Munis stronger, ignore UST selloff

Municipals rallied Wednesday, ignoring a selloff in U.S. Treasuries, after the Federal Open Market Committee meeting minutes reiterated the Fed’s position it would raise rates 50 to 75 basis points at its July meeting to stave off inflation. Equities ended slightly up..

Municipals were in their own lane Wednesday and triple-A yields fell four to 10 basis points, depending on the scale, while the two-, three-, five- and seven-year USTs rose above the 10-year, with some in the market seeing the FOMC minutes as dated now that the focus has turned the focus to a potential recession away from inflation concerns.

The Fed “wants slower economic growth to curb inflation using interest rates as a brake on the overheated job market,” said Carl Ludwigson, managing director at Bel Air Investment Advisors.
The good news, he said, is “the bond market may have already priced in much of the Fed’s action plan. The threat to asset prices is broad based inflation pushing central banks to tighten monetary policy even more rapidly than expected.”

If the Fed’s policy response “proves too aggressive, then Treasuries and high-quality municipal bonds will again be the place to hide as tighter financial conditions lead to demand destruction,” he said.

Muni-UST ratios fell out long on Wednesday. They were at 70% in five years, 86% in 10 years and 97% in 30, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the five at 70%, the 10 at 88% and the 30 at 97% at a 4 p.m. read.

In the primary, Goldman Sachs & Co. held a one-day retail offer for $700 million of TBTA Capital Lockbox — City Sales Tax sales tax revenue bonds, Series 2022A, from the Triborough Bridge and Tunnel Authority, New York, (/AA+/AAA/), consisting of 5s of 5/2025 at 2.01%, 5s of 2027 at 2.24%, 5s of 2032 at 2.89%, 5s of 2037 at 3.32%, 5s of 2042 at 3.54%, 4s of 2047 at 4.03%, 4s of 2052 at 4.14%, 4s of 2057 at 4.24% and 5.25s of 2057 at 3.79%, callable in 11/15/2032. Bonds in 2062 were not offered to retail.

The Investment Company Institute, meanwhile, reported investors pulled $1.372 billion from muni bond mutual funds in the week ending June 29 compared to the $4.591 billion of outflows in the previous week.

This brings the total to $87.8 billion of outflows year-to-date versus Refinitiv Lipper’s $47 billion figure.

Exchange-traded funds saw inflows at $690 million versus $1.219 billion of inflows the week prior, per ICI data.

Recent moves in the Treasury market dictate most of the movement in the municipal bond market, said Cooper Howard, fixed income strategist at the Schwab Center for Financial Research.

There has been a lag for munis, which he attributes to some supply and demand dynamics.

“Usually, during the summer months, there tends to be a lot of coupons and principals that return back to investors,” he said. “So that’s out there trying to find that home a little bit.”

Triple-A yields fell more basis points than USTs, marking a divergence Wednesday. However, Howard said munis have not fallen as significantly as USTs in recent sessions, which pushed relative values toward more attractive levels, especially for the seven- to 10-year muni-UST ratios. Due to this, he said there may be some increased demand and interest in these areas of the curve.

Howard he doesn’t expect rates to rise as sharply or mutual fund outflows to be as severe over the second half of the year..

“Outflows and inflows in general tend to follow the direction of overall yields, overall Treasury rates. So when interest rates rise, that creates a negative total return for funds,” he said. “For retail-dominated products like [exchange-traded funds], mutual funds, retail investors see those negative total returns that spook them, and they begin to pull money from it.”

“If we start to see Treasury yields stabilize, I would expect to see less negative flows or potentially inflows back into mutual funds and ETFs,” he added.

However, Howard noted this is also dependent on upcoming economic indicators, which issuers and investors are watching closely.

“We are starting to see some numbers tick out, that it could be rolling over, which is a positive sign,” he said. “And that’s why expectations for Fed rate hikes are starting to slow a little.”

This doesn’t mean another 75-basis point rate hike isn’t still on the table for the next Federal Open Market Committee meeting at the end of the month.

The minutes said the FOMC judged either a 50 or 75 basis point rate hike would be appropriate at the next meeting.

“Participants concurred that the economic outlook warranted moving to a restrictive stance of policy, and they recognized the possibility that an even more restrictive stance could be appropriate if elevated inflation pressures were to persist,” according to the minutes.

Howard said he expects slower economic growth as the Fed attempts to tighten financial conditions without tipping the economy into recession.

Informa: Money market muni assets rise again
Tax-exempt municipal money market funds continued a 11-week inflow streak as $1.71 billion was added the week ending July 5, bringing the total assets to $104.79 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 fell to 0.53%.

Taxable money-fund assets added $29.50 billion to end the reporting week at $4.406 trillion of total net assets. The average seven-day simple yield for all taxable reporting funds rose to 1.05%.

Secondary trading
New York UDC PITs 5s of 2023 at 1.48%-1.43%. Boston 5s of 2025 at 1.96%-1.94%. Delaware 5s of 2026 at 2.02%.

New York City TFA 5s of 2027 at 2.20%-2.15%. Triborough Bridge & Tunnel MTA bridges and tunnels 5s of 2029 at 2.46%. Triborough Bridge & Tunnel MTA bridges and tunnels 5s of 2030 at 2.61%-2.59%.

Georgia 5s of 2032 at 2.56% versus 2.63% Tuesday. Cambridge, Massachusetts, 5s of 2032 at 2.48%-2.45%. Maryland 5s of 2034 at 2.74%-2.72% versus 2.82%-2.75% Tuesday.

Washington 5s of 2035 at 2.88%. Montgomery County, Pennsylvania, 5s of 2035 at 2.75% versus 2.84% Tuesday and 3.10% original.

Clemson 5s of 2039 at 2.86%. Los Angeles DWP 5s of 2052 at 3.35%.

AAA scales
Refinitiv MMD’s scale was bumped five to 10 basis points at the 3 p.m. read: the one-year at 1.50% (-5) and 1.83% (-5) in two years. The five-year at 2.07% (-6), the 10-year at 2.51% (-10) and the 30-year at 3.01% (-5).

The ICE municipal yield curve was bumped four to five basis points: 1.52% (-5) in 2023 and 1.82% (-5) in 2024. The five-year at 2.11% (-5), the 10-year was at 2.54% (-4) and the 30-year yield was at 3.05% (-4) near the close.

The IHS Markit municipal curve was bumped five to 10 basis points: 1.47% (-10) in 2023 and 1.81% (-10) in 2024. The five-year at 2.07% (-6), the 10-year was at 2.51% (-10) and the 30-year yield was at 3.01% (-5) at the close.

Bloomberg BVAL was bumped five to seven basis points: 1.51% (-5) in 2023 and 1.79% (-5) in 2024. The five-year at 2.09% (-5), the 10-year at 2.55% (-7) and the 30-year at 3.02% (-6) near the close.

Treasuries sold off.

The two-year UST was yielding 2.963% (+14), the three-year was at 2.982% (+15), the five-year at 2.959% (+14), the seven-year 2.985% (+10), the 10-year yielding 2.923% (+11), the 20-year at 3.421% (+10) and the 30-year Treasury was yielding 3.133% (+9) near the close.

Primary to come:
The City and County of Denver, Colorado, (Aa3/A+/AA-/) is set to price Thursday on behalf of its Department of Aviation $1.5 billion of airport system revenue bonds, consisting of $1.375 billion of AMT senior lien bonds, Series 2022A, serials 2024-2042, terms 2047 and 2053 and $125 million of AMT bonds, Series 2022B, serials 2024-2042, terms 2047 and 2053. BofA Securities.

The City of Temple, Texas, (/AA//) is set to price Thursday $104.280 million of combination tax and revenue certificates of obligation and limited tax notes, consisting of $45.270 million of certificates of obligation, Series 2022A serials 2023-2042; $40.735 million of certificates of obligation, Series 2022B, serials 2025-2047, $12.180 of taxable certificates of obligation, Series 2022C, serials 2025-2047; and $6.095 million of limited tax notes, Series 2022 serials 2023-2029. Raymond James & Associates.

The Oklahoma City Water Utilities Trust (Aaa/AAA//) is set to price Thursday $270.170 million of taxable utility system revenue refunding bonds, Series 2022. J.P. Morgan Securities.