Bonds

A weaker session, but munis are outperforming on strong demand so far in Q2

Municipals were slightly weaker in secondary trading Wednesday as the Los Angeles Unified School District’s nearly $3 billion pricing for institutions took focus. U.S. Treasury yields rose and equities ended mixed.

Munis started the second quarter in “excellent shape,” as credit spreads are in fair value range, and muni-UST ratios start to cheapen, said GW&K Investment Management strategists in a report.

Additionally, the “muni AAA HG curve hit new year-to-date highs last week, and the muni HG curve now shows outperformance across the curve this month relative to the broader fixed-income market for the month,” J.P. Morgan strategists said.

Absolute yields remain attractive “in the context of the trading range over the past three years and our longer-term projections for lower rates this year,” they said.

The two-year muni-to-Treasury ratio Wednesday was at 64%, the three-year at 63%, the five-year at 60%, the 10-year at 59% the 30-year at 82%, according to Refinitiv Municipal Market Data’s 3 p.m. EST read. ICE Data Services had the two-year at 65%, the three-year at 63%, the five-year at 61%, the 10-year at 61% and the 30-year at 82% at 3:30 p.m.

Given recent richening, the two-year investment-grade muni ratios versus taxable fixed-income remain at “transactional levels,” J.P. Morgan strategists said.

Ratios look “progressively richer” toward the five- to 10-year part of the curve, with the 10-year spot still “far more attractive” in taxables versus tax-exempts, they said.

The longest portion of the tax-exempt market sees the most value, with ratios of 30-year AA tax-exempts “firmly in the middle of the trailing three-year range,” according to J.P. Morgan strategists.

“Current valuations and expectations for technicals suggest underperformance in the less favorable technical environment in April,” they said.

However, with April’s tax deadline and selling pressure that comes having passed, the technical backdrop “should once again act as a tailwind,” GW&K Investment Management strategists said.

The “impressive” investor appetite for tax-exempts has been “holding steady all quarter despite expensive valuations, supply surges and periods of low reinvestment demand,” they said.

As election campaigns “kick into gear,” retail investors will be consistently reminded that due to marginal tax rates potentially climbing they should “lock in” muni yields, according to GW&K Investment Management strategists.

“That inclination to favor municipal bonds should add a dose of stability, helping to offset any potential volatility from a data-dependent Fed,” the strategists said.

While munis would not be spared the “broader effects of economic or inflationary upside surprises,” any further selloff can be viewed as a buying opportunity and continue to leg in at more attractive levels, GW&K Investment Management said.

The Investment Company Institute reported outflows from municipal bond mutual funds for the week ending April 17, with investors pulling $328 million to funds following $18 million of inflows the week prior. The outflows were much lower than the $1.47 billion that LSEG reported last week.

ICI reported exchange-traded funds saw outflows of $886 million following $944 million of inflows the week prior.

In the primary market Wednesday, BofA Securities priced for institutions Los Angeles Unified School District’s (Aa2//AAA/AAA/) $2.984 billion of GO refunding bonds, Series A, with small bumps from Tuesday’s retail pricing: 5s of 7/2024 at 3.50% (unch), 5s of 2029 at 2.99% (unch) and 5s of 2034 at 3.01% (-5), noncall.

Jefferies priced for the New Jersey Health Care Facilities Financing Authority (A1/AA-//) $370.735 million of RWJ Barnabas Health Obligated Group revenue and refunding bonds, with 5s of 7/2025 at 3.41%, 5s of 2029 at 3.06%, 5s of 2034 at 3.10%, 5s of 2039 at 3.54%, 5.25s of 2044 at 3.97%, 4.25s of 2054 at 4.40% and 5.25s of 2054 at 4.28%, callable 7/1/2034.

BofA Securities priced for the Maine Municipal Bond Bank (Aa2/AA+//) $135.845 million of series A bonds, with 5s of 11/2025 at 3.32%, 5s of 2029 at 2.96%, 5s of 2034 at 3.03%, 5s of 2039 at 3.41%, 5s of 2044 at 3.82%, 4s of 2049 at 4.35% and 5s of 2054 at 4.21%, callable 11/1/2034.

In the competitive market, Denton County, Texas, sold $106.475 million of permanent improvement bonds, Series 2024, to Jefferies, with 5s of 7/2025 at 3.50%, 5s of 2029 at 3.00%, 5s of 2034 at 3.01%, 5s of 2039 at 3.47%, 4s of 2044 at 4.20% and 4s of 2049 at 4.35%, callable 7/15/2033.

AAA scales
Refinitiv MMD’s scale was cut two basis points: The one-year was at 3.40% (+2) and 3.17% (+2) in two years. The five-year was at 2.80% (+2), the 10-year at 2.76% (+2) and the 30-year at 3.92% (+2) at 3 p.m.

The ICE AAA yield curve was cut one to two basis points: 3.41% (+1) in 2025 and 3.20% (+1) in 2026. The five-year was at 2.82% (+1), the 10-year was at 2.80% (+1) and the 30-year was at 3.88% (+1) at 3:30 p.m.

The S&P Global Market Intelligence municipal curve was cut two basis points: The one-year was at 3.43% (+2) in 2025 and 3.20% (+2) in 2026. The five-year was at 2.81% (+2), the 10-year was at 2.81% (+2) and the 30-year yield was at 3.91% (+2), according to a 3 p.m. read.

Bloomberg BVAL was cut one to two basis points: 3.42% (+1) in 2025 and 3.21% (+2) in 2026. The five-year at 2.74% (+2), the 10-year at 2.74% (+2) and the 30-year at 3.93% (+2) at 3:30 p.m.

Treasuries were weaker.

The two-year UST was yielding 4.928% (flat), the three-year was at 4.783% (+2), the five-year at 4.657% (+3), the 10-year at 4.643% (+4), the 20-year at 4.892% (+4) and the 30-year at 4.776% (+4) at 3:30 p.m.

Negotiated calendar:
The Florida Development Finance Corp. is set to price $2.2 billion of Brightline Florida Passenger Rail Project tax-exempt AMT revenue refunding bonds for Brightline Trains Florida /BBB-/BBB-/BBB). Morgan Stanley.

Valparaiso, Indiana, is set to price Thursday $173.565 million of non-rated Pratt Paper, LLC Project exempt facilities refunding revenue bonds, serials 2034, 2044, 2054. BofA Securities.

The Okaloosa Gas District, Florida, (Aa3///) is set to price Thursday $107.585 million of taxable and tax-exempt gas system revenue bonds. BofA Securities.

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