Bonds

A quiet start for munis as investors await supply

Municipals were lightly traded and little changed in the first session of 2024 while U.S. Treasuries were weaker and equities lost ground as markets pulled back to reassess expectations after the end-of-year’s large rally.

Triple-A yields were softer in spots while USTs saw yields rise six to 10 basis points with the larger losses on the short end, pushing muni-to-UST ratios lower.

The two-year muni-to-Treasury ratio Friday was at 56%, the three-year at 57%, the five-year at 57%, the 10-year at 58% and the 30-year at 84%, according to Refinitiv Municipal Market Data’s 1 p.m., EST, read.

“Last year could easily be described with several superlatives: largest (decade-high trading range), richest (ratios, of course) and best (10-year Refinitiv MMD reached a 14-year high),” noted Kim Olsan, senior vice president at FHN Financial. ”Municipal sector allocations and returns largely projected a 1) steady credit outlook and 2) declining yields during Q3, leading to increased demand for concessionary structures.” 

A broad market index gained 2.3% in December and finished the year up 6.4%, which Olsan notes bests all but 2014 and 2019 on an annual basis. 

This performance is a dramatic rebound from 2022’s losses. The broad Bloomberg Municipal Index saw losses of 8.53%, high-yield lost 13.10%, taxables lost 18.11% and the impact index lost 11.96%.

“Buyers went all-in on revenue-sector names, with that category earning 6.8% and beating out GOs by 127 basis points,” she said. “Sub-sectors within the revenue category pointed to a risk-on theme into year-end.” 

Olsan pointed to the most active, healthcare, which gained 2.8% last month and ended 2023 up 7.5%. 

A transportation index kept pace with the market in December, gaining 2.3%, but outpaced a main index by 79 basis points for the full year, she said.   

“The outperformance in both categories correlated with issuance falling by 40% and 20%, respectively,” she said.  

Essential service bonds “held less allure, ending up 5.8% for 2023 and lagging the broad market by 60 basis points,” Olsan said. 

She noted that of the total allocated from the Infrastructure Investment and Jobs Act, $55 billion was planned for water improvements. 

“As those funds are deployed, any drop in traditional utility financings could potentially be supportive for secondary levels,” she said.

Last year’s taxable issuance fell 31% (tax-exempt volume was up 3%), Olsan noted, but later in the year, issuers were presented with “in-the-money refundings — a scenario that could well continue in 2024 should broad rates trend lower.”

“The sector gained 8.8% in 2023, trouncing a UST index gain of 4% but more closely matching that of a U.S. corporate bond index which ended up 8.5%,” she said.

High-yield munis returned “an impressive 9.2% in 2023, with the best monthly performance occurring in November and the worst in September.” 

Total municipal supply for 2023 landed at $379.992 billion, down 2.8% from 2022’s $391.078 billion.

Jason Wong, vice president of municipals at AmeriVet Securities, noted that while 2023 started off strong with the first half of the year returning about 2.67%, “the second half of the year was a roller coaster ride for munis as the third quarter saw rate volatility that pushed munis into negative territory for the year with September seeing muni yields climb an average of 50 basis points.”

The final two months of the year saw a record rally, with November returning 6.35% and December returning 2.30%, bringing the year-to-date returns to 6.38%, he said.

Wong said this year “should be the year of opportunity as muni yields are at their highest in over a decade, the Fed rate hike policy [is] done, and [with] an increase in supply, investors should take advantage of the higher rates before the Fed pivots.”

Muni investors will be receiving $22 billion of principal and $13 billion interest in January, noted CreditSights.

“Muni mutual fund investors gorged themselves in November as gross monthly flows hit a year-to-date high of $33 billion,” they noted.

While the number of dealers registered with the MSRB has declined to a new low, CreditSights said the “good news is that there were 17 firms that were newly registered last year.”

Supply projections for 2024 are at a high of $450 billion and a low of $330 billion, with most firms anticipating issuance next year will surpass 2023’s total.

Issuance will get off to a slow start during the first week of January.

The new-issue muni calendar this week is estimated at $220 million with $173.2 million of negotiated deals on tap and $49.9 million on the competitive calendar, according to Ipreo and The Bond Buyer.

There are no deals above $100 million.

The largest deal is $62.5 million of water revenue bonds from the Truckee Meadows Water Authority, Nevada, followed by $55.7 million of education revenue bonds from the Maricopa County Industrial Development Authority, both in the negotiated market.

Quincy, Massachusetts, leads the competitive calendar with $50.9 million of GO bond anticipation notes.

Bond Buyer 30-day visible supply sits at $7.61 billion.

AAA scales
Refinitiv MMD’s scale was unchanged: The one-year was at 2.67% and 2.52% in two years. The five-year was at 2.28%, the 10-year at 2.28% and the 30-year at 3.42% at 3 p.m.

Bloomberg BVAL was cut two basis points: 2.61% (+2) in 2024 and 2.52% (+2) in 2025. The five-year at 2.23% (+2), the 10-year at 2.28% (+2) and the 30-year at 3.42% (+2) at 3:15 p.m.

Treasuries were weaker.

The two-year UST was yielding 4.328% (+9), the three-year was at 4.099% (+10), the five-year at 3.92% (+),9 the 10-year at 3.939% (+8), the 20-year at 4.241% (+6) and the 30-year Treasury was yielding 4.078% (+6) at 3:15 p.m.

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