Munis brace for upcoming volatility

Municipals were narrowly mixed Thursday as U.S. Treasuries saw losses up front and gains out long and equities ended down.

Municipal yields, while bumped or cut up to three basis points, depending on the scale, have had a relatively quiet week following the volatility post-election.

However, "volatility will likely remain elevated in the coming weeks until both the impact of the election outcome and the future path of Fed policy are better understood," BlackRock (BLK) strategists said in report.

However, munis should remain strong as issuance falls off and seasonal dynamics become more supportive into the end of the year, they said.

This month is experiencing similar volatility as 2016 when generic yields traded higher by 50 to 70 basis points during November of that year, said Kim Olsan, a senior fixed income portfolio manager at NewSquare Capital.

"The current continual UST trade up in yield could begin to impact muni flows based on declining relative values, especially between 2026 and 2032 where 3.00%-handles are absent," she said.

Around 16% of all secondary, tax-exempt volume has been traded in this range over the last week, Olsan said, citing MSRB data.

Based on the 30-basis-point correction in two-year USTs, two muni-UST ratios have fallen to settle around 60%, she said.

The two-year municipal to UST ratio Thursday was at 61%, the three-year at 60%, the five-year at 62%, the 10-year at 66% and the 30-year at 82%, according to Refinitiv Municipal Market Data's 3 p.m. EST read. ICE Data Services had the two-year at 62%, the three-year at 61%, the five-year at 61%, the 10-year at 66% and the 30-year at 81% at 4 p.m.

"The balance of the curve enjoys the advantage of real yields that reach 3.00% or better across a variety of structures," Olsan said.

"Pre-refunded bonds due in 2025 are holding onto 3.00% levels, even in specialty-state names (a local Virginia credit with a 7/1/25 effective maturity traded at 3.00%)," she said.

"Intermediate maturity 5% coupons with 2025-2027 call features offer commensurate yield with defensive duration, as a sale of Massachusetts GO 5s due 2035 with a 2025 call date traded at 3.31%," Olsan said.

Outside of 10 years, "the curve slope gives buyers ample concession with yields improving from around 3.00% in 10 years to near 3.75% in 20-year maturities," she said.

Some "buyer trepidation" can be explained by expected supply increases into the end of 2024, Olsan said.

Since 2019, November and December have, on average, seen $60 billion of total issuance, with outliers in 2019 at $83 billion and 2022 with $36 billion, she said.

Ahead of the elections, issuance had topped $440 billion and was on pace to break the record $484 billion set in 2020, even potentially surpassing $500 billion, she said, but added that greater rate volatility may impede issuance for the remainder of the year.

"Less supply could prove supportive to secondary yields but overall rate direction will also factor on two other components: bids wanteds and fund flows," she said.

Daily bid list tallies remain around $1.1 billion, "not considered an elevated figure but they come ahead of late-year portfolio configurations that may develop," she said.

Meanwhile, fund flows have turned more "bearish," Olsan said.

Inflows continued this week as LSEG Lipper reported investors added $305 million to municipal bond mutual funds for the week ending Wednesday, compared to $1.264 billion of inflows the prior week. This marks 20 straight weeks of inflows.

High-yield funds saw inflows of $105.3 million compared with outflows of $333.3 million the week prior.

"Potential heavier selling with less support from the fund complex could be a signal of pending yield pressure," Olsan said.

In the primary market Thursday, Wells Fargo (WFC) priced for the Los Angeles Department of Water and Power (Aa2/AA-//AA) $507.905 million of power system revenue refunding bonds, Series 2024E, with 5s of 7/2028 at 2.40%, 5s of 2029 at 2.41%, 5s of 2034 at 2.84%, 5s of 2039 at 3.08%, 5s of 2048 at 3.69% and 5s of 2054 at 3.81%, callable 7/1/2034.

J.P. Morgan priced for the Omaha Public Power District (Aa2/AA//) $375.875 million of electric system revenue bonds. The first tranche, $299.495 million of Series 2024C, saw 5s of 2/2026 at 2.87%, 5s of 2029 at 2.74%, 5s of 2034 at 3.09%, 5s of 2039 at 3.38%, 5s of 2044 at 3.72%, 4s of 2049 at 4.18% and 5s of 2054 at 4.03%, callable 2/1/2034.

The second tranche, $76.38 million of Series 2024D, saw 5s of 2/2033 at 3.03%, 5s of 2034 at 3.09%, 5s of 2039 at 3.38% and 5s of 2043 at 3.66%, callable 2/1/2034.

Goldman Sachs (GS) priced for the Los Angeles Community College District (Aaa/AA+//) $300 million of GOs. The first tranche, $200 million of 2016 Election bonds, saw 5s of 8/2025 at 2.79%, 5s of 2029 at 2.45% and 5s of 2030 at 2.50%, noncall.

The second tranche, $100 million of 2022 Election bonds, saw 5s of 8/2025 at 2.79% and 5s of 2026 at 2.56%, noncall.

Piper Sandler (PIPR) priced for the Prosper Independent School District (Aaa//AAA/) $242.18 million of PSF-insured unlimited tax school building bonds, Series 2024A, with 5s of 2/2026 at 2.91%, 5s of 2029 at 2.82%, 5s of 2034 at 3.16%, 5s of 2039 at 3.39%, 5s of 2044 at 3.74%, 4s of 20488at 4.16% and 4s of 2054 at 4.21%, callable 7/1/2034.

AAA scales
Refinitiv MMD's scale was unchanged: The one-year was at 2.79% and 2.63% in two years. The five-year was at 2.64%, the 10-year at 2.94% and the 30-year at 3.79% at 3 p.m.

The ICE AAA yield curve was bumped one to three basis points: 2.91% (-1) in 2025 and 2.67% (-2) in 2026. The five-year was at 2.65% (-2), the 10-year was at 2.93% (-2) and the 30-year was at 3.74% (-2) at 4 p.m.

The S&P Global Market Intelligence municipal curve was cut up to two basis points: The one-year was at 2.84% (unch) in 2025 and 2.65% (unch) in 2026. The five-year was at 2.64% (+2), the 10-year was at 2.93% (+1) and the 30-year yield was at 3.73% (+2) at 4 p.m.

Bloomberg BVAL was little changed: 2.82% (unch) in 2025 and 2.63% (unch) in 2026. The five-year at 2.67% (unch), the 10-year at 2.96% (unch) and the 30-year at 3.69% (-1) at 4 p.m.

Treasuries saw mixed.

The two-year UST was yielding 4.347% (+6), the three-year was at 4.311% (+4), the five-year at 4.329% (+2), the 10-year at 4.434% (-2), the 20-year at 4.694% (-4) and the 30-year at 4.584% (-5) at the close.

Primary on Wednesday
Goldman Sachs (GS) priced for the Black Belt Energy Gas District (A1///) $1.011 billion of gas project revenue bonds, 2024 Series D, with 5s of 11/2026 at 3.80%, 5s of 2029 at 3.88% and 5s of 2034 at 4.22%, callable 8/1/2034.