Muni funds see first outflows since March 2021
Municipals cheapened by two to four basis points on Thursday and new issues had to make concessions while U.S. Treasuries continued to pare back losses and equities plunged late in the day to end in the red.
Municipal bond mutual funds saw the first outflows since
Ratios rose with the day's moves, particularly on the short end with the municipal to UST five-year at 56%, 70% in 10 and 80% in 30, according to Refinitiv MMD's
The New York City Transitional Finance Authority had to cut yields by six to 11 basis points in institutional pricing from Wednesday's retail offering while the Metropolitan Washington Airports Authority also saw some cuts to scales.
"There is nothing worse for municipal investors than rate spikes and volatility in general," said Barclays (BCS) strategists in a report. "Responding to this, they frequently choose to stay on the sidelines, even if they have cash to deploy, like they do now. Moreover, historically tax-exempts lag large Treasury moves, while fund flows typically respond to rate volatility."
In most cases, muni fund outflow cycles were triggered by rate spikes, "although the length of the current outflow cycle might be shorter compared with previous cases, in our view, as we see outflows subsiding when rates stabilize," said Barclays (BCS) strategists
They find that during periods of rising rates, muni fund flows are correlated with Treasuries, with sharp rate moves (10-year UST yields up by more than 20 basis points in a month) leading to outflows over the subsequent two to four weeks.
The 10-year UST has risen 31 basis points since
"This has already materialized this year as rates continue moving higher, and further rate volatility would likely result in heavier outflows," they said.
"We observe that there are very weak relationships between changes in rates and subsequent changes in muni-Treasury ratios, which to us means that while municipals might initially under- or outperform Treasuries, they catch up to these UST moves rather quickly, and largely return to their previous levels versus USTs within about a month."
In the primary Thursday, J.P. Morgan Securities priced for the New York City Transitional Finance Authority (Aa1/AAA/AAA/)
The New York City Transitional Finance Authority also sold
Wells Fargo (WFC) priced and repriced for the Metropolitan Washington Airports Authority (A2/AA//)
Wells also priced
J.P. Morgan Securities priced for Wisconsin Health and Education Facilities Authority (Aa3/AA-//)
Piper Sandler & Co. priced for Elgin Independent School District,
First outflows of 2022
In the week ended
Exchange-traded muni funds reported inflows of
The four-week moving average fell to
Long-term muni bond funds had inflows of
National funds had outflows of
Secondary trading
Los Angeles Department of Water and Power 5s of 2039 at 1.66% versus 1.71% Wednesday and 1.59% original. LA DWP 5s of 2040 at 1.69% versus 1.71% Wednesdsay and 1.63% original.
Massachusetts Clean Water Trust 5s of 2040 at 1.58%.
LADWP 5s of 2046 at 1.88%-1.85% versus 1.86%-1.85% Wednesday and 5s of 2048 at 1.88%.
AAA scales
Refinitiv MMD's scale was cut two to four basis points at the
The ICE municipal yield curve was cut one to two basis points: 0.35% (+1) in 2023 and 0.57% (+1) in 2024. The 10-year was at 1.30% (+1) and the 30-year yield was at 1.72% (unch) in a
The IHS Markit (INFO) municipal analytics curve was cut one to two basis points: 0.38% (+1) in 2023 and 0.54% (+2) in 2024. The 10-year at 1.26% (+2) and the 30-year at 1.74% (+2) as of a
Bloomberg BVAL was cut one to three basis points: 0.39% (+2) in 2023 and 0.53% (+2) in 2024. The 10-year cut three to 1.27% and the 30-year up two to 1.70% at a
Treasuries were stronger and equities plunged late in the day.
The two-year UST was yielding 1.042%, the five-year was yielding 1.602%, the 10-year yielding 1.816%, the 20-year at 2.190% and the 30-year Treasury was yielding 2.126%, at the close. The Dow Jones Industrial Average lost 313 points or 0.89%, the S&P was down 1.10% while the Nasdaq lost 1.30%, at the close.
Economy
While inflation was surging after the reopening of the economy following the pandemic, Federal Reserve officials were more worried about employment than inflation, but that has changed. With the Fed now focused on controlling inflation, employment may be softening.
“Investors quickly shrugged off a rather hot initial jobless claims report that rose to the highest level since October,” said
Initial jobless claims spiked to 286,000 in the week ended
"This is clearly a setback for seasonally adjusted new claims, rising to a level last seen in October," said
The Fed was late in recognizing that price pressures would last this long while the labor market recovery “pleasantly surprised” officials. “The FOMC would need to see much more substantial slowing of the recovery for expectations for rate hikes to change,” Hamrick said.
The Omicron variant may be responsible, in part, for claims “moving in the wrong direction,” he said. “Because of the pandemic, some workers have been sidelined and no doubt some businesses have been negatively impacted by this latest wave of the pandemic.”
Overall, the labor market has strengthened recently, he said. “We hold out hope that after this wave of the pandemic, the economic recovery will gather some speed."
The data confirm “the jobs recovery is slowing,” said Morning Consult Chief Economist
But the challenge ahead, he said, is increasing the participation rate. “Why should people look for work when people with jobs are being laid off?"
When COVID cases and jobless claims rose, “both employed and out-of-work adults stopped looking for work,” he said, which creates a labor shortage that worsens “supply constraints, which will drive prices higher, all else equal.”
And while “a short-term downturn in employment” may be of concern to the Fed, inflation remains its focus, Leer said, “which makes the case for increasing interest rates."
Separately, the Philly Fed manufacturing index offered a much different view than did the Empire State Manufacturing Survey, with the general business conditions index climbing to 23.2 in January from 15.4 in December.
Economists expected a 20.0 read.
Prices paid rose, while prices received dipped, although the six months from now indexes both surged, suggesting respondents expect inflation to remain hot. The number of employees index also fell in current terms and for future expectations.
Also released Thursday, existing home sales fell 4.6% in December to a seasonally adjusted 6.18 million annual pace, but 2021 sales of 6.12 million were the highest since 2006.
The median price was