Short end pressure felt; mutual fund outflows return

BY SourceMedia | MUNICIPAL | 08/11/22 04:45 PM EDT By Lynne Funk

Municipals were weaker on the short end and mutual fund outflows returned Thursday while U.S. Treasuries saw losses across the curve and equities ended mixed.

Triple-A curves saw yields rise as much as five basis points on the one-year while leaving yields a basis point weaker to little changed along the rest of the curve while U.S. Treasuries saw the larger losses 10 years and out.

Muni-UST ratios on Thursday fell on the 10- and 30-year as a result. The five-year was at 61%, the 10-year at 78% and the 30-year at 92%, according to Refinitiv MMD's 3 p.m. read. ICE Data Services had the five at 60%, the 10 at 81% and the 30 at 91% at a 4 p.m. read.

Pressure on the short end of the muni curve is being exacerbated by a 3.24% two-year Treasury note, selling pressure rising from a correction to floating rate notes and dealer positions in variable-rate demand notes.

The SIFMA 7-day rate rose to 1.83% on Wednesday, up from 1.68% on Aug. 3, 1.33% on July 27 and 0.65% on July 20.

In addition, tax-exempt municipal money market funds lost $1.06 billion the week ending Wednesday and the seven-day simple yield for all tax-free and municipal money-market funds rose by another 0.35% to 1.21%.

The losses there bring the total to over $9 billion in 2022 and are another reason why short fixed-rate maturities are experiencing repricing pressure.

"Front-end losses like these can be an outsize problem for mutual funds hoarding cash and maximizing liquidity ahead of uncertain investor flow direction, in particular if investors take too much of an indication from current fund NAV trajectories," noted Municipal Market Analytics Matt Fabian in a report earlier this week.

Municipal bond mutual funds saw losses this week reversing course after more than $1 billion of inflows were reported last week, per Refinitiv Lipper data reported Thursday.

Investors pulled $635.177 million out of municipal bond mutual funds in the latest week, versus the $1.094 billion of inflows the prior week.

High-yield saw small inflows of $23.788 million after $859.629 million of inflows the week prior. Exchange-traded funds saw outflows to the tune of $414.847 million after $260.592 million of inflows the previous week.

"August is shaping up to be somewhat more challenging than July as summer reinvestment needs start to recede, but not before $20 billion in maturing securities and scheduled redemptions over the next 30 days are expected to be available for potential reinvestment," noted Jeff Lipton, managing director of municipal credit at Oppenheimer & Co.

Municipals continue to outperform UST, more focused on reinvestment and fundamentals.

"With the improved market tone and promising outperformance for munis, ratios remain expensive with value opportunities still uneven throughout the curve," Lipton said. "Although ratios have cheapened modestly along the short end of the curve, that area remains the most expensive."

Fairer value can be found in longer tenors, he said. "We emphasize our previous guidance to allocate deployable cash into longer dated maturities as a way to capture strategic value with more attractive total return potential should rates revert to lower ground and so curve extensions may be appropriate for those investors unhindered by duration risk," Lipton said.

"We suspect that if the bond market can view Fed policy through a more realistic lens, without having overly emotional expectations for a policy pivot, there could be less volatility and more favorable guidance for muni performance," he said.

In the primary Thursday, Morgan Stanley & Co. priced and repriced for the Triborough Bridge and Tunnel Authority (Aa3/AA-/AA-/AA/) $400 million of MTA Bridges and Tunnels general revenue bonds with two basis point bumps in a final pricing. Bonds in 11/2040 with a 5% coupon yield 3.29% (-2), 5s of 2042 at 3.42% (-2), 5s of 2047 at 3.61%, 4s of 2052 at 4.11%, and 5.25s of 2057 at 3.73%, callable 11/15/2032.

Informa (IFPJF): Money market muni assets drop again, yields rise
Tax-exempt municipal money market funds lost $1.06 billion the week ending Wednesday, bringing the total assets to $96.04 billion, according to the Money Fund Report, a publication of Informa Financial Intelligence.

The average seven-day simple yield for all tax-free and municipal money-market funds rose by another 0.35% to 1.21%.

Taxable money-fund assets lost $8.89 billion to end the reporting week at $4.429 trillion of total net assets. The average seven-day simple yield for all taxable reporting funds rose by 0.14% to 1.79%.

Secondary trading
Maryland 5s of 2023 at 1.74%. Georgia 5s of 2023 at 1.71%-1.70%. Florida Board of Education PECO 5s of 2023 at 1.78%. District of Columbia 5s of 2023 at 1.72%.

North Carolina 5s of 2024 at 1.72%. Anne Arundel County, Maryland, 5s of 2027 at 1.84%-1.83%. Fairfax County, Virginia, waters 5s of 2027 at 1.83%-1.81%. Maryland 5s of 2027 at 1.84%.

Arlington County, Virginia, 5s of 2028 at 2.00%-1.95%. California 5s of 2029 at 2.09%-2.08%. Montgomery County, Maryland, 5s of 2030 at 2.18%-2.16%.

District of Columbia 5s of 2033 at 2.55%. Maryland 5s of 2033 at 2.41%. Maryland 5s of 2036 at 2.65%.

AAA scales
Refinitiv MMD's scale saw a five basis point cut on the one-year at the 3 p.m. read: the one-year at 1.64% (+5) and 1.69% in two years. The five-year at 1.82%, the 10-year at 2.24% and the 30-year at 2.91%.

The ICE AAA yield curve was cut a basis point in spots: 1.66% (+1) in 2023 and 1.71% (+1) in 2024. The five-year at 1.83% (+1), the 10-year was at 2.29% (+1) and the 30-year yield was at 2.91% (+1) at 4 p.m.

The IHS Markit municipal curve was cut on the front end: 1.62% (+6) in 2023 and 1.70% (+1) in 2024. The five-year was at 1.83% (+1), the 10-year was at 2.24% and the 30-year yield was at 2.92% at a 4 p.m. read.

Bloomberg BVAL was weaker on the short end: 1.57% (+3) in 2023 and 1.67% (+2) in 2024. The five-year at 1.83% (+1), the 10-year at 2.25% (+1) and the 30-year at 2.92% (+2) at 4 p.m.

Treasuries were weaker at the close.

The two-year UST was yielding 3.241% (+2), the three-year was at 3.190% (+4), the five-year at 3.002% (+8), the seven-year 2.958% (+10), the 10-year yielding 2.884% (+10), the 20-year at 3.386% (+12) and the 30-year Treasury was yielding 3.178% (+14) at the close.

Mutual fund details
Refinitiv Lipper reported $635.177 million of outflows for the week ending Wednesday following $1.094 billion of inflows the previous week.

Exchange-traded muni funds reported outflows of $414.847 million after inflows of $260.592 in the previous week. Ex-ETFs, muni funds saw outflows of $220.330 million after inflows of $833.365 million in the prior week.

The four-week moving average was at negative $878 million from positive $209.448 million in the previous week.

Long-term muni bond funds had outflows of $322.342 million in the latest week after inflows of $1.287 billion in the previous week. Intermediate-term funds had outflows of $81.512 million after inflows of $42.336 million in the prior week.

National funds had outflows of $594.449 million after inflows of $1.136 billion the previous week while high-yield muni funds reported inflows of $81.512 million after inflows of $859.629 million the week prior.

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.