Primary bond market

One underwriter called it a "violent inversion," given that the short end of the municipal and Treasury yield curves were so dislocated.

While the system took a hit during the COVID-19 pandemic, total traffic hit 94% of pre-pandemic levels in 2022. Traffic for the first two months of 2023 was 99% of levels in the same period of 2019.

The "weakness in the secondary market will carry over into this week, which may lead to higher yields and wider spreads in the primary market," said CreditSights strategists Pat Luby and Sam Berzok.

Except for the riskiest sectors, high-yield credit fundamentals appear to be strong, but rising interest rates and fund outflows are dampening primary and secondary market activity.

Investors will be greeted Monday with a new-issue calendar estimated at $7.208 billion, led by $1.3 billion of GOs from bellwether Washington.

Nassau County is set to issue $269.54 million of general obligation bonds in two separate sales in the upcoming week.

Proceeds will be used to refund some bonds that had been issued to finance or refinance eligible clean water and drinking water projects in the state.

Even though yields have moved to higher ground, some participants say that even cheaper levels are needed to bring about more retail conviction. Muni-to-UST ratios are still rich.

Illinois' $2.5 billion transaction took center stage Wednesday as the state's first GOs to carry an A-level rating since 2016 still offers a healthy yield kick over the A and BBB benchmarks.

The Investment Company Institute reported investors added $229 million to mutual funds in the week ending April 12, after $83 million of outflows the previous week.

Municipal outperformance to UST ended Tuesday as triple-A yields rose 12 to 20 basis points as several new issues began pricing.

Illinois' $2.45 billion GO sale should attract a wider investor audience with the higher ratings as the state seeks to raise new money for capital projects, fund ongoing pension buyout programs, and refund some debt for present value savings.

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Muni yields were cut four to eight basis points, depending on the scale, while UST yields rose seven to nine basis points. Muni outperformance and rich ratios continue.

For long-term muni bonds, BofA strategists noted that macro market and supply/demand conditions "are dominating the picture, pushing the high-grade muni market to a relatively rich valuation versus Treasuries."

For the week ending Wednesday, outflows intensified as Refinitiv Lipper reported $255.794 million was pulled from municipal bond mutual funds after $91.713 million of outflows the week prior. High-yield saw inflows.

The Southern California Public Power Authority plans to price $700 million in revenue bonds for improvements to a 488-mile power transmission system.

Strong demand in the primary market is leading to the oversubscription of many new issues. Municipals and USTs were better again as macroeconomic concerns pressure equities.

The upgrades add to the city's ratings upswing across credits that Mayor-elect Brandon Johnson will inherit from Mayor Lori Lightfoot.

The second half of 2023 may see a slowdown, perhaps even a mild recession, said Daniel Close, the newly named head of municipals at Nuveen.