Muni market takes ‘breather’ with few deals

Municipals were regular Tuesday as U.S. Treasury yields fell and equities ended higher.

The muni market will see few deals this week as issuers normally “take a breather” on coming to market during holiday-shortened weeks, noted senior vice chairman and director of strategic planning and stuck income research at SWBC Chris Brigati.

Together with the “muted” new-issue calendar, secondary market activity is predicted to even be light, said AllianceBernstein strategists.

Nonetheless, with around $31 billion of July reinvestment money hitting the muni market early this week, investors can have a “good opportunity to place money to work,” they said.

“With a nonexistent new-issue calendar and heavy dealer balance sheets, we expect the muni market to get a bit ‘grabby’ over the following few weeks,” AllianceBernstein strategists said.

While muni-UST ratios are within the mid-60s, noted David Litvack, a tax-exempt strategist at BofA Securities, they were richer in the primary quarter before cheapening attributable to weaker technicals.

Lots of latest issuance and comparatively low redemptions in May caused ratios to succeed in 70%, Litvack said.

Then, opportunistic buyers got here in, driving relative value down again, he said.

 The 2-year muni-to-Treasury ratio Tuesday was at 65%, the three-year at 65%, the five-year at 66%, the 10-year at 65% and the 30-year at 81%, in accordance with Refinitiv Municipal Market Data’s 3 p.m. EST read. ICE Data Services had the two-year at 66%, the three-year at 66%, the five-year at 66%, the 10-year at 65% and the 30-year at 81% at 3:30 p.m.

“We have seen valuations richen in June, but to not the degrees they were at first of the 12 months,” Litvack said.

Ratios will stay wealthy through the summer as issuance slows from the constant onslaught seen in the primary half of the 12 months, he said.

Redemptions picked up in the summertime months, as expected, Litvack said. Market technicals are tied to the summer redemption levels of June, July and August, which creates more of a net negative supply environment, he said.

That can keep valuations wealthy through August, he noted.

Technicals will weaken again in September as redemption figures fall, Litvack said.

September, though, will see a “kickoff” in issuance, giving investors one other shot at a less expensive entry point, he said.

June recap
Tax-exempts rallied “in sympathy” with USTs last month and outperformed on strong June reinvestment — around 108% of supply — and more “attractive” muni-UST ratios during mid-month, said Peter Block, managing director and head of municipal strategy at Ramirez.

Refinitiv MMD’s scale was bumped by a mean of 25 basis points almost “uniformly” across the curve, creating a mean negative 3 muni-UST ratio of outperformance and “(back to) fair-to-rich valuations,” he said.

“MMD 2s10s stays inverted by -27 bps which caused investors to hunt higher value in MMD 10s30s, which steepened only +3 bps on the month to +88 bps,” Block said.

The Bloomberg Municipal Index posted a complete return of 1.53% in June, bringing year-to-date returns to -0.40%, said Barclays strategists.

Munis outperformed the U.S. Treasury Index, which returned 1.0%, they noted.

Muni ratios rallied across the curve, with the MMD-UST five-, 10- and 30-year ratios falling by three percentage points, 4 percentage points and three percentage points, and ended the month at 67%, 65%, and 83%, respectively.

Issuance for June got here in at $44.769 billion, up 12.8% from $39.705 billion in 2023, in accordance with LSEG, as improved market momentum, growth of Construct America Bond refundings and mega deals pushed bond volume higher year-over-year for the sixth consecutive month.

Net issuance for June was $11 billion, in accordance with Barclays PLC.

Muni mutual funds were “barely positive” in June despite outflows of $498 million for the week ending June 26.

Inflows totaled $700 million, primarily driven by inflows into high-yield and long-term funds, Barclays strategists said.

Fund flows total $7.8 billion year-to-date: $5.5 billion for mutual funds and $2.3 billion for exchange-traded funds, they noted.

SIFMA ended June up 99 basis points at 3.88% or an inexpensive 78% of SOFR and 148% of 1Y MMD as dealer VRDO inventories surged to $5.4 billion, or around 1.75 times the yearly average, Block said.

“Munis inside and amongst credit sectors are fairly valued with no sector particularly attractive right now,” he said.

AAA scales
Refinitiv MMD’s scale was unchanged: The one-year was at 3.15% and three.10% in two years. The five-year was at 2.92%, the 10-year at 2.87% and the 30-year at 3.75% at 3 p.m.

The ICE AAA yield curve was bumped up to at least one basis point: 3.22% (unch) in 2025 and three.14% (unch) in 2026. The five-year was at 2.95% (-1), the 10-year was at 2.92% (-1) and the 30-year was at 3.74% (-1) at 3:30 p.m.

The S&P Global Market Intelligence municipal curve was cut up to at least one basis point: The one-year was at 3.19% (+1) in 2025 and three.12% (+1) in 2026. The five-year was at 2.93% (unch), the 10-year was at 2.91% (unch) and the 30-year yield was at 3.74% (unch) at 3 p.m.

Bloomberg BVAL was unchanged: 3.18% in 2025 and three.13% in 2026. The five-year at 2.96%, the 10-year at 2.87% and the 30-year at 3.77% at 3:30 p.m.

Treasuries were firmer.

The 2-year UST was yielding 4.738% (-3), the three-year was at 4.548% (-4), the five-year at 4.390% (-5), the 10-year at 4.429% (-5), the 20-year at 4.708% (-5) and the 30-year at 4.598% (-4) at 3:45 p.m.

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