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 March 3, 2021. Refinitiv Lipper reported $238.926 million of outflows, but $182.035 million of inflows to high-yield, reversing last week's outflows.

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 3 p.m. read. ICE Data Services had the five at 54%, the 10 at 72% and the 30 at 81%.

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 Mikhail Foux, Clare Pickering and Mayur Patel.

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 Dec. 31 while the 10-year muni triple-A has risen 28 bp since the start of the year.

"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/) $950 million of tax-exempt future tax secured subordinate bonds, Fiscal 2022 Series C, Subseries C-1, with six to 11 basis point cuts to scales from its Wednesday retail scale. Bonds in 2/2024 with a 3% coupon yields 0.58% (+6), 5s of 2027 at 1.01% (+6), 5s of 2032 at 1.50% (+7), 5s of 2037 at 1.78% (+10), 4s of 2042 at 2.16%, 5s of 2047 at 2.08%, 4s of 2047 at 2.28%, 4s of 2051 at 2.34% (+11) and 3s of 2051 at 2.64% (+11), callable 2/1/2032. Final pricing details were not available at press time.

The New York City Transitional Finance Authority also sold $180.995 million of taxable future tax secured subordinate bonds, Fiscal 2022 Subseries C-2 to Citigroup Global Markets Inc. Bonds priced at par: 1.64% in 2/2025., 2.02% in 2027, 2.47% in 2032, noncall.

Wells Fargo (WFC) priced and repriced for the Metropolitan Washington Airports Authority (A2/AA//) $424.790 million of Dulles Toll Road second senior lien revenue refunding bonds, Series 2022A, with two to eight basis points cuts. Bonds in 10/2052 with a 4% coupon yields 2.47% (+2), 2.75s of 2053 at 3% and 3s of 2053 at par (+8), callable 10/1/2031. Insured by Assured Guaranty (AGO).

Wells also priced $330.22 million of taxables with bonds priced at par: 1.737% in 10/2025, 2.21% in 2027, 2.824% in 2032, 3.242% in 2037 and 3.562% in 2041, callable 10/1/2031. Insured by Assured Guaranty (AGO).

J.P. Morgan Securities priced for Wisconsin Health and Education Facilities Authority (Aa3/AA-//) $165.35 million of revenue bonds, Series 2022. Bonds in 12/2036 with a 5% coupon yields 1.8%, 5s of 2037 at 1.83% 5s of 2041 at 1.95%, 4s of 2046 at 2.29%, 4s of 2051 at 2.37% and 3s of 2051 at 2.77%, callable 12/1/2031.

Piper Sandler & Co. priced for Elgin Independent School District, Texas, (/AAA//) $106.98 million of unlimited tax school building bonds, Series 2022. Bonds in 8/2029 with a 5% coupon yields 1.30%, 5s of 2032 at 1.45%, 3s of 2037 at 1.90%, 3s of 2042 at 2.09%, 3s of 2046 at 2.24% and 2.75s of 2051 at 2.75%, callable 8/1/2032.

First outflows of 2022
In the week ended Jan. 19, weekly reporting tax-exempt mutual funds saw $283.926 million of outflows, Refinitiv Lipper said Thursday. It followed an inflow of $231.121 million in the previous week and marks the first week of outflows after 45 consecutive weeks of inflows.

Exchange-traded muni funds reported inflows of $56.463 million, after inflows of $350.607 million in the previous week. Ex-ETFs, muni funds saw outflows of $295.389 after inflows of $119.485 million in the prior week.

The four-week moving average fell to $508.754 million from $847.635 million in the previous week.

Long-term muni bond funds had inflows of $426.196 million in the latest week after inflows of $118.140 million in the previous week. Intermediate-term funds had outflows of $70.812 million after inflows of $275.655 million in the prior week.

National funds had outflows of $312.876 million after inflows of $308.661 million while high-yield muni funds reported inflows of $182.035 million in the latest week, after outflows of $363.862 million the previous week.

Secondary trading
Virginia 5s of 2023 at 0.43%-0.42%. Washington 5s of 2023 at 0.38%. Maryland 5s of 2023 at 0.48%. Montgomery County, Maryland, 5s of 2023 at 0.46%. Connecticut 5s of 2024 at 0.60%.

Georgia 4s of 2025 at 0.77%. Columbus, Ohio, 5s of 2025 at 0.86%. University of Texas 5s of 2025 at 0.89%. DASNY 5s of 2027 at 1.01%. Montgomery County, Maryland, 4s of 2027 at 1.09%-1.06%.

Wisconsin 5s of 2029 at 1.25%-1.22%. Maryland 5s of 2030 at 1.30%-1.29%. Florida 5s of 2032 at 1.46%. Maryland 5s of 2033 at 1.41%.

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%. California 5s of 2041 at 1.70% versus 1.63% on 1/12.

LADWP 5s of 2046 at 1.88%-1.85% versus 1.86%-1.85% Wednesday and 5s of 2048 at 1.88%. Piedmont, California 5s of 2051 at 1.78%.

AAA scales
Refinitiv MMD's scale was cut two to four basis points at the 3 p.m. read: the one-year at 0.39% (+2) and 0.56% (+4) in two years. The 10-year at 1.28% (+3) and the 30-year at 1.72% (+2).

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 4 p.m. read.

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 4 p.m. read.

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 4 p.m. read.

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 Edward Moya, senior market analyst at OANDA. “Holiday and COVID closures were at play and likely impacted the high jobless claims reading.”

Initial jobless claims spiked to 286,000 in the week ended Jan. 15 from an upwardly revised 231,000 a week earlier. Economists polled by IFR Markets expected a drop to 220,000.

"This is clearly a setback for seasonally adjusted new claims, rising to a level last seen in October," said Mark Hamrick, senior economic analyst at Bankrate.

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 John Leer. "The rise in layoffs poses a direct financial risk to Americans since benefits leave some recipients unable to cover basic expenses."

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 $358,000 up from $354,400 in November and 15.8% higher than a year earlier. The average price grew to $374,800 from $373,100 and 9.6% higher than $342,000 in December 2020.

Jessica Lerner contributed to this report.