Municipals were little changed in mixed secondary trading as the last of the week’s largest new-issues priced and muni mutual funds clocked in more outflows. The U.S. Treasury market pendulum swung back to gains Thursday as investors reacted to the stronger-than-expected GDP numbers. Equities closed down.
Triple-A yields were little changed after outperforming UST losses Wednesday, while govies saw yields fall by up to 11 basis points out longer.
The two-year muni-to-Treasury ratio Thursday was at 72%, the three-year was at 73%, the five-year at 73%, the 10-year at 74% and the 30-year at 91%, according to Refinitiv Municipal Market Data’s 3 p.m., ET, read. ICE Data Services had the two-year at 72%, the three-year at 73%, the five-year at 71%, the 10-year at 72% and the 30-year at 89% at 4 p.m.
Investors continue to pull money from muni mutual funds with LSEG Lipper reporting $934.7 million of outflows for the week ending Wednesday after $297 million of outflows the week prior.
High-yield saw outflows of $304.5 million after outflows of $189.8 million the previous week.
In the primary market Thursday, Barclays priced for the San Francisco Airport Commission (A1//A+/) $794.340 million of second series revenue refunding bonds, on behalf of the San Francisco International Airport. The first tranche, $748.375 million of AMT bonds, Series 2023C, saw 5s of 5/2028 at 4.47%, 5s of 2033 at 4.66%, 5s of 2038 at 4.96%, 5.5s of 2043 at 5.14% and 5.75s of 2048 at 5.26%, callable 5/1/2033.
The second tranche, $45.965 million of non-AMT/governmental purpose bonds, Series 2023D, saw 5.25s of 5/0248 at 4.87%, callable 5/1/2033.
BofA Securities priced and repriced for the Chicago Board of Education (/BB+/BB+/BBB/) $575 million of dedicated revenues unlimited tax GOs, Series 2023A, with yields bumped up to five basis points from Thursday morning’s preliminary pricing: 5s of 12/2030 at 5.19% (unch), 5s of 2033 at 5.25% (unch), 5.5s of 2038 at 5.70% (-4) and 5.875s of 2047 at 6.04% (-5), callable 12/1/2033.
BofA Securities priced for the Health and Educational Facilities Board of the Metropolitan Government of Nashville and Davidson County, Tennessee (/A/A/) $145.145 million of Vanderbilt University Medical Center revenue bonds, Series 2023A, with 5s of 7/2028 at 4.16% and 5s of 2033 at 4.37%, noncall.
Morgan Stanley priced for Cape Coral, Florida (/AA//), $138.040 of BAM-insured North 1 West Area utility improvement assessment refunding, Series 2023, with all bonds pricing at par: 4.05s of 3/2025, 4.45s of 2028, 4.85s of 2032, 5.3s of 2038, 5.5s of 2043, 5.6s of 2048 and 5.65s of 2054, callable 3/1/2033.
In the competitive market, the Virginia Public School Authority (Aaa/AAA/AAA/) sold $134.600 million of special obligation school financing bonds, Series 2023, to Citigroup Global Markets, with 5s of 12/2024 at 3.80%, 5s of 2028 at 3.53%, 5s of 2033 at 3.69%, 4.25s of 2038 at 4.45% and 4.75s of 2043 at 4.78%, callable 10/1/2032.
The Albemarle County Economic Development Authority (Aa1/AA+/AA+/) sold $109.650 million of public facilities revenue bonds, Series 2023A, to TD Securities, with 5s of 6/2026 at 3.68%, 5s of 2028 at 3.60%, 5s of 2033 at 3.71%, 5s of 2038 at 4.27% and 5s of 2043 at 4.55%, callable 6/1/2033.
Secondary flows
Trading “flows suggest tax loss harvesting is gaining momentum — a function of the calendar leaving just seven full weeks in 2023 to transact and the market finding a workable trading range,” said Kim Olsan, senior vice president of municipal bond trading at FHN Financial.
Fifty-one percent of all volume comprises dealer-to-customer sells, according to current secondary trading data, down from 59% in the last 90 days, she said.
Several sectors, Olsan noted, “are represented in tax loss activity, including vintage 2014-2016 issues, those from 2020-2021 (low-coupon production) and revenue sectors such as healthcare and prepay gas bonds.”
A 300 basis point move from the market’s low of August 2020, when the 10-year Refinitiv MMD AAA spot was at 0.58%, has “generated a tax swap season with rollover opportunity more than a decade in the making,” she said.
“Liquidations related to tax swaps, syndicate settlement cash raises and mutual fund outflows will come up against smaller reinvestment figures in November and December,” which CreditSights estimates is at a combined $50 billion, she said.
“Any additional corrections would present higher new-issue yields as well as greater advantages for rollover opportunities in the secondary market,” Olsan noted.
Secondary trading
Washington 5s of 2024 at 3.89%. DC 5s of 2024 at 3.79% versus 3.84% Wednesday. North Carolina 5s of 2025 at 3.71% versus 3,72% Wednesday.
Massachusetts 5s of 2028 at 3.52%. California 5s of 2029 at 3.61%. New Mexico 5s of 2030 at 3.77%-3.74%.
Delaware 5s of 2033 at 3.56% versus 3.58% Monday and 3.58% on 10/20. Maryland 5s of 2034 at 3.67%-3.69%. NYC 5s of 2034 at 3.96% versus 4.00% Wednesday and 3.93% Tuesday.
NYC 5s of 2051 at 5.07% versus 5.06%-4.93% Wednesday and 5.03% Tuesday. Massachusetts 5s of 2053 at 4.84% versus 4.80%-4.69% Wednesday and 4.85% Monday.
AAA scales
Refinitiv MMD’s scale was little changed: The one-year was at 3.76% (unch) and 3.65% (unch) in two years. The five-year was at 3.49% (unch), the 10-year at 3.59% (unch) and the 30-year at 4.57% (+2) at 3 p.m.
The ICE AAA yield curve was bumped up to two basis points: 3.73% (unch) in 2024 and 3.70% (unch) in 2025. The five-year was at 3.53% (unch), the 10-year was at 3.57% (-1) and the 30-year was at 4.55% (-1) at 4 p.m.
The S&P Global Market Intelligence municipal curve was little changed: The one-year was at 3.79% (unch) in 2024 and 3.69% (unch) in 2025. The five-year was at 3.54% (unch), the 10-year was at 3.60% (unch) and the 30-year yield was at 4.58% (+2), according to a 3 p.m. read.
Bloomberg BVAL was unchanged: 3.80% in 2024 and 3.74% in 2025. The five-year at 3.53%, the 10-year at 3.63% and the 30-year at 4.59% at 4 p.m.
Treasuries made gains.
The two-year UST was yielding 5.041% (-8), the three-year was at 4.877% (-10), the five-year at 4.792% (-12), the 10-year at 4.843% (-10), the 20-year at 5.191% (-9) and the 30-year Treasury was yielding 4.987% (-9) near the close.
U.S. economic growth accelerated in Q3
The U.S. economy grew by 4.9% in the third quarter, more than double the second quarter.
The acceleration in the third quarter signaled that “the economy remains resilient in the face of higher rates and still-elevated prices,” said Wells Fargo Securities senior economist Tim Quinlan and economist Shannon Seery.
“Economic growth transitioned from resilience to reacceleration this quarter, defying the Federal Reserve’s aggressive tightening cycle and tighter financial conditions,” said Olu Sonola, Fitch Ratings’ head of U.S. economics.
However, the Fed’s job is not made easier in the coming quarters because of “the strength of consumer spending and the boost to growth from government spending,” he said.
There are two factors contributing to this strong growth, said Mortgage Bankers Association senior vice president and chief economist Mike Fratantoni.
Consumer spending on goods and services remained quite strong,” he said.
Some of the strength, Fratantoni noted, is because of a “big increase in spending on durable goods as well as a pickup in estimated spending on housing and utilities.”
However, it can be hard to see how this pace of consumer spending growth can continue “as excess savings built up during the pandemic continue to drop and wage gains decelerate,” he said.
There is some “consumer stress in the rising delinquency rates for credit cards and auto loans,” Fratantoni said.
The increase in private inventories also contributed to the growth in Q3, he said.
“These jumps can often be reversed in subsequent quarters, and we do expect that will contribute to slower growth in the fourth quarter,” he said.
“Some special factors may have juiced the U.S. economy this summer, including a surge in defense spending and equity market rally, but even the underlying trend seems to be running faster than potential (of around 2%),” said Sal Guatieri, BMO senior economist.
That’s inconsistent with “restoring price stability and can only mean rates will stay high for longer,” he said.
“While persistent strength in demand could put the inflation descent in jeopardy,” Wells Fargo Securities economists do not believe the report “changes much for policymakers, and we expect the [Federal Open Market Committee] to leave rates unchanged at next week’s meeting.”
The GDP figure “does not move the needle for the November meeting, which is certainly a skip,” said Lindsay Rosner, head of multi-sector fixed income investing at Goldman Sachs Asset Management.
“Higher and hold, yes. Higher and hiking, no,” she said.
Sonola added: “The Fed’s higher for longer message may turn out to be much higher for much longer.”