Munis improve, 10-year falls further, ICI reports $2B inflows

Municipals firmed across the yield curve after a strongly bid deal from gilt-edge Delaware and active secondary activity moved levels lower by two to four basis points while nearly $2 billion more inflows were reported into municipal bond mutual funds.

The Investment Company Institute Wednesday reported another week of inflows with $1.995 billion coming into long-term municipal bond mutual funds, after $813 million the previous week. This is the fifth week of inflows with only one week of outflows so far in 2021 and a total of more than $28 billion for the year.

ICI also reported $526 million of inflows into exchange-traded funds for the week ending April 7. In the previous week, ETFs saw revised inflows of $244 million.

Municipal to UST ratios closed at 59% in 10-years and 69% in 30-years on Tuesday, according to Refinitiv MMD while ICE Data Services had the 10-year at 60% and the 30 at 70%.

The 30-year muni now sits comfortably below the yield on the 10-year U.S. Treasury at 1.61% on several benchmarks compared to the taxable UST at 1.64%.

Credit spreads continue to compress among various credits and coupon structures. Fairfax County, Virginia 4s of 2032 traded at 1.12% while Maryland 5s of 2032 at 1.11%. New York City waters 5s of 2031 at 1.08% versus triple-A University of Texas 5s of 2031 at 1.07%.

The spread between triple-A and AA muni benchmarks continue to tighten, especially on the short end with a spread of 1.5 basis points between the two ratings in one year, 2.8 basis points in the two year, four basis points in the five year and seven basis points on the 10-year, widening out to 17.9 basis points on the 30-year, according to ICE Data Service reads.

In the primary Wednesday, Loop Capital Markets priced for institutions $359.1 million of lease revenue bonds, 2021 Series B for the State Public Works Board of the State of California (Aa3/A+/AA-/) with bumps of two to six basis points from retail offering. Bonds in 2022 with a 5% coupon yield 0.08%, 5s of 2026 at 0.55%, 5s of 2031 at 1.17%, 4s of 2036 at 1.65%, 4s of 2040 at 1.83%, 5s of 2041 at 1.87% and 4s of 2046 at 2.02%.

Delaware (Aaa/AAA/AAA/) sold $293 million of general obligation bonds to J.P. Morgan Securities LLC. Bonds in 2022 with a 5% coupon yield 0.05%, 5s of 2023 at 0.06%, 5s of 2026 at 0.38%, 5s of 2031 at 0.96%, 2s of 2036 at 1.57% and 2s of 2041 at 1.82% with $200 million put away and balances on 2023-2024 and 2033-2038.

Trading showed richer prints across the yield curve. Loudoun County, Virginia 5s of 2022 traded at 0.06% versus 0.09% Tuesday. North Carolina 5s of 2026 at 0.41%-0.40% versus 0.49% Friday. Oregon 5s of 2027 at 0.57% versus 0.60% Tuesday. Maryland 5s of 2028 at 0.69%.

Forsyth County, North Carolina 4s of 2029 at 0.87%-0.86%. Delaware 5s of 2029 at 0.87%. New York City waters 5s of 2031 at 1.08%. University of Texas 5s of 2031 at 1.07% versus 1.10% Tuesday and 1.19% original. Fairfax County, Virginia 4s of 2032 at 1.12%. Maryland 5s of 2032 at 1.11% versus 1.19% Thursday.

Los Angeles MTA 5 of 2038 at 1.30%-1.31% versus 1.33%-1.32% Tuesday. New York City TFA 4s of 2046 at 2.02%-2.01%. Los Angeles DWP 5s of 2041 at 1.48%. New York City waters 5s of 2050 at 1.82%. Stanford 2.25s of 2051 at 2.31%.

Value is hard to find in the current municipal bond market, in particular in the secondary market, according to Peter Block, managing director of municipal strategy at Ramirez & Co.

“To the extent one is willing to get in the weeds, however, value can be found in smaller block sizes and/or off-the-run names,” Block said on Wednesday.

The number of line items up for sale on bid-wanted lists is running 16% above the one-year average while the par offered is about average, according to Block.

“The high prices demanded by sellers and the surplus of smaller size line items is also contributing to lower than average trading throughout,” he said. The average daily par traded over the past four weeks is $9.5 billion, which is about 92% of the one-year average, but only 83% of the two-year average, he noted.

“When you have week after week of above-average line items for sale with below average block sizes, it’s tough to find value and put the cash you have coming in to work,” Block said. “That is a lot to wade through, which becomes difficult for all but the most sophisticated accounts to find that value,” and contributes to the decline in trading volume.

Secondary market
On Refinitiv MMD’s AAA benchmark scale, the one-year sat at 0.05% in 2022 and 0.09% in 2023. The yield on the 10-year fell four to 0.97% and the 30-year fell two to 1.62%.

The ICE AAA municipal yield curve showed yields lower at 0.05% in 2022 and 0.08% in 2023. The 10-year maturity fell two to 0.98% while the 30-year fell two to 1.61%.

The IHS Markit (INFO) municipal analytics AAA curve showed yields at 0.05% in 2022 and 0.10% in 2023, the 10-year fell to 0.96% and the 30-year to 1.60%.

The Bloomberg BVAL AAA curve showed yields at 0.05% in 2022 and 0.08% in 2023, while the 10-year fell two to 0.95%, and the 30-year yield fell to 1.61%.

The three-month Treasury note was yielding 0.03%, the 10-year Treasury was yielding 1.64% and the 30-year Treasury was yielding 2.32% near the close. Equities were mixed with the Dow up 82 points, the S&P 500 fell 0.35% and the Nasdaq lost 0.91% near the close.

Beige Book: Economy growing faster
The economy grew faster from late February through early April — at a “moderate pace” — while consumer spending increased,” with a possible rise in inflation in the near term, according to the Federal Reserve’s Beige Book released on Wednesday.

“Reports raised the possibility that inflation could increase in the coming months,” the report said. “Most manufacturers and one retailer reported steep input price increases.” It noted that some retailers had already passed higher costs on to consumers.

The report showed some of the effects of the economy reopening as vaccination progresses, with leisure and travel growing.

The report “confirms the stream of positive news from current economic indicators,” said Steve Skancke, chief economic advisor at Keel Point. “Consumer confidence was up significantly which was further reflected in stronger consumer spending and the likely beginning of pent-up consumer demand finding its way into the market place. Manufacturing and service sector activity was also up significantly in March as a result of positive news on COVID vaccinations and working to meet increased consumer demand.”

While “inflation has yet to materialize,” he said, “we know there are price bumps in the re-opening and meeting pent-up demand, especially in what has to be paid for building materials, gasoline and hiring lower wage personnel.”

But he expects “this will all settle out by the end of the year” with inflation between 2.1% and 2.6%.

“All of this supports the Fed’s monetary policy goals and shows how well the fiscal support is working to spur the economy forward in 2021,” Skancke said.

“Retail sales strengthened in the first quarter at two of three firms, advance travel bookings increased, and sales were either stable or up modestly among contacts in the manufacturing sector and in software and IT services,” the report said. Compared to a year ago, “more than half of manufacturers and two of three retailers saw robust gains.” Air travel had yet to recover.

The report noted most districts saw “modest to moderate” employment gains, with manufacturing, construction, and the leisure and hospitality industries hiring the most. “Hiring remained a widespread challenge, particularly for low-wage or hourly workers, restraining job growth in some cases,” the report said.

Expectations for employment “were generally bullish.”

There was “slight” acceleration in wage growth, especially in manufacturing and construction, where it was reportedly “particularly difficult” to attract and retain workers.

Separately, import prices jumped 1.2% in March after a 1.3% gain in February, while export prices soared 2.1% after a 1.6% increase a month earlier.

Economists expected import prices to rise 0.9% and exports to grow 1.0%.

On an annual basis, import prices rose 6.9%, its largest 12-month rise since January 2012, while export prices gained 9.1%, its biggest since September 2011.

Christine Albano contributed to this report.

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