Volatility

This volatility can be seen in the whipsawing figures from the SIFMA Municipal Swap Index Yield over the past few months, but in January in particular.

"Even though it is hard to see the market falling out of bed and underperforming in the near term, we are more cautious going into March," Barclays PLC said in a report.

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.

Household and U.S. bank ownership of individual bonds fell and the total face amount of munis outstanding was down 0.6% quarter-over-quarter and down 1.4% year-over-year, Fed data shows.

While muni performance has turned negative for October, "the asset class is significantly outperforming UST," said Jeff Lipton, managing director of credit research at Oppenheimer Inc.

The short end was hammered in the secondary with large blocks of high-grades showing big swings to higher yields while the rest of the curve wasn't spared the damage and triple-A yields rose by seven to 16 basis points.

New-issue volume grows to $10.7 billion led by a $2.7 billion taxable Massachusetts ESG deal, $1.35 billion of Oklahoma natural gas taxables, $1.25 billion from the Regents of the University of California and $1.1 billion from New York City.

With the Fed committed to fighting inflation with aggressive rate hikes, fewer issuers want to take the risk with taxable advance refundings.

Investors pulled more from municipal bond mutual funds, with Refinitiv Lipper reporting $1.3 billion of outflows, down from the $1.6 billion the week prior and bringing the total to $47 billion year-to-date.

The lighter calendar may help ease the imbalance between demand and supply, as selling pressure in the secondary has weighed significantly on the market tone.

The 25-basis-point move to higher yields is the largest one-day change in triple-As since March 2020 when COVID began roiling markets. Munis could not ignore a continued selloff in UST led by inflation and recession concerns.

The Investment Company Institute reported investors added $1.090 billion from muni bond mutual funds in the week ending June 1, up from $4.367 billion of outflows in the previous week.

The seasonal factors of a supply and demand mismatch, reinvestment needs and strong credit fundamentals, have opened a window of opportunity.

June redemptions will be the highest of the year at $50.6 billion. New-issue supply — 30-day visible is currently at $15.5 billion — is unlikely to keep up.

Total May volume was $31.167 billion in 750 deals versus $35.358 billion in 1,295 issues a year earlier. In a continuing trend, new-money issuance was up 14.2% in May year-over-year.

After nine months of a soft closure, two Nuveen high-yield mutual funds will resume accepting purchases from new investors in the face of improved market conditions.

The rapid swing to lower yields over the past week has led to a sunnier outlook for the summer reinvestment season, but uncertainties on the economic front, rate volatility, and supply questions hang overhead.

Triple-A yields continue to rise, with the two-year muni just below 2%, the five well above and the 10-year approaching 2.5%.

More outflows from municipal bond mutual funds were reported as bid lists surpass $1 billion 22 times in 2022.

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