The front end of the muni market remained under pressure Tuesday as the short-end correction continued. U.S. Treasuries were little changed and equities were mixed.
Muni yields were cut up to 10 basis points, with the largest losses on the front end of the curve.
The one-year MMD yield has risen 31 basis points since the Federal Reserve hiked the fed funds rate target 25 basis points on Wednesday, Sept. 16, while the two-year MMD yield has risen 23 basis points.
The 10-year has risen four basis points, while the 30-year has fallen four basis points.
The recent short-end correction stems from last week's Federal Open Market Committee meeting, said Ron Banaszek, co-head of public finance and lead underwriter at Blaylock Van.
There was no real adjustment on the muni side for the most part going into the Fed meeting, whereas the UST curve adjusted somewhat as financial markets priced in around a 90% chance of a rate hike, he said.
Now, munis are playing catch up to some extent, with an added "double whammy" of the possibility of another rate hike on the horizon, Banaszek said.
Additionally, a lot of weakness on shorter maturities, particularly 10 years and in, is catching up "slowly but surely" to the flatness of the Treasury curve, said Tim McGregor, managing partner at Riverbend Capital Advisors.
Several weeks ago, the 2s/30s Treasury curve was 50 basis points, while the 2s/30s AAA muni curve was 200 basis points, he said.
So the muni curve didn't have to adjust all the way, but it had to "get closer," as seen in the last three or four trading sessions, McGregor said.
The front end had a "pretty good adjustment coming its way" even before the Fed rate hike, as it became a little overvalued in the summer with reinvestment demand, along with low yields and even lower ratios," he said.
Even with recent volatility, current levels are a good opportunity for investors, McGregor said.
"A 5% longer intermediate is compelling after-tax return, and now you're looking at 3.5% on low duration mandates, so both levels that are probably going to be here for a little while," he said.
There will not be a 25-basis-point rally, but "there's enough supply to keep [rates] here and enough general nervousness around the macro Treasury market," McGregor said.
Investors might have a little more time than in the past few episodes when rates backed up to 5%. This time, rates are likely here for an extended period, he said.
In the primary market, new deals keep coming and getting done easily, with deals oversubscribed Tuesday, said Chad Farrington, co-head of municipal bond investment strategy at DWS.
A few were structured with maturities around 10 years and in, like the Pennsylvania Turnpike Commission. The deal saw one tranche, $169.77 million of turnpike subordinate revenue refunding bonds, with serials of 2027 to 2036, and the other tranche, $87.34 million of motor license fund-enhanced turnpike subordinate special revenue refunding bonds, with serials 2027 to 2038.
This could be because issuers thought, "Why would I issue 20 to 30 [years] when the spread is that steep," McGregor said.
There was also decent secondary market activity on Tuesday, said Chris Brigati, managing director and CIO of SWBC.
"Overall the tone is constructive, but there might be other shoes to drop out there," he said.
Brigati expects "more of the same" for the rest of the week, with munis' performance lagging USTs regardless of which direction USTs go. "We do have a supply-demand imbalance," Brigati said, "and that imbalance should continue to contribute toward the overall tone of reluctant buying for the municipal market."
New-issue market
In the primary market Tuesday, BofA Securities priced for the Missouri Health and Educational Facilities Authority (A1/A+//) $423.24 million of Mercy Health health facilities revenue bonds. The first tranche, $273.24 million of Series 2026A bonds, saw 5s of 7/2040 at 4.80%, 5s of 2041 at 4.88%, 5.25s of 2046 at 5.09%, 5s of 2051 at 5.29%, 5s of 2056 at 5.35% and 5.75s of 2056 at 5.26%, callable 7/2036.
The second tranche, $50 million of Series 2026B bonds, saw 5s of 7/2033 at 4.11%, callable 4/2033.
The third tranche, $50 million of Series 2026C, saw 5s of 7/2035 at 4.26%, callable 4/2035.
The fourth tranche, $50 million of Series 2026D, saw 5s of 7/2036 at 4.35%, callable 4/2036.
In the competitive market, Illinois (A1/A/A-/) sold $900 million of GO bonds in three series.
The first series, $385 million of taxable Series of October 2026A, sold to J.P. Morgan, all priced at par: 4.84s of 10/2027, 5.28s of 2031, 5.65s of 2036 and 5.73s of 2037, noncall.
The second series, $263 million of Series of October 2026B, sold to BofA Securities, with 5s of 10/2037 at 4.42%, 5s of 2041 at 4.87% and 5s of 2044 at 5.042%, callable 10/2036.
The third tranche, $252.2 million of Series of October 2026C, sold to Morgan Stanley, with 5.5s of 10/2045 at 5.04%, 5.5s of 2046 at 5.10% and 5.25s of 2051 at 5.341%, callable 10/2036.
Austin, Texas, (/AAA/AAA/) sold $291.7 million of public improvement and refunding bonds to Jefferies, with 5s of 9/2027 at 3.18%, 5s of 2031 at 3.50%, 5s of 2036 at 3.95%, 5s of 2041 at 4.53% and 5s of 2046 at 4.83%, callable 9/2036.
