Munis were slightly weaker Thursday as muni mutual funds saw outflows for the first time in 17 weeks. U.S. Treasuries cheapened and equities ended down.
Investors pulled $599 million from municipal bond mutual funds in the week ended Wednesday. High-yield funds saw outflows of $606 million and long-end funds saw outflows of $905 million, according to LSEG Lipper.
There is currently concern "about the overall economy, but about interest rates in general, in terms of the long-end of the market with inflation and energy prices," said Tim Iltz, fixed income credit and market analyst at HJ Sims.
But given the magnitude of inflows over the past 10 weeks — where inflows have topped $1 billion seven times — the $599 million outflow figure is relatively small, he said.
Another factor could be related to tax selling, Iltz said.
"The market is likely to remain sensitive to fund flows as spring technicals become less supportive amid net positive supply," said PIMCO strategists.
The two-year muni-UST ratio Thursday was at 61%, the five-year at 65%, the 10-year at 71% and the 30-year at 91%, according to Municipal Market Data's 3 p.m. EDT read. The two-year muni-UST ratio was at 63%, the five-year at 67%, the 10-year at 73% and the 30-year at 93%, according to ICE Data Services.
Munis were cut up to four basis points Thursday, depending on the scale, while UST yields rose double-digits on the short end.
"The continued rate volatility and unpredictable nature of geopolitical developments make for an unsettling environment for investors to commit capital, which is further exacerbated by the challenging current and expected net-supply backdrop," said J.P. Morgan strategists led by Peter DeGroot.
While it's unclear when or how the current conflict in the Middle East will end, the strategists would anticipate a rate rally with more certainty in the outcome.
Despite the potential for market conditions to deteriorate further, "current rate instability and challenging technicals represent an opportunity for investors to position bonds at higher yields than will be available when these conditions ease," J.P. Morgan strategists said.
Issuance is sizable this week at an estimated $15 billion, with most of the new deals coming to market on Tuesday and Wednesday.
This week, there have been 12 unique issues above $250 million par value, covering general obligation bonds, hospitals, schools, housings and utilities, said Kim Olsan, senior fixed income portfolio manager at NewSquare Capital.
"What has begun to emerge — and stand out — is the use of long-dated coupons above 5.00%," she said.
Illinois GOs, the Metropolitan Government of Nashville and Davidson County, Tennessee, GOs and Austin, Texas, water and sewers all included 5.25% coupons as "buyers look for greater price protection through larger premium structures," Olsan said.
The Illinois GO sale — which saw one of its tranches downsized by $135 million — shows the bifurcation in demand: "the 5s due in 10 years came 10 basis points wide to the state's August 2025 sale, but a 5.25s in 2046 priced 8 basis points tighter than the prior issue's 5% coupon," she said.
Select issues did "realize price bumps in final pricings, but secondary flows suggest buyer momentum is leveraging better yields out the curve on a buy-the-dip theme," Olsan said.
Municipal Securities Rulemaking Board trade data shows that for maturities 12 years and longer, 52% of all volume was customer buys, she said.
Shorter tenors are still in a "repricing mode," with net customer buying below the 50% threshold, Olsan said.
Issuance next week should be more "manageable," J.P. Morgan strategists said.
Demand should be a "modest boost" next week as muni investors are set to get $20 billion of April 1 principal and interest payments, said Pat Luby, head of municipal strategy at CreditSights, and Wilson Lees, an analyst at the firm.
Activity could be "subdued" to end the week, as equity markets are closed April 3 in observance of Good Friday, they said.
New-issue market
In the primary market Thursday, Raymond James priced for San Jacinto Community College District, Texas, (Aa2/AA+//) $126.97 million of limited tax GO refunding bonds, with 5s of 2/2027 at 2.58%, 5s of 2031 at 2.93%, 5s of 2036 at 3.45% and 5s of 2038 at 3.66%, callable
2/15/2036.
AAA scales
MMD's scale was cut one basis point six years and in: 2.39% (+1) in 2027 and 2.42% (+1) in 2028. The five-year was 2.67% (+1), the 10-year was 3.15% (unch) and the 30-year was 4.51% (unch) at 3 p.m.
The ICE AAA yield curve was cut one to five basis points: 2.42% (+5) in 2027 and 2.47% (+2) in 2028. The five-year was at 2.70% (+2), the 10-year was at 3.15% (+2) and the 30-year was at 4.52% (+1) at 4 p.m.
The S&P Global Market Intelligence municipal curve was cut up to a basis point: The one-year was at 2.37% (unch) in 2027 and 2.40% (unch) in 2028. The five-year was at 2.64% (+1), the 10-year was at 3.13% (+1) and the 30-year yield was at 4.51% (unch) at 3 p.m.
Bloomberg BVAL was cut a basis point: 2.39% (+1) in 2027 and 2.41% (+1) in 2028. The five-year at 2.59% (+1), the 10-year at 3.09% (+1) and the 30-year at 4.46% (+1) at 4 p.m.
U.S. Treasuries were weaker.
The two-year UST was yielding 3.998% (+11), the three-year was at 4.003% (+12), the five-year at 4.104% (+13), the 10-year at 4.423% (+9), the 20-year at 4.974% (+6) and the 30-year at 4.938% (+4) at the close.
