Bonds

Munis mixed amid inflation-fueled volatility in UST, equities

Municipals were mixed Thursday as the last of largest new-issues priced in the primary led by the Port Authority of New York and New Jersey, while U.S. Treasuries caught a risk-on trade and equities rebounded near the close after larger losses earlier in the session in another volatile day.

Triple-A benchmark yields rose up to three basis points, while UST yields fell across the curve.

Municipal to UST ratios rose further as a result of the moves, pushing the 10-year above 100%. Ratios were at 92% in five years, 103% in 10 years and 108% in 30, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the five at 90%, the 10 at 101% and the 30 at 109% at a 4 p.m. read.

Investors pulled more from municipal bond mutual funds in the latest week, with Refinitiv Lipper reporting $2.446 billion of outflows, though that was down from $2.669 billion of outflows in the previous week.

Exchange-traded muni funds reported $1.600 billion of inflows after inflows of $618.167 million the previous week, while high-yield saw outflows to the tune of $824.578 million after $879.41 million of outflows the week prior.

In the primary Thursday, BofA Securities priced and repriced for the Port Authority of New York and New Jersey (Aa3/AA-/AA+/) $909.150 million of consolidated bonds. The first tranche, $346.355 million, 230th Series, saw 4s of 12/2022 at 1.95% (-5), 4s of 2027 at 3.04% (-2), 3s of 2032 at 3.84% (+5), 5s of 2037 at 3.68% (-5), 5s of 2042 at 3.88%, 5s of 2047 at 4.06% and 5.25s of 2052 at 4.06%, callable in 12/1/2032.

The second tranche, $512.795 million of AMT, 231st Series, saw 5s of 8/2022 at 2.06% (-4), 5s of 2027 at 3.26%, 5s of 2032 at 3.79% (-2), 5s of 2037 at 4.13% (+5), 5s of 2042 at 4.21%, 5s of 2047 at 4.29% (-10) and 5.25s of 2052 at 4.34%, callable in 8/1/2032.

The third tranche, $50 million of AMT, 232nd Series, saw 4.625s of 8/2052 at 4.73% (-1), callable in 8/1/2032.

BofA Securities priced for the Virginia College Building Authority (Aa1/AA+/AA+/) $579.605 million of 21st Century College and Equipment Programs education facilities revenue bonds, Series 2022A, with 5s of 2/2023 at 1.90%, 5s of 2027 at 2.69%, 5s of 2032 at 3.14%, 5s of 2037 at 3.54%, 4s of 2042 at 4.20% and 5s of 2042 at 3.76%, callable 2/1/2032.

BofA Securities priced for the San Francisco Unified School District (Aa3/AA//) $404.685 million of exempt and taxable general obligation bonds. The first tranche, $240.57 million of unlimited tax GOs, saw 5s of 6/2023 at 2.03%, 5s of 2027 at 2.70%, 5s of 2032 at 3.17%, 5s of 2037 at 3.48%, 5s of 2042 at 3.69%, callable 6/15/2030.

The second tranche, $43.68 million of taxable notes, mature in 6/2022 at 1.375% par.

The third, $120.435 million of exempts, saw 5s of 6/2023 at 2.03%, 5s of 2027 at 2.70%, 5s of 2032 at 3.17% and 5s of 2033 at 3.25%, callable 6/15/2030.

J.P. Morgan Securities priced for the Harris County Cultural Education Facilities Finance Corp., Texas, (A1/A+//) $189.255 million of Memorial Hermann Health System hospital revenue fixed rate bonds, Series 2022A, with 5s of 7/2028 at 3.31%, 5s of 2031 at 3.68%, 4.125s of 2052 at 4.69% and 5s of 2052 at 4.49%, callable in 7/1/2032.

Citigroup Global Markets priced for the Public Utilities Commission of the City and County of San Francisco, California, (Aa2/AA/) $137.315 million of wastewater refunding revenue bonds, Series 2022B, with 5s of 10/2024 at 2.45%, 5s of 2027 at 2.75%, 5s of 2032 at 3.24% and 5s of 2034 at 3.37%, callable in 10/1/2032.

The start of 2022 has been a “perfect storm” for the muni market, said Insight Investment strategists, Daniel Rabasco and Jeffrey Burger.

“The Federal Reserve’s ‘hawkish pivot,’ inflationary pressure and uncertainty driven by the Russian invasion of Ukraine contributed to uncertainty across all fixed-income assets,” they said.

The result, they said, “has been the heaviest net outflows since the onset of the pandemic in 2020,” and is “in stark contrast to a stream of almost continuous inflows over the year prior.”

They noted that “these types of sell-offs have been rare in muni history.” When they have happened, Insight Investment strategists said, “the market has consistently rebounded strongly, with inflows sharply rebounding.”

They expect a “potentially similar trajectory, particularly as technicals are set to reverse by the summer.”

From a supply perspective, “$39 billion of munis are scheduled to mature in June, followed by $35 billion in July and $36 billion in August,” they said, adding there should be $5 billion to $10 million of calls monthly.

From a valuation perspective, muni-UST ratios are increasingly attractive as they’re at their cheapest levels since March/April 2020, they noted.

Furthermore, Rabasco and Burger noted taxable muni yields currently offer a 35 basis point yield pickup over double-A-rated corporate bonds.

“Historically, during rising rate periods, retail investors have sought shelter in municipals to benefit from higher tax-exempt interest rates,” they said. “Further, supply tends to fall as municipalities prefer to avoid raising debt at higher rates.”

“We believe that the perfect storm of municipal bond underperformance has delivered an excellent opportunity for investors to consider entering the asset class, particularly before supply materially falls over the summer,” they said.

Secondary trading
Washington 5s of 2023 at 2.05%. Hawaii 5s of 2024 at 2.38%-2.42% versus 2.36%-2.34% Wednesday.

Wake County, North Carolina 5s of 2027 at 2.59%. Oregon 5s of 2028 at 2.71%. California 5s of 2028 at 2.92%. Maryland 5s of 2030 at 2.85%-2.83%.

Baltimore County 5s of 2031 at 2.95% versus 2.85% Thursday. Arlington, Virginia 5s of 2031 at 3.13%-3.12%.

Columbus, Ohio 5s of 2038 at 3.22%. Iowa Finance Authority green 5s of 2047 at 3.64%-3.63%.

AAA scales
Refinitiv MMD’s scale was cut three basis points at the 3 p.m. read on bonds 2028 and out: the one-year at 1.97% (unch) and 2.29% (unch) in two years. The five-year at 2.56% (unch), the 10-year at 2.94% (+3) and the 30-year at 3.27% (+3).

The ICE municipal yield curve was mixed: 2.01% (-1) in 2023 and 2.35% (flat) in 2024. The five-year at 2.56% (flat), the 10-year was at 2.86% (flat) and the 30-year yield was at 3.31% (+1) at a 4 p.m. read.

The IHS Markit municipal curve was mixed: 1.99% (unch) in 2023 and 2.29% (unch) in 2024. The five-year at 2.60% (unch), the 10-year was at 2.93% (+3) and the 30-year yield was at 3.27% (+3) at 4 p.m.

Bloomberg BVAL was mixed: 2.00% (-1) in 2023 and 2.28% (unch) in 2024. The five-year at 2.61% (unch), the 10-year at 2.87% (unch) and the 30-year at 3.19% (+1) at a 4 p.m. read.

Treasuries were better across the curve.

The two-year UST was yielding 2.574% (-7), the three-year was at 2.768% (-6), five-year at 2.834% (-7), the seven-year 2.886% (-6), the 10-year yielding 2.865% (-6), the 20-year at 3.251% (-2) and the 30-year Treasury was yielding 3.031% (-2) at the close.

Mutual funds see outflows
In the week ended May 11, weekly reporting tax-exempt mutual funds saw investors pull more money out with Refinitiv Lipper reporting $2.44 6 billion of outflows Thursday, following an outflow of $2.669 billion the previous week.

Exchange-traded muni funds reported inflows of $1.600 billion after inflows of $618.167 million in the previous week. Ex-ETFs, muni funds saw outflows of $4.046 billion after $3.287 billion of outflows in the prior week.

The four-week moving average narrowed to negative $2.885 billion from negative $3.300 from in the previous week.

Long-term muni bond funds had outflows of $1.522 billion in the last week after outflows of $1.721 billion in the previous week. Intermediate-term funds had outflows of $656.447 million after $442.469 million of outflows in the prior week.

National funds had outflows of $1.868 billion after $2.277 billion of outflows the previous week while high-yield muni funds reported $824.578 million of outflows after $879.413 million of outflows the week prior.

Primary on Wednesday:
J.P. Morgan Securities priced for the Louisiana Local Government Environmental Facilities and Community Development Authority (Aaa/AAA//) $3.194 billion of taxable Louisiana Utilities Restoration Corporation Project system restoration bonds, Series 2022A. All bonds priced at par: 3.615s of 2/2029, 4.145s of 2033, 4.275s of 2036 and 4.475s of 2039, noncall.

PPI suggests inflation remains
The April producer price index, much as the consumer price index a day earlier, suggested inflation will continue to haunt Americans.

“Despite the sharp moderation in April, the solid 11.0% increase from a year ago, suggests producer inflation will persist and will likely be passed along to consumers in the months ahead, thereby keeping consumer inflation elevated,” said Scott Anderson, chief economist at Bank of the West.

With food and energy costs still pushing prices higher, albeit less than in March, the core rate, which excludes those volatile factors, he said, “slowed to 8.8% year-on-year from 9.6% in March, a modest step in the right direction.”

Still, higher fuel and energy prices “are likely to exert further upward pressure on distribution and shipping costs while the effects of disruptions to production and supply chains related to Russia’s invasion of Ukraine and China’s lockdowns could further exacerbate price pressures,” said Mickey Levy, Berenberg Capital Markets’ chief economist for the U.S. Americas and Asia.

The jump from year-ago levels, he said, “points to continued increases in consumer prices as businesses adjust prices with a lag, although a critical consideration going forward is the degree to which businesses will maintain pricing power amid the current backdrop of four-decade high inflation, depressed consumer confidence, and squeezed real purchasing power.”

The markets still focus on the Federal Reserve rate hikes. Edward Moya, senior market analyst at OANDA, said, “persistent inflation, uncertainty with commodity prices impacted by the war in Ukraine, and China’s COVID situation are all short-term risks that could lead to aggressive tightening by the Fed later in the year.”

Indeed, neither CPI or PPI confirm “we passed the peak of the inflation mountain,” said Liz Young, head of investment strategy at SoFi. And until there is a clear decline in inflation that allows the Fed to “retract its claws,” she said, “volatility is likely to persist.”

Even with a drop in inflation, Young said, “it’s going to be sticky and uncomfortably high without a deeper pullback in demand.”

But Morgan Stanley’s key takeaway “was the big divergence in outcomes for key details that matter for the April PCE inflation data pointed to an increasingly stark divergence between CPI and PCE inflation.”

While airfares played a major role in CPI’s increase, they said, “PPI details pointed to a lower outcome for PCE inflation, where we expect airfares will only be up about 3% compared with a more than 18% increase in CPI airfares.”

And while inflation may have peaked, Scott Ruesterholz, a portfolio manager at Insight Investment, said, it will stay “well above target” through the year, finishing 2022 near 4%.

“This means that the Fed’s hiking cycle may already be priced in to a large extent, allowing diligent investors to find value opportunities,” he said. “Absent falling commodity prices, it will be incredibly challenging for the Fed to bring inflation close to its 2% target over the next year. Ultimately, we believe rate hikes alone will not be enough.”

Besides rate hikes, Ruesterholz said, “the Fed will need assists from fading fiscal stimulus, supply chain improvements, housing supply increases and slowing consumer demand. The good news is that many of these scenarios are starting to transpire.”

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