The municipal market rallied Thursday with robust secondary activity, primary deals repricing lower, following better-than-expected economic data, a much stronger U.S. Treasury market, and high-yield municipal bond mutual funds reporting a record $1.28 billion of inflows.
Municipals were stronger as the reality of an improved credit outlook, and strong demand buoyed by fund flows and aid from the Federal government, positioned the asset class to continue to perform well.
Triple-A benchmarks rallied three to five basis points, with the strongest performance out long.
The search for yield continues, driving $1.28 billion into high-yield funds over the last week, surpassing the previous record from January, noted Greg Saulnier, managing analyst at Refinitiv MMD.
“With this, credit spreads continue to compress and any coupon or call structures that offer additional yield are being gobbled up,” he said. “Muni/UST ratios may be rich, but that doesn’t appear to make a lick of difference right now.”
Municipal to UST ratios closed at 61% in 10-years and 70% in 30-years on Tuesday, according to Refinitiv MMD and ICE Data Services also had the 10-year at 61% and the 30 at 70%.
“The muni market is on fire,” Ashton Goodfield, head of municipal bonds at DWS, said on Thursday, noting that tax-exempt valuations versus taxable alternatives have been holding near record lows.
Goodfield said investors have built cash balances over the last year as demand for income was high and interest paid on cash investment was near zero.
In addition, other supporting factors are the high credit quality nature of the muni market, recently buffeted by fiscal support, as well as the demand for tax-exempt income at the same time the notion that tax rates for wealthy individuals could increase during the current administration.
There seems to be no end in sight to the healthy demand for municipal bonds in the primary market as evidenced by recent and new fund flows, agreed a New York manager of underwriting and trading.
“The municipal market continues to be strong as inflows continue to come into bond funds, while the supply calendar continues to be on the smaller side, somewhere between $6 million and $8 billion,” he said Thursday. “Buyers continue to put cash to work all across the credit curve.”.
In the primary Thursday, Citigroup Global Markets Inc. repriced by 15 basis points lower $174.9 million of Idaho Housing and Finance Association federal highway trust fund grant and revenue anticipation bonds (A2//A+), with bonds in 2029 with a 5% coupon yielding 1.01%, 5s of 2031 at 1.24%, 4s of 2036 at 1.65% and 4s of 2039 at 1.77% (about +50 to triple-A curves).
J.P. Morgan Securities LLC priced $140 million of McLaren Health Care taxable revenue refunding bonds for the Michigan Finance Authority (A1//AA-), whose $64 million, serial bonds, all priced at par, with bonds in 2021 at 0.15%, at 0.25% in 2022, 0.90% in 2026 and 1.20% in 2030. The second tranche, $75 million, mature in 2038 priced at 1.20% par.
Secondary market
Trading was robust and much firmer.
Washington GOs 5s of 2022 traded at 0.04%-0.05%.
New York Urban Development Corp. PITs 5s of 2025 traded at 0.26%. Maryland 5s of 2026 at 0.43%, Virginia 5s of 2026 at 0.35%-0.36%. Dallas waters 5s of 2026 at 0.55%-0.54%. California 5s of 2028 at 0.78% and 5s of 2029 at 0.91%. Wake County 5s of 2029 at 0.79%. Texas waters 5s of 2029 at 0.88%-0.85%. Portland, Oregon 5s of 2029 at 0.78% versus 0.98% original. Forsyth County, North Carolina 5s of 2029 at 0.81%-0.77% versus 0.87%-0.86% Wednesday. Delaware 5s of 2030 at 0.84%-0.82% versus 0.87% Wednesday and 0.93% Monday. Maryland 5s of 2032 at 1.06% versus 1.11% Wednesday. Fairfax County 4s of 2032 at 1.09%-1.08% versus 1.12% Wednesday. Florida PECO 5s of 2032 at 1.06%-1.05%.
Delaware 3s of 2033 at 1.25%-1.17% versus 1.24% original. Maryland 5s of 2035 at 1.16%. Delaware 2s of 2038 at 1.68%-1.65%.
Washington 5s of 2042 at 1.54% versus 1.57% Monday. NYC TFA 3s of 2048 at 2.36%-2.30%. LA DWP 5s of 2050 at 1.69% and NYC TFA 3s of 2051 at 2.37%-2.42%.
Benchmark scales
On Refinitiv MMD’s AAA benchmark scale, the one-year sat at 0.05% in 2022 and fell one basis point to 0.08% in 2023. The yield on the 10-year fell four to 0.93% and the 30-year fell five to 1.56%.
The ICE AAA municipal yield curve showed yields at 0.05% in 2022 and one basis point lower to 0.07% in 2023. The 10-year maturity fell four to 0.94% while the 30-year fell five to 1.56%.
The IHS Markit municipal analytics AAA curve showed yields at 0.05% in 2022 and two lower to 0.08% in 2023, the 10-year fell four to 0.92% and the 30-year fell four to 1.56%.
The Bloomberg BVAL AAA curve showed yields at 0.04% in 2022 and 0.06% (-1 bp) in 2023, while the 10-year fell four to 0.91%, and the 30-year yield fell four to 1.56%.
The three-month Treasury note was yielding 0.03%, the 10-year Treasury was yielding eight basis points lower to 1.55% and the 30-year Treasury was yielding 2.23%, also eight lower, near the close. Equities climbed to record highs with the Dow up 288 points, the S&P 500 rose 1.05% and the Nasdaq gained 1.24% near the close.
Refinitiv Lipper reports $2.3B inflows
In the week ended April 14, weekly reporting tax-exempt mutual funds saw $2.255 billion of inflows. It followed an inflow of $2.122 billion in the previous week. High-yield muni funds reported inflows of $1.279 million, the highest on record after $1 billion plus in January of this year. They reported a hefty $820.890 million the week prior.
Exchange-traded muni funds reported inflows of $478.221 million, after inflows of $350.027 million in the previous week. Ex-ETFs, muni funds saw inflows of $1.777 billion after inflows of $1.772 billion in the prior week.
The four-week moving average remained positive at $1.282 billion, after being in the green at $1.036 billion in the previous week.
Long-term muni bond funds had inflows of $2.137 billion in the latest week after inflows of $1.676 billion in the previous week. Intermediate-term funds had inflows of $162.601 million after inflows of $259.233 million in the prior week.
National funds had inflows of $2.157 billion after inflows of $1.976 billion.
Cautious optimism
An “impressive” showing by Thursday’s indicators suggests “the challenge for companies is rapidly shifting from survival to how to keep up with demand,” according to an analyst.
Four out of the six economic indicators released on Thursday surpassed expectations, with consumers tapping their savings to quench pent-up demand.
In the context of an economy still not fully reopened, the “data [was] impressive,” said Bryce Doty, senior vice president and senior portfolio manager at Sit Investment. These “results are the tip of the iceberg.”
The economy is “transitioning from expectations” to the “incredible reality of just how powerful the rebound is,” Doty added.
Retail sales jumped 9.8% in March, after a revised 2.7% decline in February, first reported as a 3.0% drop.
Economists polled by IFR Markets predicted sales would increase 5.5%.
Year-over-year, sales have 27.7%.
Excluding autos, sales rose 8.4% in March, greater than the 5.0% rise economists projected. Sales minus autos are up 19.4% from a year ago.
“With consumers still sitting on a pile of accumulated savings combined with the expected reopening of the service economy this summer, our forecast looks for a consumer spending boom this year that will rival any in living memory for most Americans,” said Tim Quinlan, senior economist at Wells Fargo Securities. “Everybody wins when consumers are flush with stimulus checks.”
Given the timing of the stimulus checks’ issuance, some of the spending gains may stretch into May. But as stimulus fades in the last half of the year, he said, “there is a risk the consumer recovery could stall or at least slow.”
But high savings rate levels “should prevent goods spending from fading too quickly after surging during the pandemic,” Quinlan noted. “That said, it is services spending that we expect to pick up and drive the overall recovery in consumption this year.”
Also released Thursday, the manufacturing sector in the Federal Reserve Bank of Philadelphia region “continued to improve” in April, as the general activity index rose to 50.2 in April, the highest in almost 50 years, after March’s number was revised down to 44.5 from 51.8.
Economists predicted a 44.5 read.
The survey’s prices paid index dipped to 69.1 from 72.6, while prices received climbed to 34.5 from 30.2. The numbers suggest continued price pressures on manufacturers, which are being passed on to consumers.
The future activity index climbed to 66.6 from 59.1.
The six-months ahead prices paid rose to 71.5 from 63.4 and the future prices received jumped to 63.6 from 46.9.
Meanwhile, manufacturing activity in the New York region “grew strongly,” as the Empire State Manufacturing Survey’s general business conditions index climbed to 26.3 in April from 17.4 last month, the Federal Reserve Bank of New York reported.
Economists polled expected a gain to 20.0.
Prices paid jumped to 74.7, its highest read since 2008, from 64.4 and prices received increased to a record 34.9 from 24.2 in the previous month, the Fed said, “indicating that selling prices increased at the fastest pace in more than twenty years.”
“The key question is why yields aren’t moving higher especially given inflation expectations based on the 10-year breakeven rate for TIPS is persistently over 2.3%?” SIT’s Doty asked. “Concerns over international tensions, suspension of J&J vaccines and a looming 33% increase in corporate taxes appear to be overshadowing positive economic news. Look for relief from any of these issues to push yields higher.”
Looking six-months ahead, general business climbed to 39.8 from 36.4.
“Given the huge rebound in retail sales, it makes sense that the Empire Manufacturing and Philly Fed Business Outlook crushed the consensus expectations,” Doty said.
Initial jobless claims fell to a pandemic low of 576,000 on a seasonally adjusted annual basis in the week ended April 10 from a revised 769,000 a week earlier.
The April 3 read was first reported as 744,000. Economists estimated 700,000 claims in the week.
This is the lowest read since 256,000 the week of March 14, 2020.
Continued claims increased to 3.731 million in the week ended April 3 from a downwardly revised 3.727 million a week earlier, initially reported as 3.734 million.
“A marked decline in jobless claims coupled with solid spending numbers underscores the thesis that the U.S. economy continues to take strides of improvement, at least on a relative basis,” noted Stifel Chief Economist Lindsey Piegza. “On a nominal front, however, with claims still elevated near 700,000 on a three-week average, unemployment at 6.0%, some eight million Americans still without the position of gainful employment and some four million reliant on federal unemployment assistance, it’s clear the recovery is ‘far from complete,’ as [Federal Reserve Board] Chairman [Jerome] Powell reiterated over the weekend.”
But with stimulus and ”artificial support” promoting this growth “returning to a sustainable organic profile appears to be still a distant prospect, potentially years in the making,” she said.
Separately, industrial production climbed 1.4% in March after a decline of 2.6% in February, first reported as a 2.2% fall.
Economists had expectations of a 2.8% increase.
Capacity utilization gained to 74.4% in March from a downwardly revised 73.4% in February, first reported as 73.8%.
Economists predicted a 75.6% level.
“Despite the euphoria signaled by various purchasing manager surveys, overall March industrial production only partly recovered the output lost in February,” said Quinlan and Sarah House, senior economist at Wells Fargo Securities. They noted production was more than a full point short of projections despite the clearing of some supply chain issues.
“Some of the softness is attributable to utilities, but we are more concerned that manufacturing output was not stronger.”
The sector should “be booming,” they note. With the Institute for Supply Management manufacturing at its highest since the 1980s, “you would expect to see a surge in output, yet the increase for manufacturing output in March was just 2.7%, which is not even enough to fully offset the 3.7% decline in February.”
Also, business inventories increased 0.5% in February, after a revised 0.4% rise in January, first reported as a 0.3% increase.
Economists projected inventories to gain 0.5%.
Business sales were down 1.9% in February after a 4.5% increase in January, but up 5.7% year-over-year.
Builders’ confidence rose slightly in April as demand remained “strong,” according to the National Association of Home Builders, with its housing market index climbing to 83 from 82 in March.
Economists expected the 83 read.
The current sales index rose to 88 from 87, while traffic of prospective buyers grew 75 from 72, and sales expectations fell to 81 from 83.
Lynne Funk and Chip Barnett contributed to this report.