Munis ignore massive UST rally; outflows reach $2.7B

BY SourceMedia | MUNICIPAL | 09/28/22 04:21 PM EDT By Jessica Lerner

Municipals were mixed Wednesday as a large primary calendar led by deals from the Texas Water Development Board and state of Illinois took the focus away from the secondary, while outflows ramped up to $2.7 billion, the largest figure since late June.

U.S. Treasuries rallied hard with yields falling up to a quarter-point and equities rebounded with large gains after the Bank of England's bond purchase agreement eased selling in global markets. .

Municipals were mostly little changed on the day, though, largely ignoring the massive gains made by UST, which saw yields fall by as many as 24 basis points to close out the session.

The day's moves pushed ratios higher: The three-year was at 75%, the five-year was at 79%, the 10-year at 88% and the 30-year at 105%, according to Refinitiv MMD's 3 p.m. read.

Mutual funds have continued to see massive outflows, which CreditSights' Strategist Pat Luby calls a red flag for demand.

"It's always a tough time of year because of the seasonal technicals," Luby said. There are fewer buyers with less cash coming in, and the decreased liquidity has made it more stressful for underwriters and traders to carry inventory, he said.

The Investment Company Institute reported $2.693 billion of outflows from muni bond mutual funds in the week ending Sept. 21 compared to $1.617 billion of outflows the previous week.

Meanwhile, exchange-traded funds have become less reliably positive, a yellow flag for demand, he said. ETFs saw outflows of $492 million versus $51 million of outflows the week prior, per ICI data.

"Funds need to get priced to move because nobody wants to be in long bonds for more than they need," he said.

"Issuers who need to issue, who have capital needs and have new-money financings, they're going to continue to come [even though] they may not like the rates. So that applies supply pressure," he noted.

This week did see a significant uptick in bonds being priced or sold, and he said that will continue in the weeks ahead. Oct. 1 will bring forth redemptions, which should provide a little bit of demand from that, though it's not guaranteed.

Over the past five to 10 years, October has, on average, been the heaviest volume month of the year.

"An increase in yields tends to slow down the issuance of refunding bonds, but it has minimal effect on new-money borrowing," he said.

Municipal issuers who are looking to lock in financing for specific projects are disinclined to try to time rates. A majority of states have a fiscal year that ends in June, so "having freshly audited financials is a helpful in assembling disclosure documents for a new issue," he said.

"That's part of the driving force of why we see a little bit more borrowing in this time of year," Luby said. "This is kind of the stretch from now until the second week of November when issuers are going to need to get their new-money financings placed and they're often more interested in arranging their financing and then trying to time rates."

In the primary Wednesday, Citigroup Global Markets priced for the Texas Water Development Board (/AAA/AAA/) $964.280 million Texas Master Trust revenue bonds for the State Water Implementation Revenue Fund, with 5s of 4/2023 at 3.07%, 5s of 10/2023 at 3.11%, 5s of 4/2027 at 3.31%, 5s of 10/2027 at 3.31%, 5s of 4/2032 at 3.57%, 5s of 10/2032 at 3.57%, 4.75s of 10/2042 at par, 5s of 10/2047 at 4.45%, 4.8s of 10/2052 at par and 5s of 10/2057 at 4.85%, callable 10/15/2032.

Siebert Williams Shank & Co. priced for the Board of Regents of the Texas A&M University System (Aaa/AAA/AAA/) is set to price Wednesday $208.520 million of revenue financing system bonds, Series 2022, with 5s of 5/2023 at 3.07%, 5s of 2027 at 3.30%, 5s of 2032 at 3.55%, 5.25s of 2037 at 3.96%, 4.5s of 2042 at 4.65%, 5.25s of 2047 at 4.32% and 4.75s of 2052 at 4.81%, callable 5/15/2032.

Citigroup Global Markets priced for the Florida Housing Finance Corp. (Aaa///) $140 million of non-AMT social homeowner mortgage revenue bonds, with all bonds pricing at par except for 5.5s of 1/2054: 3.1s of 1/2024, 3.6s of 1/2027, 3.65s of 7/2027, 4.25s of 1/2032, 4.3s of 7/2032, 4.7s of 7/2037, 4.95s of 7/2042, 5.05s of 7/2047, 5.1s of 7/2053 and 5.5s of 1/2054 at 4.49%, callable 1/1/2032.

Illinois led the competitive market Wednesday. The state (Baa1/BBB+/BBB+/) sold $175 million of taxable general obligation bonds, Series of October 2022A to BofA Securities, with 5.35s of 10/2023 at par, 5.83s of 2027 at par and 6s of 2029 at 6.02%, noncall.

The state also sold $245 million of exempt GOs, Series of October 2022B, to BofA Securities, with 5s of 10/2029 at 4.50%, 5s of 2032 at 4.80% and 5.25s of 2037 at 5.22%, callable 10/1/2032.

Illinois also sold $280 million of GOs, Series of October 2022C, to Wells Fargo Bank, with 5s of 2038 at 5.21%, 5s of 2042 at 4.36 and 5.25s of 2047 at 5.50%, callable 10/1/2032.

New Mexico (Aa2/AA-//) sold $288.780 million of severance tax bonds, Series 2022B, to Jefferies, with 5s of 7/2023 at 3.15%, 5s of 2027 at 3.25% and 5s of 2032 at 3.50%, noncall.

Testing the market further will be the New York Urban Development Corp., which is set to sell $1.443 billion of tax-exempt personal income tax revenue bonds in multiple series Thursday.

Secondary trading
DC 5s of 2023 at 3.11%-3.00%. Georgia 5s of 2023 at 3.04%-3.02%. NYC TFA 5s of 2024 at 3.25%-3.24% versus 2.85%-2.84% Thursday. NYC 5s of 2024 at 3.18% versus 2.51%-2.48% on 9/15.

Maryland 5s of 2025 at 3.15%. DC 5s of 2026 at 3.24%-3.20%. Georgia 5s of 2027 at 3.12%. Wake County, North Carolina, 5s of 2028 at 3.15% versus 2.63% on 9/16.

NY Utility Debt Securitization Authority 5s of 2034 at 3.67% versus 3.43% original on 9/16. Dallas County, Texas, 5s of 2035 at 3.71%. Washington 5s of 2036 at 3.90% versus 3.82% Tuesday.

California 5s of 2041 at 4.07% versus 3.95% Monday and 3.71% on 9/13.

AAA scales
Refinitiv MMD's scale was unchanged at a 3 p.m. read: the one-year at 3.04% and 3.09% in two years. The five-year at 3.12%, the 10-year at 3.28% and the 30-year at 3.87%.

The ICE AAA yield curve was cut three to four basis points: 3.07% (+4) in 2023 and 3.10% (+4) in 2024. The five-year at 3.15% (+4), the 10-year was at 3.36% (+4) and the 30-year yield was at 3.89% (+3) at a 4 p.m. read.

The IHS Markit municipal curve was unchanged: 3.01% in 2023 and 3.07% in 2024. The five-year was at 3.13%, the 10-year was at 3.29% and the 30-year yield was at 3.88% at a 4 p.m. read.

Bloomberg BVAL was cut up to one basis point: 3.01% (unch) in 2023 and 3.04% (unch) in 2024. The five-year at 3.09% (unch), the 10-year at 3.24% (+1) and the 30-year at 3.88% (unch) at 4 p.m.

Treasuries rallied.

The two-year UST was yielding 4.120% (-17), the three-year was at 4.152% (-22), the five-year at 3.943% (-24), the seven-year 3.872% (-24), the 10-year yielding 3.727% (-22), the 20-year at 3.992% (-15) and the 30-year Treasury was yielding 3.684% (-14) at the close.

Primary to come:
The Cypress-Fairbanks Independent School District, Texas, (Aaa/AAA//) is set to price $221.640 million of unlimited tax school building bonds, Series 2022A, insured by Permanent School Fund Guarantee Program. Mesirow Financial.

The Lower Colorado River Authority (/A/A+/) is set to price Thursday $194.585 million of LCRA Transmission Services Corporation Project transmission contract refunding revenue bonds, Series 2022A. Morgan Stanley & Co.

The Tennessee Housing Development Agency (Aa1/AA+//) is set to price Thursday $185,050 million of non-AMT social residential finance program bonds, Issue 2022-3, serials 2023-2034, terms 2037, 2042, 2047 and 2053. Citigroup Global Markets.

Competitive:
The New York Urban Development Corp. is set to sell $1.443 billion of tax-exempt personal income tax revenue bonds in multiple series Thursday.

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.

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