Munis sold off on Thursday, as U.S. Treasuries continued to cheapen and equities ended mixed.
Muni yields were cut by five to 15 basis points, with the greatest losses at the short end and intermediate part of the curve. UST yields cheapened by three to nine basis points, with the biggest losses at the long end.
Muni yields are succumbing to a "domino effect," Kim Olsan, portfolio manager at NewSquare Capital. She sees a couple of factors driving the selloff.
First, munis are correcting on a ratio basis to the cumulative cheapening of USTs — the 10-year UST, for instance, started the week at 4.955% and has risen to 5.208%.
The second factor is the resulting mutual fund redemptions, Olsan said.
Unlike exchange-traded funds, mutual fund redemptions happen at the end of the day, Olsan said. "So, a fund manager may actually raise more cash than they actually think they may need because they may anticipate further redemptions coming."
Wednesday's bid list volume was the second highest ever, Olsan said, at $3.4 billion.
Olsan predicts the market will see more weakness until USTs start to stabilize. Next week's Oct. 1 redemptions will provide some support to munis, but if bid list volume remains high, the redemptions may not be able to absorb it.
Fund flows
Investors added $633 million to municipal bond mutual funds in the week ended Wednesday, following $1.81 billion of outflows the prior week, according to LSEG Lipper data.
High-yield funds saw outflows of $206.4 million after outflows of $583.7 million the previous week.
New-issue market
In the primary market Thursday, BofA Securities priced for Hampton Roads PPV $1.92 billion of military housing taxable revenue bonds. The first tranche, $1.38 billion of Series 2026A Class I bonds (/AA-//), priced at par: 6.171s of 6/2041, 6.362s of 6/2044, 6.447s of 12/2055, 6.497s of 6/2066, 6.597s of 12/2073, with the 2066 and 2073 maturities insured by Assured Guaranty.
The second tranche, $319.84 million of Assured Guaranty-insured Series 2026A Class II bonds (/AA//), saw 6.647s of 12/2073 priced at par.
The third tranche, $153.51 million of Assured Guaranty-insured Series 2026A Class III bonds (/AA//), saw 6.847s of 12/2073 priced at par.
The fourth tranche, $66.58 million of Series 2026A Class IV bonds (/BB+//) saw 8.822s of 12/2073 priced at par.
