Municipal bond yields are expected to rise this week as volatile market conditions persist, which could lead to more refunding deals being pulled.
The muni market has experienced an extended selloff over the past few weeks, with the front end hit hardest.
Last week, the one-year MMD yield rose 48 basis points, while the two-year MMD rose 45 basis points. The 10-year MMD yield was cut 30 basis points, and the 30-year was 18 basis points cheaper.
The surge in yields has "crushed" bond prices and driven total returns well into negative territory, said CreditSights strategists.
Investment-grade munis are seeing losses of 3.82% month-to-date and 3.63% year-to-date. High-yield munis are showing negative returns of 3.56% MTD and 0.92% YTD. Taxable munis are down 2.31% MTD and negative 2.41% YTD.
Rising yields "have attracted attention from some investors (as revealed by the primary and secondary market demand for muni [exchange-traded funds), while others have been stepping away, as shown by the two consecutive weeks of significant outflows from muni mutual funds," CreditSights strategists said.
Munis remain under pressure, "unable to find a strong enough bid to stabilize prices or reduce day-to-day volatility," said Tripp Kaiser, executive director for the Center on Municipal Capital Markets at the University of Texas at Austin.
"The latter, amid relentless Treasury pressure, has continued to unnerve investors who generally appreciate 'value' in the marketplace but are unwilling to commit with urgency — at least until rate markets settle," he said.
Instead, crossover and other demand has seemed to be anecdotal, which, "when combined with lower reinvestment and high supply, has lifted bids-wanted par and weighed on street balances and sentiment," Kaiser said.
This week, primary market issuance is an estimated $10.011 billion, with $8.79 billion of negotiated deals on tap and $1.221 billion of competitives, according to LSEG.
The Municipal Improvement Corp. of Los Angeles leads the negotiated calendar with $1.8 billion of Los Angeles Convention Center lease revenue bonds.
The competitive calendar is led by Thornton, Colorado, with $199.89 million of water enterprise revenue bonds.
While the new-issue pipeline remains robust, it could continue to weigh on market technicals, Barclays strategists said.
As yields top 5%, the market has started to "lose a meaningful portion" of refunding volume, which accounted for roughly 20%-30% of total supply over the past 12 months, they said.
For instance, market conditions have led to the $1.7 billion
Largely, issuers raising new money must balance the cost of coming to market now versus waiting a few weeks for more stable market conditions, CreditSights strategists said.
With the futures market pricing in more Federal Reserve
"Combined with what we expect will be heavier volume and a shortened week in mid-October, we look for the current pace of borrowing to continue," CreditSights strategists said.
