Short-end munis sold off Friday as pressure from two-year U.S. Treasury yields as well as rising floating-rate muni yields have begun to hit the triple-A yield curves. Treasuries were better five years and out while equities rallied to close out the week.
Triple-A curves saw yields rise by as much as eight to 10 basis points on the one- and two-year, respectively, and one to two basis points outside of four years, while UST saw yields fall five-years and out. The two-year UST note closed the week at 3.253%, higher than the rest of the UST yield curve, save for the 20-year.
Muni-UST ratios on Friday were steady. The five-year was at 61%, the 10-year at 79% and the 30-year at 94%, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the five at 61%, the 10 at 82% and the 30 at 92% at a 4 p.m. read.
“Short-dated tax-exempts remain extremely rich, especially compared with the SIFMA index, which has continued moving higher, and its current level is similar to that of five-year AAAs, which begs the question, ‘Why anybody would buy short-dated tax-exempts at the moment?'” said Barclays strategists Mikhail Foux, Clare Pickering and Mayur Patel in a weekly report.
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. The five-year triple-A muni is around a 1.82%-1.84%, depending on the scale.
Short ratios are still quite rich to UST at about 54%-55% in two- and three-years.
Secondary trading Friday on the short end showed large blocks of one- and two-year high-grades moving to higher yields. Maryland Department of Transportation 5s of 2023 at 1.88%-1.86%. North Carolina 5s of 2023 at 1.82%-1.78%. Prince George’s County, Maryland, 5s of 2023 at 1.80%. Los Angeles Department of Water and Power 5s of 2023 at 1.79%. Minnesota 5s of 2023 at 1.85% (originally bought at 1.59% on Tuesday).
Despite volatility in UST, continued inflation concerns and the short-end pressure to close out this week, many participants are pointing toward a market with strong technicals as keeping most of the muni market stable.
“In July, we expected muni markets to remain quite volatile, but the market definitely has not been as active as we expected this month,” noted Barclays strategists. “Heavy summer redemptions provide market support; supply is still well-below expectations, although we do expect the pipeline to become much more active in the autumn; large outflows have largely stopped, and we do not expect too much more in the fall; finally, dealer inventories are light.”
As tax-exempts are quite rich, “taxables have much more value at the moment,” they said.
“Long-dated taxable municipals trade at similar spreads to corporates, and single-As and double-As actually have more value than them,” they said. “If corporate spreads move significantly higher in the autumn, taxable will undoubtedly follow, but will likely outperform by a wide margin.”
Barclays strategists said while they were not “happy with valuations,” they expect tax-exempts will likely move sideways for the rest of August, ”and then a lot will depend on what happens in the fall — we are still very cautious.”
Bond volume grows
New-issue volume grows next week to $10.728 billion led by a $2.7 billion taxable Massachusetts social bond deal — the largest muni ESG yet — that had been delayed by some last-minute legislative spending debate that did not come to pass.
There are $8.543 billion of negotiated deals on tap and $2.185 billion of competitive loans.
Oklahoma Development Finance Authority is set to bring $1.35 billion of taxable ratepayer-backed Oklahoma Natural Gas Company bonds and the Regents of the University of California has $1.25 billion of exempts, taxables and forward-delivery general revenue bonds scheduled.
New York City will bring $1.1 billion of exempt and taxable general obligation bonds.
Bond Buyer 30-day visible supply sits at $16.28 billion while Bloomberg data pegs net negative supply at $11.165 billion.
AAA scales
Refinitiv MMD’s scale saw a 10-basis-point cut on the one-year at the 3 p.m. read: the one-year at 1.74% (+10) and 1.75% (+6) in two years. The five-year at 1.82%, the 10-year at 2.24% and the 30-year at 2.93% (+2).
The ICE AAA yield curve was cut on the short end: 1.75% (+9) in 2023 and 1.77% (+6) in 2024. The five-year at 1.83%, the 10-year was at 2.29% and the 30-year yield was at 2.91% at 4 p.m.
The IHS Markit municipal curve was cut on the front end: 1.72% (+10) in 2023 and 1.76% (+6) in 2024. The five-year was at 1.83%, the 10-year was at 2.24% and the 30-year yield was at 2.93% (+1) at a 4 p.m. read.
Bloomberg BVAL was weaker on the short end: 1.67% (+10) in 2023 and 1.75% (+8) in 2024. The five-year at 1.84% (+1), the 10-year at 2.25% and the 30-year at 2.95% (+2) at 4 p.m.
Treasuries were weaker at the close.
The two-year UST was yielding 3.253% (+3), the three-year was at 3.187% (+2), the five-year at 2.965% (-2), the seven-year 2.911% (-4), the 10-year yielding 2.837% (-5), the 20-year at 3.325% (-7) and the 30-year Treasury was yielding 3.106% (-7) at the close.
New-issues to come:
Massachusetts (Aa1//AAA/AAA) is set to price $2.69 billion of taxable special obligation social revenue bonds (unemployment trust fund); $2.001 Series A, serials 2023-2032; $639.35 million Series B, term 2033. Jefferies LLC.
The Oklahoma Development Finance Authority (Aaa//AAA/) is set to price $1.354 billion of taxable ratepayer-backed Oklahoma Natural Gas Company bonds. J.P. Morgan Securities LLC.
The Regents of the University of California (Aa2/AA/AA/) is set to price on Wednesday $1.25 billion of general revenue bonds $713.23 million of exempt general revenue bonds, Series BK, $65.24 million of Series BL taxable, and $318.625 million of Series BM forward-delivery bonds. Goldman Sachs & Co. LLC
New York City (Aa2/AA/AA-/AA+) is set to price on Wednesday (retail Tuesday) $950 million of general obligation bonds, serials 2024-2029, 2033-2046. Jefferies LLC.
The Eagle Mountain-Saginaw Independent School District, Texas, PSF guarantee, is set to price $185.64 million of unlimited tax school building bonds, serials 2023-2052. HilltopSecurities.
The Equitable School Revolving Fund (/A//) is set to price on Wednesday $164.455 million of national charter school revolving loan fund social revenue bonds via the Arizona Industrial Development Authority, serials 2027-2042, terms 2047, 2052. RBC Capital Markets.
Dallas County, Texas, (/AAA//) is set to price on Wednesday $150 million of certificates of obligation, serials 2023-2042. Ramirez & Co., Inc.
The Fort Worth Independent School District (Aaa///) is set to price on Wednesday $135.185 million of unlimited tax school building bonds, PSF guaranteed, serials 2023-2042, term 2047. Siebert Williams Shank & Co., LLC.
The Fresno Unified School District, California, (Aa3///) is set to price on Tuesday $125 million of general obligation bonds. Stifel, Nicolaus & Company, Inc.
The Community Facilities District No. 2021-1 of Orange County, California, is set to price on Wednesday $118.720 million of Series A of 2022 special tax bonds. Piper Sandler & Co.
Competitive:
Miami-Dade County, Florida, (/AA/AA/) is set to sell $479.735 million of transit system sales surtax revenue bonds, Series 2022, at 10:30 a.m. eastern Tuesday.
Mecklenburg County, North Carolina, (Aaa/AAA/AAA/) is set to sell $451.335 million of general obligation school bonds at 11 a.m. Tuesday.
Minneapolis, Minnesota, (//AA+/) is set to sell $123.635 million of general obligation bonds at 11 a.m. Wednesday.
New York City (Aa2/AA/AA-/AA+) is set to sell $125 million of taxable general obligation bonds at 11:15 a.m. Wednesday.