Municipals were better on the short end while the U.S. Treasury curve flattened and the Dow Jones and S&P 500 sold off and the Nasdaq ended in the black.
Triple-A benchmarks were bumped by a basis point on bonds five years and in. Ratios were slightly lower on the five-year ratio at 50%, 73% in 10 and 81% in 30, according to Refinitiv MMD's 3 p.m. read. ICE Data Services had the five at 49%, the 10 at 75% and the 30 at 82%.
Municipal volume is estimated at a lean $558.8 million with $494.7 million of negotiated deals and $64.2 million on the competitive slate. Thirty-day visible supply is at $3.17 billion.
The December FOMC was the highlight of the week, as expected.
"The projected policy rate path still falls short of neutral in 2024 and the Fed's inflation forecast remains robust despite the expected earlier onset of tightening, Barclays' economists look for balance sheet runoff to begin in Q4 2022," a Barclays report said. "Somewhat surprisingly, rates actually rallied on the back of the FOMC and the Treasury yield curve has steepened."
With only two weeks left in the year, "munis might outperform marginally, as investors will start positioning for next year, while also benefiting from large coupon payments and bond redemptions," Barclays strategists Mikhail Foux, Clare Pickering and Mayur Patel said.
Investors might also take advantage of any spread widening in high yield.
"The HY index is wider 5 basis points since late November and might present some opportunity for investors. Some of it appears to be driven by HY tobacco, which is wider 15 basis points in the same time frame, although we think this is more an index issue for tobacco," they said.
Favorable seasonal trends should prop up the municipal market for the remainder of the month and in January on the heels of strong performance in November, according to a report from BlackRock Inc.
Overall, a revised infrastructure bill and declining interest rates drove strong performance and higher market supply was easily absorbed by robust demand, Peter Hayes, head of the municipal bonds group, James Schwartz, head of municipal credit research and Sean Carney, head of municipal strategy, said in the report.
November’s performance was fueled by a variety of factors that will help boost the market as the year comes to a close and the New Year begins.
“The market benefited from clarity on pending infrastructure legislation, as well as falling interest rates amid uncertainty following the discovery of the coronavirus Omicron variant,” they wrote.
The performance was supported by the S&P Municipal Bond Index returning 0.74% for the month, bringing the year-to-date total return to 1.62%.
“Munis outperformed comparable U.S. government bonds for the period as investors saw the return of favorable supply-demand conditions after a new draft of the Build Back Better infrastructure bill excluded anticipated municipal-specific provisions that would have increased supply,” Hayes, Schwartz and Carney said.
High-yield munis, led by issuers in Puerto Rico and the tobacco sector, and longer-duration bonds, were the month’s best performers, according to the analysts.
“Supply exceeded expectations, avoiding the large month-over-month slowdown typically seen in November, but was ultimately met with firm demand,” they said.
New deals were oversubscribed 5.8 times on average, the largest imbalance of buyers to sellers since May, the analysts pointed out, noting that investors began positioning ahead of seasonally favorable year-end market conditions.
“We saw limited selling for tax-loss purposes, but this trend usually peaks in December,” Hayes, Schwartz and Carney wrote.
Performance ahead should be robust. "While acknowledging rich valuations, we expect the market to benefit from a seasonal return to net negative supply in December and January, where reinvestment income from maturities, calls, and coupons outpaces new supply and typically drives strong performance,” they added.
The COVID-19 pandemic is having an impact on the credit front, as the emergence of Omicron has raised concerns that may affect municipal airports.
“Before this new variant, domestic air travel had improved in November to approximately 87% of pre-COVID levels, recovering from recent weakness caused by the end of peak-summer travel and the previous coronavirus variant of concern, Delta,” they said, noting that leisure bookings continue to outperform business travel, with corporate sales down 39% from 2019.
Domestic airports have benefited from three rounds of stimulus funding, with relief legislation totaling about $20 billion, enabling management teams to cover interim expenses and stabilize rates for airline and concession businesses, they said.
Additionally, the passage of the Infrastructure Investment and Jobs Act earlier in November should give the segment some certainty and additional cushion moving forward, Hayes, Schwartz and Carney noted. “We anticipate an increase in restrictions for international travel and a potential short-term dip in bookings, but vaccines, natural immunity, and a return of safety protocols could soften the financial impact,” they said. “Market reaction has, so far, been muted, but any related market weakness could present a buying opportunity.”
Overall, the team’s strategy going forward includes shifting to a long-duration stance on municipal bond positioning and maintaining a barbell yield curve strategy consisting of zero to five years and 20-plus years.
“We prefer lower-rated investment grade bonds, particularly in the front end of the yield curve, as well as select high-yield credits,” the analysts wrote. “We maintain a favorable view on the tax-backed, transportation, healthcare, and education sectors,” they added.
In terms of strategy, the team is overweight in higher-quality states and essential-service bonds, school districts and local governments supported by property taxes, and issuers that should benefit from the re-opening of the economy, and select issuers in the high-yield space.
At the same time, they are underweight in speculative projects with weak sponsorship, unproven technology, or unsound feasibility studies, as well as senior living and long-term care facilities in saturated markets.
Refinitiv Lipper reports $763M inflow
In the week ended Dec. 15, weekly reporting tax-exempt mutual funds saw $763.839 million of inflows, Refinitiv Lipper said Thursday. It followed an inflow of $803.635 million in the previous week.
Exchange-traded muni funds reported inflows of $478.797 million, after inflows of $24.516 million in the previous week. Ex-ETFs, muni funds saw inflows of $285.042 million after inflows of $779.119 million in the prior week.
The four-week moving average remained positive at $580.813 million, after being in the green at $739.640 million in the previous week.
Long-term muni bond funds had inflows of $682.494 million in the latest week after inflows of $978.924 million in the previous week. Intermediate-term funds had inflows of $76.268 million after inflows of $194.386 million in the prior week.
National funds had inflows of $749.242 million after inflows of $825.164 million while high-yield muni funds reported inflows of $482.915 million in the latest week, after inflows of $702.289 million the previous week.
Secondary trading
Georgia 5s of 2023 at 0.23%. Maryland 5s of 2025 0.47%. New York Dorm PITs 5s of 2025 at 0.41% versus 0.48%-0.47% Thursday.
North Carolina 5s of 2026 at 0.56%-0.55%. Prince George's County 5s of 2027 at 0.73%. California 5s of 2027 at 0.75%.
Georgia 4s of 2038 at 1.32% versus 1.34% on Wednesday. Humble ISD 2.375s of 2051 at 2.48%-2.40%.
AAA scales
Refinitiv MMD's scale better by a basis point on bonds five years and in: the one-year at 0.14% and 0.24% in 2023. The 10-year sat at 1.03% and at 1.48% in 30.
The ICE municipal yield curve showed yields were better by a basis point to 0.15% in 2022 and 0.27% in 2023. The 10-year steady at 1.04% and the 30-year yield held steady at 1.49%.
The IHS Markit municipal analytics curve was down one basis point to 0.16% in 2022 and to 0.25% in 2023. The 10-year was down one to 1.01% and the 30-year down one to 1.48% as of a 3 p.m. read.
Bloomberg BVAL was steady at 0.17% in 2022 and down one to 0.22% in 2023. The 10-year was at 1.04% and the 30-year at 1.48%, down one.
Treasuries were weaker on the short end and stronger on the long end, while equities were mixed.
The five-year UST was yielding 1.179%, the 10-year yielding 1.408%, the 20-year at 1.859% and the 30-year Treasury was yielding 1.817% at the close. The Dow Jones Industrial Average lost 532 points, or 1.48%, the S&P was down 0.56% while the Nasdaq gained 0.33% at the close.
