Munis continue their outperformance to UST

Municipal bonds were slightly weaker Friday inside 10 years, but trading was light and munis still outperformed U.S. Treasuries, which weakened further on the day from Wednesday’s large sell-off.

Investors put nearly $2 billion into municipal bond mutual funds for the most recent week with high-yield reversing a downward course to hit $1.2 billion following $1 million a week prior, according to Refinitiv Lipper data.

It was the 36th consecutive week and the largest reported inflows since July and the second-largest inflows into high-yield in 2021.

The focus this week shifted to economic releases, with the CPI topping the list, and the above-projected read led to the bear-steepening of UST. Despite the large U.S. Treasury sell-off, munis are “in much better shape technically than last month,” said Barclays strategists in a Friday report.

Ratios have “declined meaningfully as a result — we suspect municipal yields have some catching up to do to the upside in the near term,” said Mikhail Foux, Clare Pickering and Mayur Patel in a weekly report.

Ratios fell further on Friday. Municipal-to-Treasury ratios were at 50% in five years, at 68% in 10-years and 78% in 30-years, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the five-year at 48%, the 10 at 70% and the 30 at 80%.

“Given rising investor concern that the Fed is falling behind the curve and moving too slowly despite stronger payrolls and inflation data, Treasury yields have been trending higher and yield curves have been flattening,” the Barclays strategists said.

While lagging a bit, muni curves have also been getting flatter, and the long-end has finally started performing, with the 10s30s curve flattening by about 10 basis points in November, they said.

“As investors await the start of tapering, and given that the economic data will likely remain strong as the effects of the Delta strain abate, we could see more flattening of muni curves near term, although the long end (especially the 20-year part of the curve) is far from cheap compared with shorter-dated maturities,” the report said.

But they said because municipal credit largely managed through the pandemic, and most sectors have recovered from it, largely befitting from the federal support, the market saw this well in advance.

“Credit spreads even for high-beta credits have fully recovered and are currently trading at, or close to, their all-time tights — even the IG-HY index differential is near its lows,” the report said.

In the taxable space, they said, municipals have been lagging corporates since the second half of 2020 — more so for intermediate bonds, as long-dated taxables have recovered faster — but the muni index is now trading well through the similar-maturity corporate index.

As such, “we do not see a meaningful selloff in muni credit in the current market environment, as municipalities’ fundamentals remain strong and they are flush with cash.

“However, we also do not expect much of a rally from current levels — for credit spreads, sideways trading is the most likely outcome, in our view,” they said.

For next week, a robust new-issue calendar greets investors, totaling $9.127 billion — of that $2.9 billion is taxable — with $6.507 negotiated and $2.619 billion in the competitive market. The 30-day visible supply is at $14.91 billion.

The calendar is led by Mississippi (Aa2/AA/AA/) with $1.225 billion of tax-exempt and taxable general obligation bonds, the largest tranche of which is a $900 million taxable refunding.

King County, Washington, (Aaa/AAA/AAA/) leads a smaller competitive calendar with $494.9 million of taxable limited tax general obligation bonds on Tuesday.

Secondary trading
Not much to write home about for a relatively quiet Friday, trading down about 19% from Wednesday’s levels, but certain prints were clearly cheaper.

Loudon County, Virginia, 5s of 2022 at 0.20%. Washington 5s of 2023 at 0.24%-0.23%.

New York City water 5s of 2026 at 0.64%. Montgomery County, Maryland, 5s of 2027 at 0.81%. California 5s of 2027 at 0.77%. Monmouth County, New Jersey, 5s of 2027 at 0.70%. Delaware 5s of 2028 at 0.86%.

Ohio 5s of 2031 at 1.15%. Charleston County, South Carolina, 5s of 2031 at 1.26%.

District of Columbia 5s of 2041 at 1.49%. New York EFC green bond 5s of 2051 at 1.82%-1.81% versus 1.81% original.

AAA scales
According to Refinitiv MMD, yields were cheaper by a basis point to 0.15% in 2022 and 0.24% in 2023. The 10-year held steady at 1.08% and the yield on the 30-year sat at 1.53%.

The ICE municipal yield curve showed yields rise one basis point to 0.16% in 2022 and 0.25% in 2023. The 10-year maturity sat at 1.08% and the 30-year yield was steady at 1.56%.

The IHS Markit municipal analytics curve showed short yields up one to 0.15% in 2022 and to 0.22% in 2023. The 10-year yield sat at 1.06% and the 30-year yield stayed at 1.54%.

The Bloomberg BVAL curve showed short yields steady at 0.16% in 2022 and 0.21% in 2023. The 10-year yield rose one basis point to 1.09% and the 30-year yield steady at 1.56%.

Treasuries were weaker and equities made gains.

The five-year UST was yielding 1.231%, the 10-year at yielding 1.576%, the 20-year at 1.978% and the 30-year Treasury was yielding 1.946% near the close. The Dow Jones Industrial Average gained 191 points or 0.53%, the S&P was up 0.73% while the Nasdaq gained 1.00% near the close.

Refinitiv Lipper reports $1.9B inflow
In the week ended Nov. 10, weekly reporting tax-exempt mutual funds saw $1.899 billion of inflows, Refinitiv Lipper said Thursday. It followed an inflow of $602.933 million in the previous week.

Exchange-traded muni funds reported inflows of $671.670 million, after inflows of $519.543 million in the previous week. Ex-ETFs, muni funds saw inflows of $1.227 billion after inflows of $83.390 million in the prior week.

The four-week moving average remained positive at $768.916 million, after being in the green at $409.586 million in the previous week.

Long-term muni bond funds had inflows of $1.810 billion in the latest week after inflows of $586.687 million in the previous week. Intermediate-term funds had inflows of $162.894 million after inflows of $184.412 million in the prior week.

National funds had inflows of $1.817 billion after inflows of $598.065 million while high-yield muni funds reported inflows of $1.223 billion in the latest week, after inflows of only $1.072 million the previous week.

Powell vs. Brainard
With Jerome Powell expected to be renominated as Federal Reserve Board chair, with an outside chance that Fed Gov. Lael Brainard may be chosen to replace him, analysts say the difference between the two in terms of monetary policy might be minimal.

The market seems to be concentrating on “the arguably unfounded assumption a Brainard Fed would result in a slower, more accommodative pathway than would a second-term Powell Fed,” said Stifel Chief Economist Lindsey Piegza.

With inflation at the level it’s at, she said, “we contend the leadership at the Fed would matter less than many anticipate, at least in the near term, with both candidates likely to maintain the asset reduction pathway previously discussed and moving on to rate hikes by the end of 2022.”

Rising inflation expectations suggests the market is “less convinced the Fed will move at an appropriate pace to quell the upward momentum.”

The odds of a Powell renomination are about 2-to-1, according to Luigi Speranza, chief global economist at BNP Paribas Markets 360 and his team, with Brainard given a vice chair role.

Among the benefits of a Powell renomination, he said, are continuity when monetary policy is at a crucial period, easier Senate confirmation, and “shields somewhat the White House against Republican attacks on inflation.”

With two open spots and possibly more depending on whether Powell and Vice Chair Richard Clarida are renominated, “the next FOMC is likely to have a more dovish inclination than the current one,” Speranza said. “But a Brainard appointment is likely to give further confidence to the markets that the Fed is in no rush to spoil the party.”

While Powell would have some support from Democrats, although Sen. Elizabeth Warren strongly opposes another term, given her belief his Fed has walked backed too much supervision, many Republicans see Brainard as too progressive, he said.

If nominated and confirmed, Brainard “would have to tone down some of [her] positions in an attempt to build consensus, in our view, but her position would still make a difference at the margin, especially in the context of an overall more dovish committee.”

With data will determine the Fed’s monetary policy path, Speranza said, “A Brainard appointment would not significantly change the Fed’s overall policy stance over the next four years. However, her dovish bias could still make the difference at the margin by making an acceleration of tapering plans less likely and delaying rate liftoff a bit longer.”

In data released Friday, the University of Michigan consumer sentiment index fell to 66.8 in November from 71.7 in October, while the current conditions index fell to 73.2 from 77.7 and the expectations index dropped to 62.8 from 67.9.

“Consumer sentiment tumbled to a ten-year low in November,” noted Wells Fargo Securities Senior Economist Tim Quinlan, Economist Shannon Seery and Economic Analyst Sara Cotsakis. “Sentiment has been shaken in recent months amid the more recent outbreak of COVID, dwindling stimulus and sharply higher consumer goods inflation. But the details of today’s pessimistic read on sentiment for November makes it clear that inflation is weighing on the minds of consumers.”

Primary to come
Mississippi (Aa2/AA/AA/) is set to price $1.225 billion of general obligation bonds, consisting of $198.85 million of tax-exempt GOs, $126.89 million of taxable GOs, and $900 million of taxable refunding GOs. Wells Fargo Corporate & Investment Banking.

Grand Canyon University (Ba1///) is set to price on Thursday $1.2 billion of taxable corporate CUSIP bonds. Barclays Capital Inc.

The California Health Facilities Financing Authority (Aa3/AA-/AA-/) is set to price on Wednesday $1.05 billion of Cedars-Sinai Health System revenue bonds, serials 2037-2041. Barclays Capital Inc.

The Cedars-Sinai Health System (Aa3/AA-AA-/) is also set to price on Wednesday $300 million of taxable corporate CUSIP bonds. Barclays Capital Inc.

The Metropolitan Water Reclamation District of Greater Chicago (/AA/AAA/) is set to price on Tuesday $500 million of general obligation limited and unlimited tax, tax-exempt, green and taxable bonds. J.P. Morgan Securities LLC.

The Port of Houston Authority, Harris County, Texas, (Aa3/AA+//) is set to price on Tuesday $315.95 million of first lien revenue bonds, serials 2022-2041, terms 2046, 2051. Siebert Williams Shank & Co., LLC.

The CSCDA Community Improvement Authority (nonrated) is set to price on Tuesday $197.675 million of 777 Place-Pomona essential housing revenue bonds. Goldman Sachs & Co. LLC.

Cook County, Illinois, (A2/A+/AA-/) is set to price on Wednesday $193.19 million of general obligation refunding bonds, serials 2022-2028. Loop Capital Markets.

The CSCDA Community Improvement Authority (nonrated) is set to price on Wednesday $177.825 million of Millennium South Bay-Hawthorne revenue bonds. Stifel, Nicolaus & Company, Inc.

Clark University, Massachusetts, (A2///) is set to price $156 million of taxable refunding bonds on Wednesday. Goldman Sachs & Co. LLC.

Colorado (Aa2/AA-//) is set to price on Wednesday $149.56 million of Building Excellent Schools Today certificates of participation, serials 2022-2046. RBC Capital Markets.

Maricopa County, Arizona, (A3/A-/BBB+/) is set to price on Tuesday $144.4 million of pollution control revenue refunding bonds (Southern California Edison Company). Morgan Stanley & Co. LLC.

Katy Independent School District, Texas, (Aaa/AAA//) is set to price $133.495 million of unlimited tax school building bonds, PSF guarantee, serials 2022-2051. Huntington Securities, Inc.

Bellevue, Washington, (Aaa/AAA//) is set to price on Tuesday $122.73 million of limited tax general obligation taxable delayed delivery refunding bonds. RBC Capital Markets.

The Public Finance Authority, Wisconsin, (/AA-/AA/) is set to price on Tuesday $113.97 million of Bayhealth Medical Center Project tax-exempt and taxable revenue bonds. PNC Capital Markets LLC.

The Forsyth County School District, Georgia, (Aaa/AAA//) is set to price on Tuesday $109.575 million of taxable general obligation refunding bonds, serials 2022-2033. Citigroup Global Markets Inc.

The Michigan Finance Authority (Aaa//AAA/) is set to price on Tuesday $107.585 million of drinking water revolving fund revenue bonds, serials 2023-2042. Citigroup Global Markets Inc.

Farmington, New Mexico, (A3/A-/BBB+/) is set to price on Tuesday $103.46 million of pollution control refunding revenue bonds (Southern California Edison Company Four Corners Project). J.P. Morgan Securities LLC.

Farmington is also set to price $100 million of pollution control refunding revenue bonds (Southern California Edison Company Four Corners Project), serials 2029. Barclays Capital Inc.

Georgia Tech Foundation is set to price on Thursday $100 million of taxable corporate CUSIP bonds, term 2051, indications of interest on Wednesday. Barclays Capital Inc.

The California Statewide Communities Development Authority is set to price $100 million of Southern California Edison Company pollution control refunding revenue bonds on Tuesday. J.P. Morgan Securities LLC

Competitive calendar
King County, Washington, (Aaa/AAA/AAA/) is set to sell $494.9 million of taxable limited tax general obligation bonds at 10:45 a.m. Tuesday.

King County will also sell $30.555 million of limited tax general obligation bonds at 11:15 a.m. Tuesday.

The San Francisco Public Utilities Commission (Aa2/AA//) is set to sell $266.265 million of green wastewater revenue SSIP bonds at 10 a.m. Tuesday.

The issuer will also sell $38.735 million of wastewater revenue bonds non-SSIP at 10:30 a.m. Tuesday.

Day-to-day calendar
Main Street Natural Gas (Aa2//AA-/) remains on the day-to-day calendar with $750 million of gas supply revenue bonds, Series 2021A, serials 2023-2031, term 2052. RBC Capital Markets.

The California Community Choice Financing Authority (A2///) is on the day-to-day calendar with $556.030 million of clean energy project revenue climate bond certified green bonds. Goldman Sachs & Co. LLC.

The Arizona Industrial Development Authority is on the day-to-day calendar with $177.97 million of revenue bonds (NewLife Forest Restoration Project), consisting of $110.045 million of senior federally taxable series 2021A (sustainability-linked bonds), term 2041 and $67.925 million of subordinate federally taxable series 2021B (sustainability-linked bonds), term 2046. Goldman Sachs & Co.

The Successor Agency to the Redevelopment Agency of the City and County of San Francisco (/AA///) is on the day-to-day calendar with $107.34 million of taxable third-lien tax allocation social bonds, 2021 Series A (affordable housing projects), serials 2023-2031, insured by Assured Guaranty Municipal Corp. Citigroup Global Markets.

Chip Barnett contributed to this report.

Bonds

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