Munis a touch higher; post-holiday new-issue calendar grows

Municipals were a tad firmer ahead of the Fourth of July holiday, as U.S. Treasury yields fell and equities ended mixed.

The Federal Open Market Committee meeting minutes released after the early market close signaled the Fed is in no hurry to chop rates.

FOMC members saw inflation “diminishing” but still needed more evidence it was heading toward their 2% goal before lowering rates of interest, although several officials would consider a rate hike if inflation not moderate further, in response to minutes of the June 11-12 meeting.

“Participants noted that progress in reducing inflation had been slower this 12 months than that they had expected last December,” in response to the minutes. “They emphasized that they didn’t expect that it will be appropriate to lower the goal range for the federal funds rate until additional information had emerged to provide them greater confidence that inflation was moving sustainably toward the Committee’s 2% objective.”

Officials noted the importance of remaining data-dependent. “Several participants noted that financial market reactions to data and feedback received from contacts suggested that the Committee’s policy approach was generally well understood,” the minutes said.

“There continues to be uncertainty concerning the economic outlook and until that uncertainty clears there isn’t any consensus on the committee to start rate cuts,” said Brian Rehling, head of Global Fixed Income Strategy at Wells Fargo Investment Institute. “We remain in wait and see mode — upcoming data, especially jobs and inflation are key.”

Scott Anderson, chief U.S. economist and managing director at BMO Economics, said he still expects the speed cuts to start in September. The Fed ” is clearly on hold,” while data “is step by step moving in the best direction.”

Triple-A yields fell one to 3 basis points while Treasuries were higher by 4 to eight.

The 2-year muni-to-Treasury ratio Wednesday was at 66%, the three-year at 66%, the five-year at 67%, the 10-year at 66% and the 30-year at 83%, in response to Refinitiv Municipal Market Data’s 1 p.m. EST read. 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% at 1 p.m.

The Investment Company Institute reported Wednesday $160 million of outflows into municipal bond mutual funds for the week ending June 26 following $118 million of inflows the week prior.

Exchange-traded funds saw outflows at $411 million, following inflows of $220 million the week prior.

“The forces of municipal fundamental and technical measures are establishing a reconciliation against higher UST yields,” said Kim Olsan, senior vp of municipal bond trading at FHN Financial.

July is in the course of the summer reinvestment cycle — when over $110 billion could have matured or been called in June through August — but 2024 sees several aspects that would impact near-term yields, she noted.

The Federal Open Market Committee will meet in mid-July and “issuers might be mindful of November’s election and certain pre-fund transactions through the summer to capture larger rollover needs,” Olsan said.

Five- and 10-year tenors are higher than the last 12 months’ average ranges, she said.

Within the five-year area, high-grade munis “are trading just through 3.00%, or about 20 basis points above their annual median, she noted.

“Intermediate AAA bonds have settled around 2.90%, nearly 15 basis points higher than the annual median,” while “long-dated bonds near 3.75% (for pure AAA specialty state names) are inside a nominal spread to a 3.80% average since July 2023,” Olsan said.

Many AA-rated revenue bonds might be bought at 4.00% or higher, and carry taxable equivalent yields over 6.00%, she said.

For instance, a recent issue of Massachusetts Bay Area Transportation sales tax bonds saw 5s due 2048, callable in 2034, at 3.95%, Olsan said.

Above-average value might be seen in yields along a lot of the curve, she said.

Supply could begin to tackle a “larger bifurcated nature,” in response to Olsan.

“There may be some likelihood that heavier volume normally market names could create spread widening while substantial supply deficits in high-tax states (CA, NY, MA, NJ, MD) could begin to compress spreads,” she said, pointing to recent trades that show a “potential pattern.”

Los Angeles Department of Water and Power 5s due 2037 (call 2034) “traded at 3.00% and flat to the MMD spot but University of Texas 5s due 2035 (call 2034) were sold at 3.10% for a diffusion of +20/MMD,” she said.

Over the past several years, July seasonality has been “heavily directed” by supply and pre- and post-tightening cycle forces, Olsan said.

“High demand/low yield periods” were seen in 2020 and 2021, she said.

The primary week of July in 2020 saw the 10-year yield end at 0.90% before rallying through month end to shut at 0.65%, Olsan said.

July 2020 saw $47 billion of recent issuance, where the “demand fed larger supply,” she said.

Similarly, July 2021 saw the 10-year yield fall from 0.98% to 0.82% on $37 billion in issuance, Olsan said.

Nonetheless, July 2022 and 2023 saw “mismatched results,” Olsan said.

The effect of the fourth Fed rate hike in 2022 impacted July supply, which saw $28 billion of issuance, Olsan said.

Reinvestment demand moved the 10-year yield from 2.66% to 2.21% through the tip of July 2022, she said.

Meanwhile, “a modest 25 basis point rate hike had a muted effect on each yield direction and provide (just $27 billion was priced),” in July 2023, she said.

The ten-year MMD yield in 2023 was at 2.56% firstly of the month before selling off  “marginally” mid-month and ending nearly flat, Olsan said.

“Any surge this month in general-market volume could produce the next yield set across most sectors,” she said.

Despite issuance falling to a paltry $245 million this week, there are already several large deals on the horizon. Bond Buyer 30-day visible supply grows to $11.93 billion.

The Dormitory Authority of the State of Recent York is about to sell July 10 $1.29 billion of state sales tax revenue bonds in three series.

Harris County is about to cost next week a $730 million deal, consisting of $100 million of everlasting improvement refunding bonds, $220 million of unlimited tax road refunding bonds and $410 million of everlasting improvement tax and revenue certificates of obligation.

The Washington Metropolitan Area Transit Authority is about to cost July 9 $625 million of second lien dedicated revenue bonds.

The Recent York City Transitional Finance Authority is about to cost the week of July 15 $1.7 billion of tax-exempt and taxable future tax-secured revenue refunding bonds.

Miami-Dade County, Florida, is about to cost July 16 $923 million of aviation revenue refunding bonds, consisting of $782 million of AMT bonds and $141 million of non-AMT bonds.

Recent York City is about to cost the week of July 29 $1.2 billion of GO refunding bonds.

The Port of Seattle is about to cost the week of July 29 around $850 million of AMT and non-AMT intermediate lien revenue and refunding bonds.

Houston is about to cost a $720.445 million deal, consisting of $589.41 million of GO refunding bonds and $131.035 million of public improvement refunding bonds.

AAA scales
Refinitiv MMD’s scale saw bumps five years and in: The one-year was at 3.12% (-3) and three.08% (-2) in two years. The five-year was at 2.90% (-2), the 10-year at 2.87% (unch) and the 30-year at 3.75% (unch) at 1 p.m.

The ICE AAA yield curve was bumped three basis points: 3.19% (-3) in 2025 and three.12% (-3) in 2026. The five-year was at 2.92% (-3), the 10-year was at 2.89% (-3) and the 30-year was at 3.72% (-3) at 1:30 p.m.

Bloomberg BVAL was bumped up to 1 basis point: 3.17% (-1) in 2025 and three.12% (-1) in 2026. The five-year at 2.95% (-1), the 10-year at 2.86% (-1) and the 30-year at 3.76% (-1) at 1:30 p.m.

Treasuries were firmer.

The 2-year UST was yielding 4.703% (-4), the three-year was at 4.488% (-6), the five-year at 4.319% (-7), the 10-year at 4.353% (-8), the 20-year at 4.629% (-8) and the 30-year at 4.523% (-8) at 1:45 p.m.

Gary Siegel contributed to this report.

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