Munis largely ignore UST selloff; mutual fund inflows top $1B

Bonds

Munis were slightly weaker in spots, but triple-A yield curves largely ignored U.S. Treasury losses following the release of economic data that saw initial jobless claims fall below expectations. Equities ended mixed.

Municipal bond mutual fund saw inflows return with Refinitiv Lipper on Thursday reporting investors added $1.040 billion to funds for the week ending Wednesday following $136.174 million of outflows the previous week.

The last time muni mutual funds saw inflows over $1 billion was at the end of January.

Jobless claims fell from 237,000 to 228,000, while continuing claims rose 33,000 to 1.75 million, and along with other data led, to a spike in UST yields. 

“Initial jobless claims were widely expected to increase given all layoff announcements telegraphed by the larger corporations, but this week’s release showed there is still a healthy demand for workers,” noted Edward Moya, senior market analyst at OANDA. “The bond market took notice to the data and sent yields sharply higher.”

Municipals outperformed and ratios fell slightly on the day’s moves. The two-year muni-to-Treasury ratio Thursday was at 59%, the three-year at 61%, the five-year at 62%, the 10-year at 65% and the 30-year at 89%, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the two-year at 61%, the three-year at 62%, the five-year at 62%, the 10-year at 67% and the 30-year at 91% at 4 p.m.

For most of the week, the Treasury market had been exhibiting a relatively positive tone, said Jeff Lipton, managing director of credit research at Oppenheimer. “Munis were more than happy to go along for the ride,” he said.

Thursday morning, though, saw some “green flashing on the screen” for the Treasury market, he said. USTs engaged in a selloff due to the initial jobless claims figures, which came in below the consensus, falling to a two-month low, according to the Bureau of Labor report.

This, Lipton said, points to another indication of labor market resiliency.

Muni yields were weaker on the short end, with triple-A yields being cut up to three basis points.

“A lot of that has had to do with the fact that the short end has been so rich compared to the longer end of the curve,” Lipton said.

Elsewhere, summer reinvestment activity is in full swing and driving the municipal market, according to a New York trader.

“Limited supply met by a lot of cash is leading to a good market,” the trader said Thursday. “The municipal market is hanging in there, even with the weakness in the Treasury market,” he added. 

Lipton said munis are still being supported by a rather constructive technical backdrop, he noted.

“We’re going through this summer seasonality effects, where you tend to have a rather pronounced supply deficit,” he said.

Lipton noted the supply deficit has narrowed somewhat compared to several weeks ago, but the market is still at a net supply of negative $16 billion.

“The new-issue supply that we’re seeing can’t keep pace with the amount of bonds calls and redemptions as well as maturing securities,” he said.

This week, the calendar did see a “step up,” according to Lipton, giving investors an opportunity to spend ample cash ahead of next week’s meeting of the Federal Open Market Committee, which is slated to convene on Tuesday and Wednesday.

“We had a good primary week; all the deals did well,” the trader said, pointing out the $1 billion-plus deal from the New York City Transitional Finance Authority and an upsized $600 million from Salt Lake City.

Lipton noted Bond Buyer current 30-day supply at $7.50 billion is revealing a “somewhat tighter calendar.” This is in line with expectations for the summer months.

“A lot of market participants are away on vacation, trading desks are not fully staffed,” he said.

“I still think we are toeing the line here with the supply,” the trader said, adding that next week’s calendar should pale in comparison to this week’s approximate $8.6 billion bounty.

“There’s not going to be a lot of supply next week with the Fed meeting,” he said.

Lipton expects July and August performance to do reasonably well given “where we are in the technical landscape.”

Month-to-date, munis are modestly outperforming USTs. Munis are returning 0.68%, while Treasuries are returning 1.94%

However, year-to-date, he said munis are “out in the lead” at 3.37% versus 2.52% for Treasuries.

Additionally, for most of this week there “was this sort of euphoria that the Fed was going to tighten rates by another 25 basis points next week,” he said, noting the probability of another 25 basis point rate hike come September is “rather uninspiring.” The futures market is pricing the probability of a 25 basis point rate hike next week at 96%, he said.

Overall, he said munis are in good shape “through the balance of the summer and going into the fall season.”

In the primary market Thursday, J.P. Morgan priced for the Board of Regents of Texas Tech University System (Aa1//AA+/AA+) $194.190 million of revenue financing system refunding and improvement bonds, Series 2023A, with 5s of 2/2025 at 3.00%, 5s of 2028 at 2.65%, 5s of 2033 at 2.73%, 5s of 2038 at 3.19% and 5s of 2040 at 3.36%, callable 2/15/2033.

Secondary trading
New York 5s of 2024 at 3.00%-2.96%. Washington 5s of 2025 at 2.94%. Maryland 5s of 2025 at 2.90%.

Charlotte 5s of 2028 at 2.54%-2.52%. North Carolina 5s of 2029 at 2.60%. DASNY 5s of 2030 at 264%-2.63%.

California 5s of 2031 at 2.40%. Connecticut 5s of 2032 at 2.65%. LA DWP 5s of 2036 at 2.65% versus 2.69% Wednesday.

Massachusetts 5s of 2048 at 3.71% versus 3.70%-3.67%% Wednesday and 3.85% on 7/13. Indiana Finance Authority 5s of 2053 at 4.03% versus 4.01%-4.00% Tuesday and 4.13%-4.10% on 7/13.

AAA scales
Refinitiv MMD’s scale was cut up to three basis points: The one-year was at 3.00% (+3) and 2.87% (+3) in two years. The five-year was at 2.52% (unch), the 10-year at 2.50% (unch) and the 30-year at 3.46% (unch) at 3 p.m.

The ICE AAA yield curve was cut up to two basis points: 2.99% (flat) in 2024 and 2.90% (+2) in 2025. The five-year was at 2.51% (+1), the 10-year was at 2.49% (+1) and the 30-year was at 3.48% (+1) at 4 p.m.

The IHS Markit municipal curve was cut up to two basis points: 3.00% (+2) in 2024 and 2.88% (+2) in 2025. The five-year was at 2.52% (unch), the 10-year was at 2.51% (unch) and the 30-year yield was at 3.47% (unch), according to a 3 p.m. read.

Bloomberg BVAL was cut up to one basis point: 2.93% (+1) in 2024 and 2.83% (+1) in 2025. The five-year at 2.51% (+1), the 10-year at 2.46% (+1) and the 30-year at 3.45% (unch) at 4 p.m.

Treasuries sold off.

The two-year UST was yielding 4.833% (+7), the three-year was at 4.439% (+10), the five-year at 4.094% (+11), the 10-year at 3.847% (+10), the 20-year at 4.107% (+8) and the 30-year Treasury was yielding 3.910% (+7) near the close.

Mutual fund details
Refinitiv Lipper reported $1.040 billion of inflows into municipal bond mutual funds for the week ending Wednesday following $136.174 million of outflows the week prior.

Exchange-traded muni funds reported inflows of $1.184 billion after outflows of $131.522 million in the previous week. Ex-ETFs muni funds saw outflows of $144.395 million after outflows of $4.652 million in the prior week.

Long-term muni bond funds had inflows of $1.030 billion in the latest week after inflows of $38.354 million in the previous week. Intermediate-term funds had $121.952 million of inflows after outflows of $16.159 million in the prior week.

National funds had inflows of $1.047 billion after outflows of $71.419 million the previous week while high-yield muni funds reported inflows of $408.477 million after inflows of $83.798 million the week prior.

Christine Albano contributed to this story.

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