Municipals were weaker to start the week, while U.S. Treasuries sold off 10 years and in, and equities ended down ahead of a rebounding primary calendar.
Triple-A benchmarks were cut three to 12 basis points, while UST yields rose 10 to 18 basis points 10 years and in.
The three-year muni-UST ratio was at 53%, the five-year at 55%, the 10-year at 61% and the 30-year at 87%, according to Refinitiv MMD’s 3 p.m. ET read. ICE Data Services had the three at 55%, the five at 57%, the 10 at 63% and the 30 at 89% at 4 p.m.
Secondary trading for last week totaled about $42.65 billion “with the majority of trading volume being on Thursday, the day after the Fed’s 25-basis-point rate hike,” said Jason Wong, vice president of municipals at AmeriVet Securities.
Clients’ bids-wanted continue to be at elevated levels and, per Bloomberg, clients put roughly $5.3 billion of bonds up for the bid. Bids-wanteds have been up roughly 131.45% since the start of 2020, he said.
Muni yields fell once more last week with 10-year notes falling 1.7 basis points to 2.20%.
“We did see some bump in the curve as a result of the FOMC hiking rates by 25 basis points on Wednesday,” Wong said. “However, with an unexpected high employment number, fixed income yields rose.”
Yields have fallen “an average of 37 basis points so far this year, a far cry from what we saw last year with yields rising to levels we have not seen in decades,” he noted.
With yields falling again last week, muni-UST ratios declined.
Ratios for 10-year notes are at 63% Monday compared to 69% a month earlier. The muni curve flattened slightly last week by 2.9 basis points to 108 basis points.
After three consecutive weeks of inflows, investors pulled about $362 million from municipal bonds funds last week, according to Refinitiv Lipper. This follows the prior week’s inflow of $1.3 billion.
“This is a unique situation as munis are a bit firmer and demand for tax-exempts are still present,” Wong said.
Munis continue to have a “firmer tone going into the first few days of February,” he said, “based on investors acknowledging that the Feds hawkish tone is nearing its end as it appears that the Fed is still firmly committed to 25 basis points moves.”
Munis ended January “up 2.87% compared to a loss of 2.74% in January of 2022 and have continued that rally into February with munis up 0.12% so far this month totaling gains of 2.99% for the year, according to Wong.
With January being one of the lowest new-issue supplies on record, he expects to see the rally “spill over into February as the 30-day supply is only $4.7 billion and 30-day redemptions are at $18 billion.”
Yields will fall even further as well and muni-USTs ratios to become even richer as USTs have sold off after the unexpectedly strong jobs number, he said.
“Investors spent much of 2022 watching their municipal portfolios suffer losses as AAA municipal yields rose multiple percentage points,” said Goldman Sachs strategists Scott Diamond, Sylvia Yeh and David Alter.
“Unsurprisingly, investors reacted by selling municipals at a historic pace,” they said. “The silver lining to these negative returns are the elevated tax-free yields currently available to investors.”
Three themes drove municipal performance last year: higher global yields, record outflows and lower primary market supply, they said.
In 2023, they said there will be higher and steadier absolute yields. “Yields at multi-decade highs create an opportunity to earn high levels of tax-free income through the purchase of highly rated credits,” the Goldman Sachs strategists said.
There will also be continued strength in high-grade municipal credits. Most “investment-grade issuers are well-positioned should the U.S. economy enter a recession in 2023,” they said.
Additionally, opportunities in lower-rated credits will emerge.
“Spreads widened in 2022 as the global economic picture darkened and mutual fund outflows created immense selling pressure,” they said. “As the dust settles, we see a larger opportunity set in lower-rated credits.”
Secondary trading
California 5s of 2024 at 2.41%. North Carolina 5s of 2024 at 2.43%. Maryland 5s of 2024 at 2.46% versus 2.39% Friday. Ohio 5s of 2024 at 2.50% versus 2.45% original on Friday.
LA DWP 5s of 2027 at 2.03%. California 5s of 2028 at 2.10% versus 2.03% on 1/25 and 2.04% on 1/24. Georgia 5s of 2029 at 2.16%-2.07% versus 2.10% Wednesday.
NY Dorm PIT 5s of 2034 at 2.52%-2.53% versus 2.50% on 1/27 and 2.43%-2.42% on 1/23. Connecticut 5s of 2034 at 2.67%-2.63%. Anne Arundel County, Maryland, 5s of 2035 at 2.52%.
NYC TFA 5s of 2051 at 3.78%. Massachusetts 5s of 2052 at 3.60% versus 3.60%-3.59% on 1/31 and 3.53% on 1/25.
AAA scales
Refinitiv MMD’s scale was cut three to five basis points. The one-year was at 2.47% (+5) and 2.24% (+5) in two years. The five-year was at 2.09% (+5), the 10-year at 2.23% (+5) and the 30-year at 3.20% (+3) at 3 p.m.
The ICE AAA yield curve was cut four to 12 basis points: at 2.46% (+12) in 2024 and 2.32% (+8) in 2025. The five-year was at 2.10% (+6), the 10-year was at 2.19% (+5) and the 30-year yield was at 3.24% (+4) at 4 p.m.
The IHS Markit municipal curve was cut up to five basis points: 2.49% (+5) in 2024 and 2.21% (+3) in 2025. The five-year was at 2.09% (unch), the 10-year was at 2.20% (+2) and the 30-year yield was at 3.18% (+2) at a 4 p.m. read.
Bloomberg BVAL was cut three to five basis points: 2.48% (+5) in 2024 and 2.21% (+4) in 2025. The five-year at 2.11% (+3), the 10-year at 2.24% (+4) and the 30-year at 3.24% (+3).
Treasuries sold off 10 years and in.
The two-year UST was yielding 4.479% (+17), the three-year was at 4.148% (+18), the five-year at 3.827% (+16), the seven-year at 3.742% (+14), the 10-year at 3.637% (+10), the 20-year at 3.819% (+5) and the 30-year Treasury was yielding 3.667% (+4) at 4 p.m.
Primary to come:
The New York City Transitional Finance Authority (Aaa/AAA/AAA/) is set to price Wednesday $1.097 billion of tax-exempt future tax-secured subordinate bonds, Fiscal 2023 Series E, Subseries E-1, serials 2024-2041. BofA Securities.
The Lamar Consolidated Independent School District, Texas, (Aa3/AA//) is set to price Wednesday $648.615 of unlimited tax schoolhouse bonds, Series 2023, serials 2024-2058. Raymond James & Associates.
The Massachusetts Development Finance Agency (Baa2/BBB//) is set to price Thursday $229.195 million of Boston Medical Center Issue sustainability refunding revenue bonds, Series G, serials 2023-2029, terms 2048 and 2052. RBC Capital Markets.
The Magnolia Independent School District, Texas, (Aa2///) is set to price Tuesday $228 million of unlimited tax school building bonds, Series 2023. FHN Financial Capital Markets.
The Troy School District, Michigan, (/AA//) is set to price Tuesday $174.900 million of 2023 school building and site bonds, serials 2024-2052, insured by Michigan School Bond Qualification and Loan Program. Stifel, Nicolaus & Co.
The Little Elm Independent School District, Texas, (/AA-//) is set to price Wednesday $173.905 million of unlimited tax school building bonds, Series 2023, serials 2026-2043, terms 2048 and 2053. BOK Financial Securities.
The Shawnee Mission Unified School District #512, Kansas, (Aaa///) is set to price Wednesday $137.575 million of GOs, consisting of $132.110 million of Series 23A, serials 2024-2043, and $5.464 million of Series 23B, serials 2024 and 2026. Stifel, Nicolaus & Co.
The Massachusetts Housing Finance Agency (Aa2/AA+//) is set to price Wednesday $132.960 million of non-AMT sustainability housing bonds, consisting of $46.870 million of Series A-1, serials 2025-2035, terms 2038, 2044, 2048, 2053, 2058 and 2065, and $86.090 million of Series A-3, serials 2024-2027. UBS Financial Services.
The Florida Housing Finance Corp. (Aaa///) is set to price Wednesday $130 million of non-AMT homeowner mortgage revenue bonds, 2023 Series 1, serials 2025-2035, terms 2038, 2043, 2048, 2053 and 2054. RBC Capital Markets.
The Health Care Authority for Baptist Health, Alabama, (A3/BBB+//) is set to price Thursday $119.195 million of refunding bonds, Series 2023, serials 2023-2037. Morgan Stanley & Co.
Competitive:
The New York City Transitional Finance Authority is set to sell $119.580 million of taxable future tax-secured subordinate bonds, Fiscal 2023 Series E, Subseries E-2, at 11:15 a.m. eastern Wednesday.