PrintMunis underperform UST rally, 'constructive' market technicals
BY SourceMedia | MUNICIPAL | 04:04 PM ESTMunis underperformed a U.S. Treasury rally Thursday as equities ended down.
Munis were bumped up to four basis points, depending on the scale, while UST yields fell six to nine basis points near the close, with the largest gains on the front end.
The two-year muni-UST ratio Thursday was at 61%, the five-year at 58% the 10-year at 62% and the 30-year at 88%, according to Municipal Market Data's 3 p.m. EDT read. The two-year muni-UST ratio was at 59%, the five-year at 56%, the 10-year at 61% and the 30-year at 86%, according to ICE Data Services.
Munis enter this year with "strong credit fundamentals, elevated tax-equivalent yields, and a steeper curve that supports duration extension," said James Welch, municipal portfolio manager at Principal Asset Management.
"With federal tax exemption uncertainty resolved, investor confidence has improved, and demand is expected to strengthen, even as supply remains elevated," he said.
This is an environment where technicals are "extremely constructive," said Matthew Gastall, head of municipal strategy and research at Bloomberg Intelligence.
"Currently, there's a broad supply/demand imbalance that continues to anchor ratios, and that dynamic actually intensifies when seasonals are constructive," he said.
There was "notable outperformance" in unchanged muni action early this week, and even more strength Wednesday on the short-end of the curve, which "is very indicative of where redemption proceeds are returning to the market," he said.
"That outperformance was also apparent last week, and was likely intensified by anticipations for Feb. 1 payments," Gastall said. "It's very likely [Thursday]'s underperformance is simply due to lag, as the asset class is 2/3 controlled by U.S. households."
For investors, "it may seem like groundhog month in February when it comes to the fundamental supply and demand dynamics in the municipal market," said Ted Ruddock, managing director of fixed income private wealth at Raymond James, and Drew O'Neil, director of fixed income strategy at the firm.
They expect a repeat performance this month, similar to January, when supply was limited but demand remained strong.
"That kept a lid on the relative value of municipal bonds to Treasuries, while also pushing yields on the short end lower," Ruddock and O'Neil said.
February redemption flows are estimated at around $46 billion in principal and interest returned to investors, they said.
There is "little relief in sight on the relative value front" as the muni curve steepens: Yields on the short end are declining, falling 15 to 20 basis points since the beginning of January, while yields further out have barely moved higher, Ruddock and O'Neil said.
"That's continued good news for investors with a longer-term investment horizon and a 'buy-monitor-hold' strategy," they said.
Fund flows
Investors added $2.381 billion to municipal bond mutual funds in the week ended Wednesday, following $2.06 billion of inflows the prior week, according to LSEG Lipper data.
High-yield funds saw inflows of $563.6 million compared to inflows of $485.6 million the previous week.
Tax-exempt municipal money market funds saw outflows of $1.011 billion for the week ending Feb. 2, bringing total assets to $142.758 billion, according to the Money Fund Report, a weekly publication of EPFR.
The average seven-day simple yield for all tax-free and municipal money-market funds was 1.94%.
Taxable money-fund assets saw $41.329 billion added, bringing the total to $7.577 trillion.
The average seven-day simple yield was 3.37%.
The SIFMA Swap Index was at 2.17% on Wednesday compared to the previous week's 2.28%.
New-issue market
In the primary market Thursday, Wells Fargo
The second tranche, $28.455 million of Series 2026B sales tax receipts revenue refunding bonds (/AA//AA/), saw 5s of 12/2030 at 2.42%, 5s of 2036 at 3.06% and 5s of 2040 at 3.52%, callable 12/1/2035.
Raymond James priced for Cartersville, Georgia, (Aa3/AA-//) $233.855 million of water and sewer revenue bonds, with 5s of 6/2027 at 2.16%, 5s of 2031 at 2.28%, 5s of 2036 at 2.75%, 5s of 2041 at 3.34%, 4.125s of 2046 at 4.26%, 5s of 2051 at 4.45% and 5s of 2056 at 4.55%, callable 6/1/2036.
J.P. Morgan priced for the Maryland Health and Higher Educational Facilities Authority (A2/A//) $187.265 million of MedStar Health issue revenue bonds, Series 2026C, with 5s of 8/2027 at 2.31%, 5s of 2031 at 2.57%, 5s of 2036 at 3.10%, 5s of 2041 at 3.66% and 5s of 2042 at 3.79%, callable 2/15/2036.
AAA scales
MMD's scale was little changed: 2.12% (unch) in 2027 and 2.12% (-1) in 2028. The five-year was 2.19% (unch), the 10-year was 2.60% (unch) and the 30-year was 4.29% (unch) at 3 p.m.
The ICE AAA yield curve was bumped two to four basis points: 2.14% (-3) in 2027 and 2.12% (-3) in 2028. The five-year was at 2.14% (-4), the 10-year was at 2.60% (-3) and the 30-year was at 4.22% (-2) at 4 p.m.
The S&P Global Market Intelligence municipal curve was unchanged: The one-year was at 2.11% in 2027 and 2.12% in 2028. The five-year was at 2.19%, the 10-year was at 2.59% and the 30-year yield was at 4.24% at 3 p.m.
Bloomberg BVAL was bumped one to two basis points: 2.13% (-2) in 2027 and 2.11% (-2) in 2028. The five-year at 2.16% (-2), the 10-year at 2.57% (-2) and the 30-year at 4.14% (-1) at 4 p.m.
U.S. Treasuries rallied.
The two-year UST was yielding 3.470% (-9), the three-year was at 3.54% (-9), the five-year at 3.739% (-9), the 10-year at 4.199% (-8), the 20-year at 4.795% (-7) and the 30-year at 4.855% (-6) near the close.
