Nearly a billion of outflows reported while muni bonds strengthen again

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Municipal bonds continued their post-election rally on Thursday, with yields on top-quality bonds falling in the intermediate- to long-end of the curves. On the AAA scales, muni yields dropped by as much as four basis points on the long end after falling 10 basis points on Wednesday.

“The municipal bond market is seeing some follow through today after yesterday’s dramatic post-Election Day rally,” ICE Data Service said. “Yields on the ICE muni curve are one to four basis points lower, with the larger moves occurring in the long end. Markets are still trying to assess the impact of the election on municipal bonds going forward.”

Investors made an about face and pulled cash out of tax-exempt mutual funds, with Refinitiv Lipper reporting muni bond funds about $954 million of outflows in the latest reporting week, the first time since Sept. 30.

In Washington, the Federal Open Market Committee voted to leave interest rates unchanged.

The Federal Reserve said it decided to keep the target range for the federal funds rate at between zero to 1/4% and expects "it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the committee's assessments of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time."

The Fed also said it would increase its holdings of Treasury securities and agency mortgage-backed securities over the next few months to "sustain smooth market functioning and help foster accommodative financial conditions, thereby supporting the flow of credit to households and businesses."

Meanwhile as election results remained uncertain, there were some factors in play that may have more of a near-term effect on the market, according to Kim Olsan, senior vice president at FHN Financial.

“The 10-year AAA benchmark moving below 0.90% creates optic barriers for some inquiry as it takes many AA categories below 1% implied yields. Heavier issuance in October created pockets of opportunity with higher yields and slightly wider spreads,” she said. “Some flows took advantage to shorten up duration by moving a little shorter on the curve.”

Olsan said a swift reversal could take some recalibrating of yield expectations and cause inquiry to reverse course and reach further out the curve for comparable yields.

She noted that any gains could be short-lived, however, with the amount of supply expected for the rest of this month.

“Since 2010, November’s average figure is $33 billion. Two truncated weeks this month mean the issuance timeline will be more aggressive,” Olsan said.

Muni to Treasury ratios have had a wild ride this year, Olsan said, and only recently settled back near historic levels.

In May, the five-year muni/UST ratio moved over 250% and the 10-year range rose above 200%.

“In the week before the election, short yields reached 100% against USTs and longer tenors exceeded 110%,” she said. “Post-election, relative value is declining across all maturity ranges and will begin to affect allocations if new ranges hold. The relevance of optionality will grow to offset the ratio tightening.”

On Thursday, the 10-year muni-to-Treasury ratio was calculated at 106.5% while the 30-year muni-to-Treasury ratio stood at 101.9%, according to Refinitiv MMD. ICE calculated the 10-year M/T ratio at 107% and the 30-year at 102%.

Primary market
With no major deals on the calendar for this week, the market is looking ahead to next week to get its next big supply fix.

One of the deals already set is the California Earthquake Authority’s (NR/NR/A/AA-) $300 million of Series 202B taxable revenue bonds.

Citigroup is expected to price the deal on Thursday. Proceeds will be deposited in the authority’s claims-paying fund to pay any claims if needed.

Co-managers are Goldman Sachs; JPMorgan Securities; 280 Securities; Academy Securities; Amerivet Securities; BofA Securities; Caldwell Sutter Capital; Great Pacific Securities; KeyBanc Capital Markets; Loop Capital Markets; Mesirow Financial; Oppenheimer & Co.; and Ramirez & Co. Raymond James is the municipal advisor; Orrick is the bond counsel.

Informa: Money market muni funds rose $348M
Tax-exempt municipal money market fund assets rose $348.2 million, bringing total net assets to $112.09 billion in the week ended Nov. 2, according to the Money Fund Report, a publication of Informa Financial Intelligence.

The average seven-day simple yield for the 186 tax-free and municipal money-market funds remained at 0.02% from the previous week.

Taxable money-fund assets dropped $19.42 billion in the week ended Nov. 3, bringing total net assets to $4.159 trillion.

The average, seven-day simple yield for the 778 taxable reporting funds remained at 0.01% from the prior week.

Overall, the combined total net assets of the 964 reporting money funds fell $19.07 billion in the week ended Nov. 3.

Refinitiv Lipper reports $954M outflow
In the week ended Nov. 4, weekly reporting tax-exempt mutual funds saw $954.015 million of outflows. It followed a gain of $582.366 million in the previous week.

Exchange-traded muni funds reported inflows of $24.840 million, after inflows of $40.771 million in the previous week. Ex-ETFs, muni funds saw outflows of $978.854 million after inflows of $541.595 million in the prior week.

The four-week moving average remained positive at $212.457 million, after being in the green at $883.120 billion in the previous week.

Long-term muni bond funds had outflows of $887.545 million in the latest week after outflows of $205.727 million in the previous week. Intermediate-term funds had outflows of $120.110 million after inflows of $87.597 million in the prior week.

National funds had outflows of $805.232 million after inflows of $593.114 million while high-yield muni funds reported outflows of $260.247 million in the latest week, after inflows of $100.092 million the previous week.

Secondary market
Some notable trades on Thursday:

Charles County, Maryland 5s of 2025 at 0.30%. Houston Texas 5s of 2025 traded at 0.38%. Maryland GOs 5s of 2025 at 0.25%-0.23%. Delaware GOs, 5s of 2025 at 0.31%. University of Texas 5s of 2030 traded at 0.93%. High grades around 10 years traded up Thursday.

Baltimore County, 5s of 2030, at 0.84% after trading at 0.96%-0.95% on. Monday. Georgia GOs, 5s of 2031, traded at 0.88%. On Tuesday, it traded at 1.04%. Maryland GOs, 5s of 2031, traded at 0.94% after 0.99% on Wednesday. Virginia GOs, 3s of 2032, traded at 1.16%-1.12%. On Wednesday, at 1.19%.

Clark County Washington SD #114, 4s of 2034, at 1.41%-1.35%. Original: 1.59%. Cypress Fairbanks Texas ISD 2.25s of 2045 at 2.31%. NYC TFA subs 4s of 2046 traded at 2.29%. NYC TFA 4s of 2047 traded at 2.33%.

On Thursday, high-grade municipals were mixed, according to final readings on Refinitiv MMD’s AAA benchmark scale. Short yields in 2021 and 2022 were unchanged at 0.18% and 0.19%, respectively. The yield on the 10-year muni dropped two basis points to 0.82% while the yield on the 30-year declined four basis points to 1.57%

The ICE AAA municipal yield curve showed short maturities were unchanged in 2021 and 2022 at 0.18% and 0.20%, respectively. The 10-year maturity fell two basis points to 0.83% and the 30-year yield declined four basis points to 1.58%.

The IHS Markit municipal analytics AAA curve showed short yields steady at 0.16% and 0.17% in 2021 and 2022, respectively, with the 10-year dropping to 0.83% and the 30-year yield down to 1.60%.

The BVAL AAA curve showed the yields on the 2021 and 2022 maturities unchanged at 0.14% and 0.16%, respectively, while the 10-year dropped two basis points to 0.83% as the 30-year fell three basis points to 1.61%.

Treasuries were mixed as stock prices traded higher.

The three-month Treasury note was yielding 0.10%, the 10-year Treasury was yielding 0.78% and the 30-year Treasury was yielding 1.54%. The Dow rose 2.12%, the S&P 500 increased 2.29% and the Nasdaq gained 2.78%.

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