market heading into year-end, he said.

For one, there will be inflows into muni mutual funds “due to favorable returns recently and high absolute yields,” Howard said. LSEG Lipper reports investors added $292.5 million to muni mutual funds for the week ending Wednesday. That was the first week of inflows after 11 straight weeks of outflows.

While fund flows will still be negative for the year, Jennifer Johnston, director of municipal bond research at Franklin Templeton, said there is hope that fund flows will pick up “as people recognize this is an asset class that’s worth being in, whether it’s from the fundamental story, whether it’s the ability to lock in these rates, or the tax advantage can help anybody, regardless of what tax bracket you’re in.”

It’s a “great time” for individual investors to get back in the market and lock in these rates, Johnston said, adding that if more retail comes in, there will be an improvement in fund flows going into 2024.

Howard added that the supply-demand dynamic continues to be favorable and he expects rates “to move lower from here which will help support total returns.”

The Bond Buyer 30-day visible supply sits at $12.6 billion while December redemptions are estimated to be just over $30 billion, per CreditSights data.

It’s possible bond volume could improve next year if rates continue to come down, Johnston said.

In the remaining weeks of this year, munis are expected to continue to outperform USTs, said Jeff Lipton,managing director of credit research at Oppenheimer.

He said the muni market is poised to enter 2024 from a relative position of strength.

“Credit quality remains strong across the broad array of sectors despite some noted areas of concern, absolute yields and attractive and competitive cashflows provide a compelling argument to put sidelined cash to work,” he said. “Improved relative value opportunities — although still distanced from fair value and historical norms — support future investment performance, and market technicals should drive outperformance.”

Key fixed income cohorts month-to-date “are earning positive returns, largely tied to ebbing inflationary pressure and more attendant yield stabilization as the Fed seemingly concludes its tightening cycle, and such factors have now moved [year-to-date] performance into the green column,” he said.

Munis are “generally being well-placed in the primary and well-bid in the secondary and we expect this dynamic to hold steady through year-end, particularly as new-issue supply remains seasonally lower,” Lipton said.

The attractive cashflows have created “a strong ‘carry’ component to performance providing an offset to the lack of price appreciation that has backdropped most of this year as well as defensive attributes ahead of an economic slowdown or perhaps even recession,” he said.

Lipton noted the “carry” attributes will likely extend into 2024, although he expects “less in the way of price erosion and more opportunities to experience meaningful price advancement.”

Munis “should be in a good position to outperform other fixed income options in 2024, yet such outperformance would likely produce somewhat richer ratios,” he said.

In the competitive market Tuesday, Illinois (A3/A-/A-/) sold $875 million of GOs in three series.

The state sold $175 million of taxable GOs, Series of December 2023A, to J.P. Morgan, with 5.8s of 12/2024 at 5.84% and 5.25s of 2028 at 5.31%, noncall.

The state also sold $350 million of tax-exempt GOs, Series of December 2023B, to BofA Securities, with 5s of 12/2029 at 3.50%, 5s of 2033 at 3.60% and 5s of 2038 at 4.14%, callable 12/1/2033.

Additionally, Illinois sold $350 million of tax-exempt GOs, Series of December 2023C, to BofA Securities, with 5s of 12/2039 at 4.22%, 5s of 2043 at 4.42% and 5s of 2048 at 4.70%, callable 12/1/2033.

In the negotiated market, Goldman Sachs priced for the Massachusetts Development Finance Agency (A3/A//) $400 million of Beth Israel Lahey Health issue revenue bonds, Series M (2023). The first tranche, $200 million of Series M-1, saw 5s of 7/2032 at 3.59%, noncall.

The second tranche, $200 million of Series M-2, saw 5s of 7/2034 at 3.66%, callable 1/1/2034.

BofA Securities priced for the Palm Beach County School Board, Florida (Aa3//AA-/), $142.060 million of certificates of participation, Series 2023A, with 5s of 8/2032 at 3.14%, 5s of 2033 at 3.18%, 5s of 2038 at 3.69% and 5s of 2040 at 3.87%, callable 8/1/2033.

Secondary trading
Utah 5s of 2024 at 3.18% versus 3.24% Monday. Wisconsin Environmental Improvement Fund 5s of 2025 at 3.03%-3.00%. NYC 5s of 2026 at 3.04%.

Connecticut 5s of 2028 at 2.87%. California 5s of 2029 at 2.83%-2.82% versus 2.94%-2.93% on 11/22. Triborough Bridge and Tunnel Authority 5s of 2030 at 2.84%-2.81%.

California 5s of 2033 at 2.88%-2.85% versus 2.93%-2.91% Monday and 3.01% on 11/20. DC 5s of 2034 at 2.95%-2.91%. Maryland 5s of 2036 at 3.10%-3.08% versus 3.26%-3.23% on 11/17 and 3.31% on 11/16.

LA DWP 5s of 2049 at 3.85%. NYC 5s of 2051 at 4.21%-4.20% versus 4.32%-4.34% on 11/17 and 4.42% on 11/16. Massachusetts 5s of 2053 at 4.23%-4.18% versus 4.25% Monday and 4.27%-4.25% 11/22.

AAA scales
Refinitiv MMD’s scale was bumped five to seven basis points: The one-year was at 3.14% (-5) and 2.98% (-7) in two years. The five-year was at 2.76% (-7), the 10-year at 2.83% (-7) and the 30-year at 3.91% (-7) at 3 p.m.

The ICE AAA yield curve was bumped four to five basis points: 3.15% (-4) in 2024 and 3.02% (-4) in 2025. The five-year was at 2.78% (-5), the 10-year was at 2.88% (-5) and the 30-year was at 3.89% (-4) at 4 p.m.

The S&P Global Market Intelligence municipal curve was bumped six basis points: The one-year was at 3.08% (-6) in 2024 and 2.95% (-6) in 2025. The five-year was at 2.81% (-6), the 10-year was at 2.88% (-6) and the 30-year yield was at 3.89% (-6), according to a 3 p.m. read.

Bloomberg BVAL was bumped five to seven basis points: 3.06% (-6) in 2024 and 2.99% (-6) in 2025. The five-year at 2.75% (-7), the 10-year at 2.85% (-5) and the 30-year at 3.88% (-5) at 4 p.m.

Treasuries were firmer.

The two-year UST was yielding 4.735% (-16), the three-year was at 4.483% (-12), the five-year at 4.283% (-13), the 10-year at 4.333% (-6), the 20-year at 4.697% (-3) and the 30-year Treasury was yielding 4.516% (-1) near the close.

Primary to come:
The New York Transportation Development Corp. (Baa3//BBB-/BBB-/) is set to price Wednesday $1.5 billion of green AMT John F. Kennedy International Airport New Terminal One Project special facilities revenue bonds, Series 2023, serials 2038-2044, terms 2049, 2054, 2060. Citigroup Global Markets.

The Los Angeles Community College District (Aaa/AA+//) is set to price Thursday $575 million of tax-exempt GOs, consisting of $174 million of Series M, serials 2024-2038, and $400 million of Series D, serials 2024-2030. BofA Securities.

Miami-Dade County, Florida (A3//A/), is set to price Thursday $455.110 million of taxable seaport revenue bonds, Series 2023, serials 2026-2038, term 2055. Stifel, Nicolaus & Co.

The Ohio Water Development Authority is set to price Wednesday $300 million of green Water Pollution Control Loan Fund revenue bonds, Series 2023C, serials 2027-2033. Citigroup Global Markets.

The Economic Development Authority of the Isle Of Wight County, Virginia (A1/AA//), is set to price Wednesday $273.075 million of Riverside Health System health system revenue bonds, Series 2023, serials 2026-2033, terms 2043, 2048, 2053, insured by Assured Guaranty Municipal Corp. KeyBanc Capital Markets.

The Utah Housing Corp. (Aa2///) is set to price Wednesday $232.380 million of single-family mortgage bonds, consisting of $108.145 million of non-AMT refunding bonds, 2024 Series A, and $124.235 million of taxables, 2024 Series B. Jefferies.

The Idaho Housing and Finance Association (Aa1///) is set to price Wednesday $205.115 million of taxable single-family mortgage bonds, 2023 Series E, serials 2024-2033, terms 2039, 2044, 2049, 2054, 2054. Barclays.

Manatee County, Florida (Aaa//AA+/), is set to price Thursday $175 million of revenue improvement bonds, serials 2026-2043, terms 2048, 2053. BofA Securities.

The Ohio Housing Finance Agency (Aaa///) is set to price Thursday $130 million of taxable social Mortgage-Backed Securities Program residential mortgage revenue bonds, 2023 Series C. J.P. Morgan Securities.

King County, Washington (Aaa/AAA/AAA/), is set to price Wednesday $126.410 million of taxable social limited tax GOs, Series 2023C. Morgan Stanley.

The Fort Bend County Public Facilities Corp., Texas (Aa2//AA/), is set to price Thursday $107.230 million of lease revenue bonds, Series 2023, serials 2025-2053. Raymond James & Associates.

EP Tuscany Zaragosa PFC, Texas (/A+//), is set to price Wednesday $101.005 million of HOME Essential Function Housing Program Project residential development revenue bonds, Series 2023, serial 2033. KeyBanc Capital Markets.

The State of New York Mortgage Agency (Aa1///) is set to price $100 million of social homeowner mortgage revenue bonds, consisting of $62.610 million of non-AMT bonds, Series 255 and $37.390 million of taxables, Series 256. Jefferies.

Competitive
Alexandria, Virginia, (Aaa/AAA//) is set to sell $253.545 million of GO capital improvement bonds at 10:30 a.m. Wednesday.

Westchester County, New York, is set to sell $125.469 million of GOs, 2023 Series A, at 11 a.m. Thursday; $27.468 million of GOs, 2023 Series B1, at 11:15 a.m. Thursday; $34.035 million of taxable GOs, 2023 Series C, at 11:30 a.m. Thursday; and $15.625 million of taxable GOs, 2023 Series D, at 11:45 a.m. Thursday.

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