Municipal yields hold steady; ICI reports $7.2B outflows

Municipals were relatively stable amid mixed trading Wednesday as U.S. Treasuries rallied out long and stocks were mixed.

The Investment Company Institute reported $7.2 billion of outflows from municipal bond mutual funds, the largest figure since the outlier months of March 2020.

In the week ending April 13, investors pulled $7.227 billion from the funds, up from $4.786 billion of outflows in the previous week. Exchange-traded funds saw inflows at $477 million versus $151 million of inflows the week prior.

Triple-A muni yields were mostly steady while UST yields fell two to 12 basis points with the largest gains out long. Muni-UST ratios were at 83% in five years, 93% in 10 years and 103% in 30, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the five at 82%, the 10 at 93% and the 30 at 104% at a 4 p.m. read.

In the primary Wednesday, Ramirez & Co. priced for Texas (Aaa/AAA/AAA/) $267.670 million of bonds. The first tranche, $94.365 million of water financial assistance bonds, Series 2022A, saw bonds in 8/2023 with a 5% coupon yield 2.06%, 5s of 2027 at 2.53%, 5s of 2032 at 2.87%, 5s of 2037 at 3.13%, 4s of 2042 at 3.50% and 4s of 2046 at 3.57%, callable 8/1/2031.

The second tranche, $139.235 million of water financial assistance refunding bonds, Series 2022B, saw bonds in 8/2024 with a 5% coupon yield 2.33%, 5s of 2027 at 2.56%, 5s of 2032 at 2.81%, 5s of 2037 at 2.98% and 5s of 2041 at 3.04%, callable 8/1/2025.

The third tranche, $13.050 million of Economically Distressed Areas Program water financial assistance refunding bonds, Series 2022C, saw all bonds price at par: 2.6s of 8/2023, 3.25s of 2027, 3.8s of 2032 and 4.1s of 2035, callable 8/1/2032.

The fourth tranche, $18.020 million of taxable State Participation Program water financial assistance refunding bonds, Series 2022D, saw bonds in 8/2023 with a 5% coupon yield 2.10%, 5s of 2027 at 2.56% and 5s of 2032 at 2.90%, callable 8/1/2030.

Goldman Sachs priced for the Massachusetts Development Finance Agency (Aaa/AAA//) $207.830 million of green Harvard University issue revenue bonds, Series 2022B. Bonds in 11/2032 with a 5% coupon yield 2.75%, noncall.

In the competitive market, the Virginia Public School Authority (Aa1/AA+/AA+/) sold $213.080 million of 1997 Resolution school financing bonds, Series 2022A, to BofA Securities. Bonds in 8/2023 with a 5% coupon yield 2.05%, 5s of 2027 at 2.55%, 5s of 2032 at 2.92%, 4s of 2037 at 3.40%, 4s of 2042 at 3.65%, 4s of 2046 at 3.73% and 4s of 2051 at 3.88%, callable 8/1/2032.

Due to a large increase in inflation, benchmark triple-A tax-exempt yields have risen again across a steeper curve, while USTs steepened even more aggressively last week, said Matt Fabian, a partner at Municipal Market Analytics the firm’s weekly Outlook report.

While the Fed hikes rates to combat inflation, he said the news of Russia’s invasion continues to imply a longer-term impact on global growth/recession risk and rising COVID-19 cases weigh on investors’ minds.

Despite triple-A rates rising roughly 46 basis points on the 10-year since the beginning of April, per Refinitiv MMD data, and lower-rated yields rising a bit more, buyers have not fully engaged due to the associated uncertainty and volatility.

Fabian said the pullback of large funds as a marginal buyer in the primary market has led, in part, to the increase in yields. Last week, Refinitiv Lipper recorded $4.3 billion of outflows while ICI’s $7.2 billion of outflows reported on Wednesday are the highest of the year.

This is similar to the scale of 2020 outflows, however, the purge took only six weeks in 2020. The market disruption then was fierce and rapid — more than $24 billion pulled out in two weeks in that month alone — while this year it has been steady since the start of the year.

“In 2022, the longer time frame for outflows has given the funds the opportunity to marshal sufficient cash to avoid desperate selling,” he said. “And the new marginal buyer-holders have no interest in re-rallying bond prices and ratios to 2021 levels,.”

He said ahead of more Fed action, the fear-inducing losses with new purchases despite evident value across the curve.

While many on the buy-side expect the second quarter to bring an investor reengagement, just when that occurs is up for debate as macro effects continue to pound all markets.

Based on Bloomberg’s bids wanted figure — hitting $2.093 billion on Tuesday — and a widening de minimus impact across lower coupon positions, Fabian said pressure appears to be developing, with long 2s already swallowed and long 3s just beginning to be impacted as of last week.

If recent losses do not turn around before April 30, he said this will not be good for statement returns and could stimulate faster selling, Fabian said.

The recent underperformance of municipals to Treasuries continues to make the tax-exempt sector attractive, according to Joseph Kalish, chief global macro strategist at Ned Davis Research.

Amid the underperformance, the municipal/Treasury ratios have risen, according to the report from the Florida-based global independent investment research firm.

“That means munis may make sense regardless of your tax bracket, as the municipal curve remains steep compared to the Treasury curve,” he said. “The underperformance has been so striking that investors in the top tax bracket can earn higher after-tax yields than similarly rated corporate bonds across all maturities.”

Yields on municipal securities have risen sharply this year, across the term structure, across sectors, and by credit quality, according to Kalish.

“Munis have underperformed Treasuries this year, with long-term yields higher than comparable Treasuries on a pre-tax basis,” he said.

Not only do munis make more sense than Treasuries on an after-tax basis, they make more sense than corporates for investors in high tax brackets, Kalish noted.

The underperformance has also trickled across the credit spectrum, as lower-rated credits have started to underperform, Kalish said in the report.

“Within investment grade, Baa has rolled over relative to double-A and single-A,” he said.

“Lower quality credits remain richly priced relative to higher-quality credits,” Kalish said. “With tax-equivalent yields so attractive, a normalization of quality spreads could offset the additional yield from lower-rated credit. It is not worth taking the additional credit risk at this time.”

Although investors have been lightening their exposure to municipals recently due to the rising yields and market volatility, the asset class remains an attractive option.

“Although yields may continue to rise, taxable investors looking for good relative opportunities should strongly consider munis,” Kalish said in the report.
The strong fiscal health among most state and local governments is helping support municipals, he said.

The reopening of the economy and higher prices have lifted sales and income tax receipts, Kalish said.

“Property taxes will surely increase in fiscal year 2023, reflecting higher home values,” he said, noting that default risk appears to be low.

The default rate that excludes both Puerto Rico and Industrial Development Bonds is up by roughly a third in the last four years (to 0.30% this month from 0.22% in January 2018), “which is a source of some, but not undue, concern,” Fabian noted in MMA’s Default Trends.

Secondary trading
New York City 5s of 2023 at 2.08%-2.07%. California 5s of 2024 at 2.25%-2.20%.

Georgia 5s of 2028 at 2.51%-2.50%. Washington Suburban Sanitation District 5s of 2028 at 2.54%-2.52%. Wake County, North Carolina 5s of 2028 at 2.52%-2.48%. Maryland 5s of 2029 at 2.56%-2.54%.

Minnesota 5s of 2031 at 2.66% versus 2.62%-2.61% Tuesday. Ohio waters 5s of 2036 at 2.91%. Iowa Finance Authority green 5s of 2040 at 3.07% versus 3.18% Tuesday and 2.96% original.

New York City TFA 5 of 2047 at 3.60% versus 3.61%-3.48% Tuesday. New York City TFA 5s of 2051 at 3.65% versus 3.64%-3.55% Tuesday. Massachusetts Bay Transportation Authority 5s of 2052 at 3.38%.

AAA scales
Refinitiv MMD’s scale was unchanged a 3 p.m. read: the one-year at 1.92% and 2.18% in two years. The five-year at 2.37%, the 10-year at 2.64% and the 30-year at 2.99%.

The ICE municipal yield curve was little changed: 1.92% in 2023 and 2.22% in 2024. The five-year at 2.38%, the 10-year was at 2.64% and the 30-year yield was at 3.04% at 4 p.m.

The IHS Markit municipal curve was little changed: 1.93% in 2023 and 2.18% in 2024. The five-year at 2.40%, the 10-year was at 2.62% and the 30-year yield was at 3.00% at 4 p.m.

Bloomberg BVAL was little changed: 1.90% in 2023 and 2.15% in 2024. The five-year at 2.41% (+1), the 10-year at 2.63% (+1) and the 30-year at 2.95% at the close.

Treasury yields fell.

The two-year UST was yielding 2.576% (-2), the three-year was at 2.788% (-3), five-year at 2.868% (-5), the seven-year 2.89% (-7), the 10-year yielding 2.847% (-9), the 20-year at 3.073 (-11) and the 30-year Treasury was yielding 2.882% (-12) at the close.

Primary to come:
The Iowa Finance Authority (Ba1/BBB-/BB+/) is set to price Thursday $854.325 million of tax-exempt, non-alternative minimum tax Iowa Fertilizer Company Project midwestern disaster area revenue refunding bonds, Series 2022, serial 2050, terms 2050 and 2050. Citigroup Global Markets.

The New Jersey Higher Education Student Assistance Authority is set to price Thursday $266.345 million of student loan revenue and refunding bonds, Series 2022, consisting of: $22.245 million of senior bonds (Aa1///), Series A, serials 2024-2030; $202.420 million of senior bonds (Aa1///), Series B, serials 2024-2030, term 2041; and $41.500 million of subordinate bonds (A2///), Series C, serial 2052. RBC Capital Markets.

San Juan Unified School District, California, (Aa2///) is set to price Thursday $150 million of Election of 2016 general obligation bonds, Series 2022, consisting of $139.180 million of bonds, Series 2022, serials 2023-2024 and 2026-2046 and $10.820 million of taxable bonds, Series 2022, serial 2022. Raymond James & Associates.