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Munis a touch better; post-holiday news calendar grows

Munis a touch better; post-holiday news calendar grows

Municipalities were slightly firmer ahead of the Fourth of July holiday as U.S. Treasury yields fell and stocks closed mixed.

Minutes of the Federal Open Market Committee meeting, released after the early market close, showed the Fed is in no hurry to cut rates.

FOMC members saw inflation “easing” but still needed more evidence that inflation was moving toward the 2 percent target before cutting rates. However, minutes from the June 11-12 meeting show that several officials would consider raising rates if inflation did not ease further.

“Participants noted that progress in reducing inflation this year has been slower than they had anticipated last December,” the minutes said. “They emphasized that they did not expect it to be appropriate to reduce the target range for the federal funds rate until additional information emerged that would give them greater confidence that inflation was moving toward the Committee’s 2 percent objective in a sustained manner.”

Officials noted the importance of continuing to rely on data. “Several participants noted that financial market responses to data and feedback from contacts suggested that the Committee’s policy approach was generally well understood,” the minutes said.

Yields on AAA bonds fell by one to three basis points, while yields on government bonds rose by four to eight basis points.

The two-year muni-to-Treasury ratio was 66% on Wednesday, the three-year was 66%, the five-year was 67%, the 10-year was 66% and the 30-year was 83%, according to a reading from Refinitiv Municipal Market Data as of 1 p.m. EST. ICE Data Services had the two-year at 65%, the three-year at 66%, the five-year at 66%, the 10-year at 66% and the 30-year at 81% as of 1 p.m.

The Investment Company Institute on Wednesday reported $160 million in outflows into municipal bond funds for the week ended June 26, after $118 million inflows the week before.

ETFs saw outflows of $411 million, following inflows of $220 million the previous week.

“The strengths of municipal fundamentals and technicals are driving a reconciliation with higher UST yields,” said Kim Olsan, senior vice president of municipal bond trading at FHN Financial.

July is in the middle of summer reinvestment cycle — when more than $110 billion will have matured or been called in June through August — but in 2024 there will be several factors that could impact near-term returns, she noted.

The Federal Open Market Committee meets in mid-July and “issuers will be mindful of the November elections and likely conducting prefund transactions over the summer to meet larger rollover needs,” Olsan said.

The five- and 10-year maturities are higher than the averages of the past 12 months, she said.

In the five-year area, high-quality munis are “trading at just under 3.00%, or about 20 basis points above their annual median, she noted.

“Intermediate AAA bonds have fallen around 2.90%, almost 15 basis points higher than the annual median,” while “long-dated bonds around 3.75% (for pure AAA special government names) are within a nominal spread of 3.80% on average since July 2023,” Olsan said.

Many AA-rated income bonds can be purchased at 4.00% or better and provide a taxable yield of more than 6.00%, she said.

An example of this is the recent issuance of Massachusetts Bay Area Transportation sales tax bonds with a maturity of 5 in 2048, due 2034, at 3.95%, Olsan said.

She said returns are above average across most of the curve.

According to Olsan, the offering could become “more split in nature.”

“There is a potential for increased volume in general market names to lead to spread widening, while significant supply shortages in high-tax states (CA, NY, MA, NJ, MD) could begin to compress spreads,” she said, citing recent transactions that show a “potential pattern.”

The 5-share Los Angeles Department of Water and Power due 2037 (candidate 2034) “traded at 3.00%, remaining flat on the MMD spot, but the 5-share University of Texas due 2035 (candidate 2034) sold at 3.10% for a spread of +20/MMD,” she said.

According to Olsan, July’s seasonality in recent years has been “strongly driven” by supply and by pre- and post-tightening cycle factors.

She said 2020 and 2021 saw periods of “high demand and low yields.”

According to Olsan, the 10-year yield closed at 0.90% in the first week of July 2020, before rising at the end of the month and closing at 0.65%.

In July 2020, $47 billion of new bonds were issued, with “demand leading to increased supply,” she said.

According to Olsan, the yield on 10-year bonds fell from 0.98% to 0.82% in July 2021 on $37 billion in issuance.

However, according to Olsan, there were “mismatched results” in July 2022 and 2023.

According to Olsan, the Fed’s fourth rate hike in 2022 affected the July offering, which consisted of $28 billion in issuance.

According to her, the reinvestment demand caused the yield on 10-year government bonds to rise from 2.66% to 2.21% through July 2022.

Meanwhile, a modest 25 basis point rate hike in July 2023 had a muted effect on both yield direction and supply (only $27 billion was priced), she said.

The yield on 10-year MMDs in 2023 was 2.56% at the start of the month, but fell “marginally” mid-month and ended nearly flat, Olsan said.

“Any increase in overall market volume this month could lead to higher returns across most sectors,” she said.

Despite issuance falling to a mere $245 million this week, there are already several big deals in the pipeline. Bond Buyer 30-day visible inventory grows to $11.93 billion.

The New York State Dormitory Authority will sell $1.29 billion of state sales tax bonds in three series on July 10.

Harris County will announce a $730 million deal next week, consisting of $100 million in permanent improvement reimbursement bonds, $220 million in unrestricted road tax reimbursement bonds and $410 million in permanent improvement tax and revenue obligation certificates.

The Washington Metropolitan Area Transit Authority will issue $625 million in second mortgage loans on July 9.

The New York City Transitional Finance Authority will price $1.7 billion in tax-exempt and taxable future tax-backed revenue refund bonds the week of July 15.

Miami-Dade County, Florida, will issue $923 million in aviation revenue repayment bonds on July 16, consisting of $782 million in AMT bonds and $141 million in non-AMT bonds.

New York City will price $1.2 billion of GO refinancing bonds the week of July 29.

The Port of Seattle is expected to price approximately $850 million in AMT and non-AMT interim liens and reimbursement bonds during the week of July 29.

Houston will commit $720.445 million to the deal, consisting of $589.41 million in GO Refinancing Bonds and $131.035 million in Public Improvement Refinancing Bonds.

AAA scales
The Refinitiv MMD scale saw bumps five years and in: The one-year was 3.12% (-3) and 3.08% (-2) in two years. The five-year was 2.90% (-2), the 10-year 2.87% (unch) and the 30-year 3.75% (unch) at 1 p.m.

The ICE AAA yield curve was raised by three basis points: 3.19% (-3) in 2025 and 3.12% (-3) in 2026. The five-year stood at 2.92% (-3), the 10-year at 2.89% (-3) and the 30-year at 3.72% (-3) at 1:30 p.m.

Bloomberg BVAL was raised to one basis point: 3.17% (-1) in 2025 and 3.12% (-1) in 2026. The five-year at 2.95% (-1), the ten-year at 2.86% (-1) and the thirty-year at 3.76% (-1) at 1:30 p.m.

Government bonds were firmer.

The two-year US Treasury yielded 4.703% (-4), the three-year 4.488% (-6), the five-year 4.319% (-7), the 10-year 4.353% (-8), the 20-year 4.629% (-8) and the 30-year 4.523% (-8) at 1:45 p.m.

Gary Siegel contributed to this report.