The municipal market was lightly traded and little changed Friday ahead of the Thanksgiving-shortened week, with strong market technicals leading to more muni outperformance to U.S. Treasuries and corporates.
Triple-A yields barely budged for the ninth consecutive trading session while USTs saw small losses on the short end and small gains 10 years and out.
“November’s technical reprieve brought significant outperformance across the curve in municipals this month,” noted Peter DeGroot, managing director and head of J.P. Morgan’s municipal research and strategy team.
Supply has “declined materially, allowing dealers to take a breather, with their inventories dropping significantly, while retail investors do not seem to be spooked by rate volatility, lower taxes and possible threats to the tax-exempts, and continued putting money into tax-exempts at a brisk pace,” said Mikhail Foux, managing director and head municipal research and strategy at Barclays.
Tax-exempt ratios are now “more neutral relative to corporates across the curve,” DeGroot said. “On a month-to-date basis, HG municipals have considerably outperformed Treasuries by 26, 17, 24, and 25 basis points in 2-, 5-, 10- and 30-years, respectively.”
The two-year municipal to UST ratio Friday was at 60%, the five-year at 62%, the 10-year at 66% and 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 61%, the five-year at 62%, the 10-year at 66% and the 30-year at 81% at 3 p.m.
“Although the market outlook seems relatively benign in the near term, we do not think investors have been overly excited by chasing performance, as ratios are rather unattractive,” Foux said. “As a result, trading activity has declined materially, and market participants have been focusing more on the primary market.”
The new-issue calendar Thanksgiving week will come in at a little over $1.4 billion, and investors will be left to parse through the month’s new-issue inventories. Bond Buyer 30-day visible supply sits at $6.91 billion.
Net negative supply in December falls to $3 billion from $17 billion this month, leading to a still supportive technical backdrop and likely muni outperformance in December, “but it will be difficult to repeat November’s relative gains,” DeGroot said.
Municipals are returning 0.85% in November and 1.66% year to date, per Bloomberg’s Municipal Index, while high-yield performance endures with November returns at +1.02% leading to 6.92% returns in 2024. Taxable municipals have followed USTs and corporates with losses this month at -0.27%, moving year-to-date returns to positive 2.14%.
“Historically, municipal performance in December has been strong, especially for high-grade munis, which have not lost money in any December in the past decade, with an average monthly return of 0.9%; and, in our view, this year will be no different,” Foux said.
High-yield performance has been “more spotty (especially in 2021, when the HY index lost nearly 2%), but the average return in this month over the past decade is still positive at 0.4%,” Foux noted.
Looking ahead to macroeconomic data, Foux said third-quarter core PCE “will be closely watched and will provide additional input into the next [Federal Open Market Committee] meeting; at this point, a 25bp rate cut is priced in by fed fund futures with just a 55% probability, making the outcome relatively uncertain.”
“In general, the U.S. economy seems to have done relatively well in Q3, with the economic surprise index trending higher since early September and now in positive territory,” Foux said. ”As a result, our economists forecast a solid Q3 2024 GDP print of 2.8%, indicating that hard landing is unlikely any time soon.”
For municipals, “we would not be surprised if the market gets richer in December (especially in the second half of the month), but we remain cautious looking ahead to 2025, as the trading environment will likely remain challenging, and valuations far from attractive,” Foux said.
“As we look to December, while tax-exempts no longer flash value versus taxable fixed-income, we are reminded of the market’s propensity to outperform in December and January, and particularly after presidential election years,” DeGroot said.
“Absolute yields continue to look attractive in the context of the trading range over the past three years and our longer-term projections for lower rates next year,” DeGroot said.
And long-dated municipal market rates are still attractive from a historical perspective, and the tax-exempt net-supply backdrop is favorable, “we like the performance profile over the balance of the year and into 1Q25, assuming some stability in the rates market,” DeGroot added.
Primary to come:
The Katy Independent School District, Texas, (Aaa/AAA//) is on the day-to-day calendar with $220.28 million of unlimited tax refunding bonds, PSF guarantee. BOK Financial Securities, Inc.
The Aerotropolis Regional Transportation Authority, Colorado, (nonrated) is set to price Tuesday $205.25 million of special revenue bonds, terms 2044, 2054. Jefferies LLC
The Westfield Washington Multi-School Building Corp., Indiana, (/AA+//) is set to price Tuesday $188.61 million of ad valorem property tax first mortgage bonds, Indiana State Aid Intercept Program, serials 2027-2044. Stifel, Nicolaus & Company, Inc.
The Westfield Washington Multi-School Building Corp., Indiana, (/AA+//) is also set to price Tuesday $115.205 million ad valorem property tax first mortgage bonds, Series 2024 B, Indiana State Aid Intercept Program, serials 2027-2044. Stifel, Nicolaus & Company, Inc.
The Illinois Finance Authority is set to price $150 million of CenterPoint Joliet Terminal Railroad Project tax-exempt surface freight transfer facilities revenue bonds, Series 2020, remarketing, Truist Securities Inc.
The Illinois Finance Authority is also set to price $100 million of CenterPoint Joliet Terminal Railroad Project tax-exempt surface freight transfer facilities revenue bonds, Series 2016, remarketing. Truist Securities Inc.
The Ohio Water Development Authority (/AAA//) is set to price $102.02 million of water development refunding revenue bonds, fresh water revolving fund Series 2024B, serials 2025-2042. Jefferies LLC.
The State of New York Mortgage Agency (Aa1///) is set to price Tuesday (retail order period Monday) $88.08 million of homeowner mortgage revenue social bonds, non-AMT, terms 2039, 2044, 2049, 2054. Barclays Capital Inc.