Inflows near $2B while muni yields continue their descent

Bonds

Municipal bonds continued their descent to lower yields Thursday, declining at least five basis points across the curve while the short end continued its rally.

The one- to three-year yields are reaching near-record lows, calling into question how far they can drop before investors start backing off. A decent crossover trade from taxable bond sectors into the municipal market has already begun.

Meanwhile, funds and retail don’t seem to be backing off as of now. Refinitiv Lipper reported a $1.84 billion inflow to municipal bond funds in the week ended May 20 after a $582 million inflow the previous week.

“The front end of the municipal bond curve continues to plunge into uncharted waters,” ICE Data Services said. “The one-year yield on the ICE muni curve is four basis points lower today to 0.18% … the muni percent of Treasury yields is moving closer to 100% in the one-year, down from over 600% one month ago.

Taxable equivalent yields on exempts are close to converging into taxables, said FHN Financial’s Senior Vice President Kim Olsan.

“Two-year AAA munis yielding 0.25% work out to a 0.31% TEY for a 21% corporate buyer,” just 15 basis points above the current two-year U.S. Treasury yield.

Secondary trading showed Virginia one-year general obligation bonds trading in blocks at 0.17%. Washington GOs, 2026, 5s of 2021 were at 0.23%-0.20% in early trading. Georgia GOs, 5s of 2022, were at 0.24%-0.21%. Baltimore City and County 5s of 2022 were at 0.24%. Utah GOs, 5s of 2024, at 0.35%-0.33%. Boston GOs, 5s of 2026 at 0.58%.

In the span of a week, one- to five-year high grades have rallied as much as 25 basis points while the major spots past this range are lower by about 10 basis points.

“Such a fast move down in yield is likely to bring a more measured response from some buyer constituencies than a comparable rise in yield given where absolute rates sit,” Olsan said.

Meanwhile, Municipal Securities Rulemaking Board data showed that during Wednesday’s session retail trades jumped the greatest in the 16-20 year range (up 27% from the 30-day average) while block trading spiked 39% inside five years.

“Interestingly, trades above $1 million par value were up 35% in 16-20 years where the curve maximizes yield opportunities,” she said.

Municipals continued to outperform in the backdrop of an imbalance of supply and demand with rates close to their pre-pandemic levels with a holiday-shortened week on the horizon, a New York trader said.

“It’s a bond grab without any bonds,” he said Thursday afternoon. “There is a reasonable amount of money and confidence at these levels.”

The thin market and insatiable demand is what is driving the market, as new issues have been swallowed up — many oversubscribed — and now trading up 20 basis points, the trader said.

“The market is very strong right now with a lot less bonds around,” he added. “Right now, it’s seemingly all about supply and the lack of it,” he said, adding that next week’s new-issue calendar should have no trouble finding buyers.

“We continue to outperform every day,” he said. “There’s not enough supply and it’s pushing levels within 30 basis points of recent lows and it’s almost as if the past three months didn’t happen.”

The short-end of the yield curve continues to see strong demand — especially inside five-years — where yields are hovering below 0.20% on triple-A paper.

Though some investors are scratching their heads at those levels, he said plenty of other traditional buy-and-hold accounts are putting money to work.

“These are real buyers, not trading accounts. The appetite from real money is there and it looks like it will continue with next week’s calendar,” the trader said.

Judging by this week and last week’s demand for new issues — there should be just as much post-holiday appetite.

“Some of the deals people were concerned about this week and last, the market chewed right through them, and they are trading up 20 basis points,” he said, pointing to deals from Connecticut, the New York Transitional Finance Authority, the New York Power Authority and Illinois.

“There is not much fear in the market at all,” he said.

The rates are helping issuers and underwriters bring much-needed current and future supply to an eager market, according to the trader.

“Underwriters four weeks ago were worried and questioned when they would be able to bring a new deal, but with these rates, now you can’t bring enough,” the trader said.

“With these low rates and market appetite you are going to see a lot of stuff pop up and come to market,” he added.

Primary market
In competitive action, the Ann Arbor Public Schools, Mich., (Aa2/NR/NR/NR) sold $137.9 million of unlimited tax general obligation school building and site bonds.

Morgan Stanley won the deal with a true interest cost of 2.0294%.

The deal was priced with 3% coupons to yield from 0.31% in 2021 to 2.30% in 2040.

PFM Financial Advisors was the financial advisor; Miller Canfield was the bond counsel.

Loudoun County, Va., (Aaa/AAA/AAA/NR) sold $199.785 million of unlimited tax general obligation public improvement and refunding bonds.
Morgan Stanley won the bonds with a TIC of 1.4828%.

The deal was priced to yield from 0.18% with a 5% coupon in December 2020 to 2.24% with a 2.125% coupon in 2039.

Davenport & Co. was the financial advisor and Nixon Peabody was the bond counsel.

Secondary market
Short-term muni yields continued to fall Thursday taking longer-dated bonds along.

On Refinitiv Municipal Market Data’s AAA benchmark scale, yields dropped by five basis points, to 0.17% in 2021, 0.23% in 2022 and 0.30% in 2023.

Out longer on the MMD scale, the yield on the 10-year GO fell five basis points to 0.89% while the 30-year was off five basis points to 1.70%.

The 10-year muni-to-Treasury ratio was calculated at 130.9% while the 30-year muni-to-Treasury ratio stood at 121.4%, according to MMD.

The ICE AAA municipal yield curve also showed short-term maturities declining, with the 2021 maturity off four basis points to 0.18%, the 2022 down five basis points to 0.22% and the 2023 maturity down five basis points to 0.30%.

Out longer on the ICE municipal yield curve, the 10-year yield fell five basis points to 0.88% while the 30-year was down five basis points to 1.71%.

IHS Markit’s municipal analytics AAA curve showed the 2021 maturity at 0.19%, the 2022 maturity at 0.24% and the 2023 maturity at 0.33% while the 10-year muni was at 0.94% and the 30-year stood at 1.74%.

The BVAL curved showed the 2021 maturity down four basis points to 0.13% and the 2022 at 0.19%. BVAL also showed the 10-year muni fall to 0.88% while the 30-year fell five basis points to 1.74%.

Munis were also stronger on the MBIS benchmark scale, with yields falling in the 10- and 30-year maturities.

Treasuries strengthened as equities fell.

Late in the day, the three-month Treasury was yielding 0.127%, 10-year Treasury was yielding 0.677% and the 30-year was yielding 1.397%.

The Dow was off 0.28%, the S&P 500 was down 0.59% and the Nasdaq was down 0.69%.

Money market muni funds fall $531M
Tax-exempt municipal money market fund assets fell $531.1 million, bringing total net assets to $134.77 billion in the week ended May 18, according to the Money Fund Report, a publication of Informa Financial Intelligence.

The average seven-day simple yield for the 187 tax-free and municipal money-market funds dipped to 0.07% from 0.08% in the previous week.

Taxable money-fund assets increased $6.35 billion in the week ended May 19, bringing total net assets to $4.587 trillion.

The average, seven-day simple yield for the 793 taxable reporting funds declined to 0.11% from 0.13% in the prior week.

Overall, the combined total net assets of the 980 reporting money funds rose $5.81 billion to $4.722 trillion in the week ended May 19.

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