Municipals were little changed Thursday as the final new issues of the week priced with some bumps in repricings while U.S. Treasuries held steady. Refinitiv Lipper reported nearly $2 billion of inflows into municipal bond mutual funds.
Fund flows continue to pour into municipal bond mutual funds, making up at least a quarter of the market’s holdings. Refinitiv Lipper reported $1.913 billion came into funds with $511.681 million of that high-yield.
“Fund flows are certainly contributing to the strength in the market,” a New York strategist said. “It’s hard to ignore 16 weeks of consistent inflows and high-yield in particular is crushing it. If some investors want higher yields, and for sure we’ve seen some movement higher in the last week, it is still hard to imagine this market making moves like we saw in February any time soon.”
The late-February into March correction saw muni yields rise 40-plus basis points. The 10-year hit a low of 0.66% in early February and a high in April of 1.12%.
“If you think about the prospects of recovery in early March, COVID vaccines were still not readily available to the general public and cities were still shut down. How investors can look at the current fundamentals and say munis are too rich is hard” to see, the strategist said.
Scarcity of supply is also keeping rates low. Thirty-day visible supply sits at $10.16 billion, according to Bond Buyer data. Net negative supply is -$23.7 billion, according to Bloomberg data.
“Ratios are better than they were to start the month, but I don’t see them moving to anywhere near historical levels at the current moment,” he said.
The 10-year muni-to-UST ratio sat at 68% while the 30-year was at 73%, according to Refinitiv MMD. ICE Data Services had the 10-year muni-to-Treasury ratio at 66% and the 30-year at 72%.
Refinitiv MMD had the five-year at 55% and ICE pegged it at 58%.
In the primary, BofA Securities repriced for the Pennsylvania Turnpike Commission (A1/A+/A+/AA-) $387.9 million of turnpike revenue bonds with two to eight basis point bumps from preliminary pricing wires. Bonds in 2022 with a 5% coupon yield 0.18% (-5), 5s of 2026 at 0.65% (-8), 5s of 2031 at 1.30% (-8), 5s of 2036 at 1.57% (-2), 4s of 2041 at 1.89% (-3), 5s of 2046 at 1.82% (-5) and 5s of 2051 at 1.87% (-5).
Piper Sandler & Co. repriced for the Fort Worth Independent School District, Texas, (Aaa/AAA//) (PSF guarantee) $242.5 million of unlimited tax school building bonds with three to eight basis point bumps. Bonds in 2022 with a 5% coupon yield 0.11% (-8), 5s of 2026 at 0.59% (-3), 5s of 2031 at 1.16% (-3), 4s of 2036 at 1.49%, 3s of 2041 at 1.84% (-3) and 2.375s of 2046 at par.
RBC Capital Markets repriced for the Northwest Independent School District, Texas, (Aaa//AAA/) (PSF guarantee) $183.4 million of unlimited tax school building bonds with a mix of bumps and cuts. Bonds in 2022 with a 5% coupon yield 0.10% (-7), 5s of 2026 at 0.65% (+3), 5s of 2031 at 1.19%, 3s of 2036 at 1.69%, 3s of 2041 at 1.82% (-2) and 3s of 2046 at 2.02%.
The Bryan Independent School District, Texas, (/AAA/AAA/) (PSF guarantee) sold $120 million of unlimited tax school bonds to Citigroup Global Markets Inc. Bonds in 2022 with a 4% coupon yield 0.12%, 4s of 2026 at 0.58%, 4s of 2031 at 1.27%, 2s of 2036 at 2.02%, 2.125s of 2041 at 2.19% and 2.30s of 2046 at 2.34%.
Secondary trading and scales
Trading showed little movement in yields. Anne Arundel County, Maryland, 5s of 2022 traded at 0.15%. Maryland 5s of 2023 at 0.20%. North Carolina 5s of 2023 at 0.15%.
Delaware 5s of 2026 at 0.59%. Georgia 5s of 2027 at 0.66%.
New York City water 5s of 2031 at 1.09%. Hennepin County, Minnesota, 5s of 2035 at 1.26%.
Out longer, New York City TFAs 4s of 2045 at 1.86%. Georgia Road and Tollway Authority 4s of 2046 traded at 1.73%-1.72% versus 1.71% original and 3s of 2037 traded at 1.93%-1.94% versus 1.93% original.
High-grade municipals were steady on all triple-A benchmarks on Wednesday. According to Refinitiv MMD’s AAA, short yields were steady at 0.12% and at 0.16% in 2021 and 2022. The yield on the 10-year stayed at 1.01% while the yield on the 30-year sat at 1.52%.
The ICE AAA municipal yield curve showed bonds steady in 2022 at 0.11% and 0.16% in 2023. The 10-year maturity was at 1.00% and the 30-year yield sat at 1.51%.
The IHS Markit municipal analytics AAA curve showed short yields steady at 0.13% and 0.16% in 2021 and 2022, respectively, with the 10-year unchanged at 1.01%, and the 30-year yield rose one to 1.52%.
Bloomberg BVAL AAA curve showed short yields rise to 0.12% and 0.15% in 2021 and 2022, with the 10-year steady at 1.00% and the 30-year yield at 1.53%.
In late trading, the 10-year Treasury was yielding 1.49% and the 30-year Treasury was yielding 2.10%. Equities rallied, with the Dow Jones gaining 322 points, or 0.95%, the S&P 500 up 0.58% while the Nasdaq gained 0.69%.
Economy
Thursday’s economic indicators suggest the economy is “headed in the right direction,” but not improving enough to force the Federal Reserve to remove accommodation so quickly.
“There is no rush to remove the punchbowl of stimulus as jobless claims are still elevated and durable goods data suggests manufacturing is still working its way through bottlenecks and supply shortages,” according to Ed Moya, senior market analyst for the Americas at OANDA.
Durable goods climbed 2.3% in May after falling a revised 0.8% in April, first reported as a 1.3% decline.
Excluding transportation, new orders grew 0.3% in May after a 1.7% increase a month earlier and excluding defense, new orders gained 1.7% following a 0.5% April gain.
Economists polled by IFR Markets surveyed anticipated a gain of 2.7% in May for the headline number, and a 0.7% rise excluding transportation.
“Durable goods data in May showed smaller-than-expected increases, but when combined with upward revisions to April, the underlying trend still looks good,” Moya said. “Boeing is bouncing back, but supply shortages are still a big issue.”
“Weakness in the volatile defense aircraft category” held back orders, said Scott Ruesterholz, portfolio manager at Insight Investment. “Nondefense capital goods shipments, which feed directly into GDP, hit a new record high,” he said. “After a sharp decline in business investment last year, businesses are spending again and expanding capacity, which should drive growth well into 2022.”
Separately, Initial jobless claims slipped to 411,000 on a seasonally adjusted annual basis in the week ended June 19 from a revised 418,000 in the prior week, originally reported at 412,000.
Economists expected 380,000 claims in the week.
Continuing claims fell to 3.390 million in the week ended June 12, from a revised 3.534 million in the prior week, initially reported at 3.518 million. IFR expected 3.445 million continuing claims.
This marks the lowest number for continuing claims since the week ended March 21, 2020, when it was 3.094 million.
“Layoff activity has largely normalized as employers try to retain the staff they have, amid anecdotal reports of working shortages,” Ruesterholz said. “The labor market differs dramatically by region, which is why many employers complain of difficulty finding workers.”
With most states fully open, “laggard states should more meaningfully catch up in coming months, buoying the national unemployment picture,” he said. “The fact that many states have recovered so strongly already is an encouraging sign, suggesting that scarring will be limited and the U.S. can return to full employment before the end of next year.”
In other data, gross domestic product climbed 6.4% on a seasonally adjusted annual basis in the final first quarter read, unchanged from the preliminary report. In the fourth quarter of 2020, GDP gained 4.3%.
Economists surveyed had expected the gain would remain 6.4%.
Personal consumption expenditures rose 3.7% in the first quarter, the same as the preliminary read. PCE in the Q4 2020 rose 1.5%. Core PCE, which excludes food and energy, increased an unrevised 2.5%, after a 1.3% rise in the prior quarter.
Economists predicted core PCE to climb 2.5%.
“With the decline in inventories slowing and exports likely to increase later this year as the global economy recovers, that should be a tailwind for growth,” Ruesterholz said.
The 6.4% increase, while most states restricted certain gatherings and activities, he said, “was a very solid” start to the year, and it should only get better, “given reopening and additional fiscal stimulus during the summer.”
With GDP growth over 7% forecast by Insight, the economy is “on track to eclipse its pre-COVID trend by mid-2022.”
Finally, the Kansas City region manufacturing sector “remained strong” in June.
The composite index gained to 27 in June from 26 in May.
The number of employees index climbed to 26 from 20. Prices received for finished product index slipped to 48 from 51, while prices paid for raw materials fell to 79 from 86.
Volume of new orders index decreased to 22 from 35, while backlog of orders rose to 29 from 25.
“The headline beat estimates and is the second strongest reading in the survey’s history,” said Ruesterholz. Expectations were at record level, he said, “which speaks to how optimistic manufacturers are that the current economic momentum can persist into 2022.”
The Fed regional surveys, show a “clear national picture” of manufacturers “doing well,” despite supply chain constraints holding back production.