Municipals were steady to firmer on the short end Thursday, while U.S. Treasuries were also little changed and equities rallied.
After an impressive rally that began at the end of May leading to the first month of positive returns for the asset class, investors took the positive signals and poured cash into municipal bond mutual funds for the first time after 19 weeks of consecutive outflows.
Refinitiv Lipper reported $1.216 billion of inflows, reversing 19 weeks of massive outflows from the mutual fund complex.
High-yield saw $1.222 million of that after $512.832 million of outflows the week prior, due in part to Nuveen reopening two of its high-yield funds to new investors.
The four-week moving average narrowed to negative $1.244 billion from negative $2.215 from in the previous week and outflows now total $36.4 billion so far in 2022.
Nuveen reopening two of its high-yield funds to new investors
Much of the volatility during the first few months of 2022 drove a lot of the underperformance in the muni space, said Peter Cramer, head of insurance portfolio management at SLC Management.
“The shift in the constant drumbeat of outflows in the muni space until mid-May is different from where we are now,” he said.
Munis have outperformed U.S. Treasuries and benefited from supply-demand dynamics heading into the summer reinvestment season, Cramer said.
The shift these past two weeks has made a marked difference for muni performance.
“What initially attracted people to space was the poor performance and ratios at the start of the year got all the way up to the high 90s for part of the curve,” he said.
Muni-to-UST ratios on Thursday were steady at 70% in five years, 83% in 10 years and 90% in 30, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the five at 70%, the 10 at 83% and the 30 at 92% at a 4 p.m. read.
Higher, fair value ratios make munis attractive to investors, but with ratios falling, Cramer said munis are still attractive as a more defensive play compared to investment-grade corporates.
As ratios fall, he said some demand may weaken from corporate buyers, while there will continue to be strong demand from retail investors.
“We’ve seen some stability in terms of overall yields in the space,” he said. “The negative net supply dynamic will drive more of that money as flows start to shift and possibly turn positive, which will continue to push the ratios lower because demand will stay pretty consistent.”
The Bond Buyer’s 30-day visible supply sits at $14.64 billion while Bloomberg data has net negative supply at $26.768 billion.
The recent outperformance also stems from the anticipation of the heavier reinvestment period.
“We’ll continue to see that strong performance, particularly given that the outflow cycle seems to have turned a bit,” he said. “There’s not as much secondary paper, and that exacerbates that dynamic of negative net supply that we’re going to be seeing this month.”
The summer months in particular are strong because of a dearth of new-issue supply. This, he said, should coincide with a reduction in outflows for the mutual fund space.
“Those two will go hand in hand to create a strong demand environment for munis over the course of summer,” he said.
But toward the end of the summer through fall, Cramer expects volatility to return. The impact of higher rates and the Fed looking to actively squash demand to bring down inflation will eventually start to be felt more dramatically in terms of economic slowdown, leading to some widening as the market digests that, he added.
In the primary market Thursday, Goldman Sachs & Co. priced for the Southwest Energy Authority, A Cooperative District, Alabama, (A2///) $642.865 million of Project No. 4 commodity supply revenue bonds. The first tranche, $597.865 million of fixed-rate bonds, Series 2022B-1, saw 5s of 8/2023 at 2.47% and 5s of 2027 at 3.43%, make whole call. The second tranche, $45 million of SOFR index rate bonds, Series 2022 B-3, saw 5s of 5/2053 at 3.62%, callable 5/1/2028.
Barclays Capital priced for the Utah Board of Higher Education (Aa1/AA+//) $473.520 million of green University of Utah general revenue bonds, Series 2022B, with 5s of 8/2024 at 1.79%, 5s of 2027 at 2.07%, 5s of 2032 at 2.55%, 5s of 2037 at 2.91%, 5s of 2042 at 3.09% and 5s of 2047 at 3.20%, callable 8/1/2032.
Morgan Stanley & Co. priced for the New York State Housing Finance Agency (Aa2///) $458.505 million of affordable housing revenue bonds. The first tranche, $86.770 million of climate bond certified/sustainability bonds, 2022 Series D-1, saw all bonds price at par: 2.45s of 11/2025, 2.95s of 2027, 3.65s of 2032, 3.875s of 2037, 4s of 2042, 4.125s of 2047, 4.2s of 2052 and 4.3s of 2057, callable 5/1/2031.
The second tranche, $256.170 million of climate bond certified/sustainability bonds, 2022 Series D-2, saw 3.1s of 5/2062 price at par, callable 12/1/2023.
The third tranche, $24.785 million of sustainability bonds, 2022 Series E-1, aw all bonds price at par: 2.45s of 11/2025, 2.95s of 2027, 3.65s of 2032, 3.875s of 2037, 4s of 2042, 4.125s of 2047, 4.2s of 2052 and 4.3s of 2057, callable 5/1/2031.
The fourth tranche, $90.780 million of sustainability bonds, 2022 Series E-2, saw 3.1s of 5/2062 price at par, callable 12/1/2023.
Siebert Williams Shank & Co. priced for the Department of Water and Power of the City of Los Angeles (Aa2//AA/AA+/) $328.270 million of water system revenue bonds, 2022 Series C, with 5s of 7/2023 at 1.50%, 5s of 2025 at 1.93%, 5s of 2034 at 2.72%, 5s of 2037 at 2.81%, 5s of 2042 at 2.93%, 5s of 2047 at 3.01% and 5s of 2052 at 3.06%, callable 7/1/2032.
Secondary trading
North Carolina 5s of 2023 at 1.50%. New York City TFA 5s of 2023 at 1.50%-1.49%. Washington 5s of 2024 at 1.82%.
North Carolina 5s of 2027 at 2.17%-2.16%. California 5s of 2029 at 2.41%. Texas waters 5s of 2030 at 2.44%-2.43%.
Princeton 5s of 2032 at 2.44%-2.40% versus 2.48% Wednesday. Ohio 5s of 2032 at 2.58%-2.57% versus 2.97% original. New York City 5s of 2032 at 2.71%-2.70%.
Los Angeles DWP 5s of 2035 at 2.78%-2.72%. California 5s of 2037 at 2.83%. NYC TFA 5s of 2041 at 3.23%.
AAA scales
Refinitiv MMD’s scale was bumped two basis points inside five years at the 3 p.m. read: the one-year at 1.49% (-2) and 1.77% (-2) in two years. The five-year at 2.03% (-2), the 10-year at 2.43% (unch) and the 30-year at 2.78% (unch).
The ICE municipal yield curve saw two basis point bumps 10 years and in and one basis point cut outside of 10 years: 1.47% (-2) in 2023 and 1.81% (-2) in 2024. The five-year at 2.05% (-2), the 10-year was at 2.41% (-1) and the 30-year yield was at 2.86% (+1) at a 4 p.m. read.
The IHS Markit municipal curve saw one basis point bump: 1.47% (-1) in 2023 and 1.77% (-1) in 2024. The five-year at 2.04% (-1), the 10-year was at 2.44% (-1) and the 30-year yield was at 2.78% (-1) at 4 p.m.
Bloomberg BVAL saw up to one basis point bump: 1.52% (-1) in 2023 and 1.80% (-1) in 2024. The five-year at 2.11% (-1), the 10-year at 2.44% (unch) and the 30-year at 2.80% (unch) at a 4 p.m. read.
Treasuries were mixed.
The two-year UST was yielding 2.643% (-1), the three-year was at 2.829% (+1), the five-year at 2.915% (flat), the seven-year 2.948% (flat), the 10-year yielding 2.914% (flat), the 20-year at 3.295% (+2) and the 30-year Treasury was yielding 3.072 (+1) at the close.
Mutual fund details
In the week ended June 1, weekly reporting tax-exempt mutual funds saw investors add money with Refinitiv Lipper reporting $1.216 billion of inflows Thursday, following an outflow of $1.035 billion the previous week.
Exchange-traded muni funds reported inflows of $890.769 million after inflows of $1.781 billion in the previous week. Ex-ETFs, muni funds saw inflows of $324.877 million after $2.816 billion of outflows in the prior week.
The four-week moving average narrowed to negative $1.244 billion from negative $2.215 from in the previous week.
Long-term muni bond funds had inflows of $1.414 billion in the last week after outflows of $654.795 million in the previous week. Intermediate-term funds had outflows of $177.117 million after $145.451 million of outflows in the prior week.
National funds had inflows of $1.234 billion after $651.618 million of outflows the previous week while high-yield muni funds reported $1.222 million of inflows after $512.832 million of outflows the week prior.
Primary on Wednesday:
UBS Financial Services priced for Colorado (Aa2/AA-//) $500 million of Rural Colorado certificates of participation, Series 2022, with 6s of 12/2022 at 1.38%, 6s 0f 2027 at 2.24%, 6s of 2032 at 2.74%, 6s of 2037 at 2.99% and 6s of 2041 at 3.06%, callable 12/15/2032.