Munis and U.S. Treasuries were stronger Thursday after news that the ceasefire in Iran will be extended, while equities ended higher. However, financial markets' gains were smaller than observers expected.
Muni yields richened by up to four basis points, depending on the scale, and UST yields fell by up to three basis points.
Financial markets have been contending with the "merry-go-round" of headlines over the past few weeks of whether a deal had or had not been reached with Iran, said Peter Delahunt, managing director and head of the municipal bond department at StoneX.
However, multiple outlets reported the end to the three-month war could be on the horizon, after an announced 60-day extension of the ceasefire and further negotiations on Iran's nuclear program.
"On the initial news [of the extended ceasefire], it had a relatively quick and sharp reaction," SWBC's Chris Brigati said. Bond markets saw some strengthening, but their ultimate reaction was "relatively muted," Brigati said.
"It's just being accepted as maybe a step in the right direction, but obviously there's still some hesitancy that we really have an immediate end in sight," he said.
Oil prices are now below $100 a barrel, Brigati noted, at which point the market tends to react to headlines with more confidence, he said.
The lower price of oil and the reaction from equities suggest "we could have a lower inflationary environment at some point in the future," Brigati said, "but that's not on our immediate horizon."
This week, issuance exceeded $9 billion. Currently, there's lot of cash that's been "hiding under the table, waiting for better signals in terms of the war and in terms of inflation," Delahunt said.
"As much as there are folks thinking that we could be heading into higher inflation or even stagflation, [U.S. Secretary of the Treasury] Scott Besant has been good at damping volatility and keeping things in check," he said.
If the war ends soon, "we could have a pretty good snapback with all this cash that's on the sideline," Delahunt said.
Therefore, rising supply is not much of a deterrent. "We'll be OK in terms of supply/demand dynamics, as these folks that have been sitting on cash for a long time, and the rates just keep grinding lower," will have to go out the curve, he said.
Right now, the market feels "good," especially as it sets up for next week's supply, which could be between $14 billion and $16 billion, said Jock Wright, an underwriter at Raymond James.
Demand will remain robust, especially as the market enters the strong seasonals of June, he said.
Fund flows have been sizable this year, with the week ending Wednesday seeing investors add $2.33 billion to muni mutual funds. This is the largest weekly figure since early February.
Part of the inflows may be tied to the stock market, Wright said.
"When we get a big run up in stocks, people want to protect their investments a little bit and look for a more fixed income vehicle," he noted.
"It's a good, strong market, which we need going into next week," Wright said.
Fund flows
Investors added $2.33 billion into municipal bond mutual funds in the week ended Wednesday, following $1.517 billion of inflows the prior week, according to LSEG Lipper data. This is the fourth week in a row that inflows topped $1 billion.
High-yield funds saw inflows of $311.6 million compared to inflows of $7.5 million the previous week.
Tax-exempt municipal money market funds saw outflows of $1.836 billion for the week ending May 25, bringing total assets to $149.327 billion, according to the Money Fund Report, a weekly publication of EPFR.
The average seven-day simple yield for all tax-free and municipal money-market funds was 1.66%.
Taxable money-fund assets saw $25.436 billion added, bringing the total to $7.633 trillion.
The average seven-day simple yield was 3.30%.
The SIFMA Swap Index was at 1.57% on Wednesday compared to the previous week's 1.64%.
New-issue market
In the primary market Thursday, BofA Securities priced for the Medical University Hospital Authority, South Carolina, (Aa2/AA+//) $315.17 million of FHA-insured Nexton Project hospital mortgage revenue bonds, with 5s of 5/2029 at 2.93%, 5s of 11/2029 at 2.98%, 5s of 5/2031 at 3.14%, 5s of 11/2031 at 3.18%, 5.25s of 5/2036 at 3.61%, 5.25s of 11/2036 at 3.63%, 5.25s of 5/2041 at 3.96%, 5.25s of 11/2041 at 4.00%, 5.25s of 5/2046 at 4.46%, 5.25s of 11/2046 at 4.49%, 5.5s of 11/2050 at 4.64% and 5.25s of 11/2054 at 4.87%, callable 11/2032.
In the competitive market, the North Texas Municipal Water District (Aa2/AAA//) sold $143.135 million of regional wastewater system revenue refunding and improvement bonds to Wells Fargo, with 5s of 6/2027 at 2.58%, 5s of 2031 at 2.79%, 5s of 2036 at 3.22%, 5s of 2041 at 3.65%, 4.25s of 2045 at par, 4.625s of 2051 at par and 4.5s of 2056 at 4.671%, callable 6/2036.
