Securitization

Issuance remains robust Wednesday with an estimated $5.9 billion, said J.P. Morgan strategists led by Peter DeGroot.

New-issue volume has topped $50 billion over the past few weeks, said AllianceBernstein in a weekly report.

Falling occupancy figures, staffing shortages, and rising labor costs have elevated the sector's risk, with Greenwich Investment Management's bankruptcy yet another example of how the sector requires thorough credit analysis.

This week's surge in issuance, which tops $14 billion, is "likely going to keep a lid on any enthusiasm," Birch Creek strategists said in a weekly report.

While particpants expect some pressure in the near-term with more than $16 billion on tap, they also say the current yield and ratio levels offer investors opportunity.

Despite losses, munis are "being set up nicely" as the summer season approaches, said Jeff Lipton, a research analyst and market strategist.

Muni yields rose up to 13 basis points Wednesday, depending on the curve, coming on the tailwind of a market correction, said Brad Libby, a fixed-income portfolio manager and credit analyst at Hartford Funds.

SMA growth has been "pretty staggering to see," said Matthew Schrager, managing director and co-head of TD Securities Automated Trading, noting the "interplay between SMA and electronic trading is a very symbiotic relationship."

Munis sold off last week "as the anticipated market correction may have finally started ahead of the summer reinvestment period," said Jason Wong, vice president of municipals at AmeriVet Securities.

A pair of muni market experts propose cities and towns borrow through state-based, credit-enhanced bond banks to make the market more efficient.

Marty Mannion and Matt Schrager, managing directors and co-heads at TD Securities Automated trading division, discuss how automation and electronic trading are creating more opportunities and better outcomes for municipal market participants, including making muni bonds more accessible to a broader range of investors.

"For each May dating to 2021, the average 30-year MMD was 2.74% — or 122 basis points below the current yield," FHN Financial's Kim Olsan said. "The recent adjustment offers better investor value."

Municipal bond mutual funds saw the second week of outflows as investors pulled $217.6 million from the funds after $546.2 million of outflows the week prior, according to LSEG Lipper. High-yield saw inflows again.

The ongoing influx of new-issue supply has pushed muni-UST ratios to at or near year-to-date highs, J.P. Morgan strategists said.

Several weeks of elevated supply should theoretically be "weighing more on performance, but the market is now just ahead of its largest reinvestment season, which so far in 2024 has become even more pronounced, with an additional $19.5 billion scheduled for call/redemption between [June 1 and August 30]," said Matt Fabian, a partner at Municipal Market Analytics.

"While we acknowledge that the market tone is weaker [Monday], we are generally constructive regarding valuations and expect this week's supply to be absorbed fairly well after last week's giveback of the richening witnessed over prior weeks," said Vikram Rai, head of municipal markets strategy at Wells Fargo.

"The industry is built on relationships, and it's powered by technology," said Josh Rosenblum, head of algorithmic trading at Brownstone.

There are nearly 30 new-issues over $100 million on tap across the credit spectrum, led by the week's largest negotiated deal from Harris County, Texas, with $950 million of toll road first lien revenue and refunding bonds. The competitive calendar ticks up with several high-grade names.

"In terms of credit quality, high-yield funds proved resilient" while investment-grade funds saw outflows of $673 million, noted J.P. Morgan's Peter DeGroot in a market note.

The CPI print keeps the possibility of the Fed cutting rates at least once this year, potentially at least two rate cuts if the data continues to point to a trend of inflation falling further, said Jeff Lipton, a research analyst and market strategist.