Municipal Bonds completed buying and selling little modified Friday because the Market rode out the tip of the month and the primary quarter on a peaceful be aware as Treasuries strengthened and shares surged.

Whereas munis got here into March like a lamb, they went out like a lioness, calm and proud.

The 2-year muni-Treasury ratio was at 58%, the three-year at 59%, the five-year at 61%, the 10-year at 65% and the 30-year at 89%, in keeping with Refinitiv MMD’s 3 p.m. ET learn. ICE Knowledge Companies had the two-year at 58%, three-year at 58%, the five-year at 59%, the 10-year at 64% and the 30-year at 90% at 3 p.m.

Provide is first rate for a holiday-shortened buying and selling week. The market is closed on April 7 for the Good Friday vacation; buying and selling resumes Monday, April 10.

Quantity is estimated at $6.2 billion for the week of April 3, with $5.44 billion of negotiated offers and $759.2 million of aggressive gross sales slated. The week’s greatest deal is popping out of California, with the state set to promote over $2.5 billion of normal obligation bonds.

Provide to this point this yr has been abysmal. In March, quantity fell 30% on a year-over-year foundation to $31.8 billion from $45.6 billion in 2021. Outcomes weren’t significantly better for the primary quarter, with quantity falling 27% to $75.4 billion from $103.5 billion within the first quarter of 2022.

Secondary buying and selling was comparatively subdued for a lot of the week after latest volatility within the markets. Municipals have been regular Monday and Tuesday and remained little modified in Wednesday buying and selling. Munis grew to become barely firmer by a lot of the curve on Thursday.

Market technicals remained robust on Friday, with an general balanced tone and slight stage of optimism, in keeping with two municipal consultants.

An absence of provide is lowering the general market turnover and dampening volatility for tax-exempts, in keeping with Wesly Pate, senior portfolio supervisor at Revenue Analysis + Administration.

“An absence of provide continues to buoy the market even amid volatility in different asset courses as evidenced by ratios hovering round 60% for a lot of the intermediate curve,” Pate Mentioned.

Provide for the yr is manner down in comparison with final yr, he famous, and that’s making full-year market expectations seem incrementally harder to realize.

“The tax-exempt market stays starved for bonds as provide over the past 20 years has fallen properly wanting each demand and the availability seen in different asset courses,” he mentioned, noting over the past 20 years, the municipal market has grown solely 50%, whereas the broader taxable market has greater than tripled in dimension.  

“The provision imbalance leaves us anticipating ratios to stay compressed over the close to future relative to long term averages,” Pate added.

In the meantime, buyers are taking the present local weather of uncertainty and volatility in stride, in keeping with one other municipal participant.

“People are conscious of potential stress that might weigh in the marketplace, however attitudes are nonetheless typically extra constructive than damaging presently,” mentioned Tom Kozlik, head of public coverage and municipal technique at HilltopSecurities. 

“We’re not seeing proof of significant pressure from the monetary sector within the municipal bond market on the first or secondary aspect,” he mentioned.

New issuance has not been negatively impacted and the first market is behaving orderly — though a provide scarcity continues to hold over the market, Kozlik famous.

“One other gentle week of main market issuance is anticipated subsequent week, however that isn’t too shocking based mostly on issuance over the primary three months of the yr,” he mentioned. 

Many buyers are placing obtainable money to work, whereas others are being extra discriminating in regards to the market.

“Some imagine market technicals should not as engaging as they want,” Kozlik added.

BofA cuts ’23 quantity estimate by $100B
BofA has revised its 2023 issuance forecast all the way down to $400 billion.

“The massive muni market rally since November 2022 has to date didn’t meaningfully alter the low new cash issuance sample,” BofA wrote in a weekly market remark. “We may have to attend till deep into the second half to see a transparent shift. We revise our 2023 issuance forecast down from $500 billion to $400 billion to replicate the persisting sample and the time misplaced.”

BofA mentioned within the first quarter, a low new cash issuance sample seems to be persisting, signifying that the change since November is right here to remain for some time.

“We seemingly might want to wait till the third quarter to see some significant change once we anticipate the 10-year AAA to fall under 2.00%. If that’s the case, higher new cash issuance later within the yr ought to deliver the full to a barely larger stage. Our revised estimate for brand spanking new cash issuance is $320 billion,” BofA mentioned.

“Going ahead, we imagine a 2.00% 10-year AAA charge ought to deliver a few materials enhance in refunding exercise,” BofA mentioned. “Nonetheless, that is largely seemingly for the second half of 2023. So, we minimize our refunding quantity estimate to $80 billion. Please be aware that the $80 billion of refunding is near 2022’s $81 billion of whole refundings.”

BofA mentioned March proved to be a great month for high-grade buyers with the 10-year AAA muni yields falling 34 foundation factors in a bull steepening transfer and credit score spreads widened.

“Munis didn’t observe the latest bear flattening in Treasuries within the banking sector stabilization commerce. Bull flattening ought to start if inflation and financial knowledge weaken greater than market consensus,” BofA mentioned. “Excessive-grade buyers could make use of barbell methods to outperform the intermediate a part of the curve. Credit score buyers ought to undertake a extra tactical method to handle by an financial downturn.”

Friday’s AAA scales
Refinitiv MMD’s scale was unchanged throughout the board on Friday. The one-year was at 2.49% and a pair of.38% in two years. The five-year was at 2.22%, the 10-year at 2.27% and the 30-year at 3.33% at 3 p.m.

The ICE AAA yield curve was bumped as much as two foundation factors: 2.52% (-2) in 2024 and a pair of.42% (-1) in 2025. The five-year was at 2.19% (-1), the 10-year was at 2.27% (-1) and the 30-year was at 3.36% (-2) at 3 p.m.

The IHS Markit municipal curve was unchanged: 2.47% in 2024 and a pair of.36% in 2025. The five-year was at 2.19%, the 10-year was at 2.25% and the 30-year yield was at 3.29%, in keeping with a 3 p.m. learn.

Treasuries have been stronger as equities rose.

The 2-year UST was yielding 4.07% (-7), the three-year was at 3.83% (-8), the five-year at 3.61% (-7), the seven-year at 3.56% (-7), the 10-year at 3.49% (-6), the 20-year at 3.82% (-6) and the 30-year Treasury was yielding 3.69% (-5) at 3 p.m.

The Dow Jones Industrial Common was up 1.07% in late buying and selling whereas the S&P 50 rose 1.21% and the Nasdaq gained 1.53%.

Secondary buying and selling
This week’s NYC GO 4s of 2050, initially priced Wednesday at 95.083 to yield 4.31%, traded 64 instances on Friday in a complete quantity of $51.85 million at a excessive value of 98.375 to yield 4.10% and a low value of 95.083 to yield 4.31%, in keeping with the MSRB’s EMMA web site.

The NYC GO 5.25s of 2047, initially priced at 111.326 to yield 3.87%, have been traded seven instances in a complete quantity of $1.3 million at a excessive value of 111.941 to yield 3.80% and a low value of 111.326 to yield 3.87%, in keeping with EMMA.

Massachusetts 5s of 11/1/2048, initially priced in December at 109.214 to yield 3.87%, traded in a block of $5 million-plus+ at value of 110.994, a yield of three.63%, in keeping with ICE. Massachusetts 5s of 11/1/2052, initially priced at 108.87 to yield 3.91%, traded in a block of $5 million-plus at value of 110.313, a yield of three.71%.

HJ Sims: How munis fared in March
The municipal market was the beneficiary of many haven trades in March, Gayl Mileszko, director of capital markets evaluation and commentary at HJ Sims wrote in a weblog put up.

“State and native bonds are usually ranked just under U.S. Treasuries when it comes to relative security and munis are inclined to outperform throughout Fed tightening cycles, however are additionally clearly impacted by financial institution lending practices in addition to financial institution buying and gross sales,” she mentioned.

“Banks on a mixed foundation personal roughly 15% of the $4 trillion of excellent municipal bonds, or $592 billion,” she added. “Silicon Valley Financial institution reportedly held $7.4 billion of munis as of Dec. 31, Signature Financial institution reported $247 million and First Republic carried $19.4 billion.”

Why do munis typically outperform different asset courses?

“There are occasions when munis outperform their taxable counterparts for technical causes: demand for tax-exempts exceeding provide particularly throughout heavy redemption durations (months with excessive maturities, calls, coupons obtainable for reinvestment), fund flows, and after-tax ratios, for instance,” Mileszko mentioned.

She mentioned that proper now, as has been the case since December, muni yields are additionally unusually askew and commerce circulate is off.

“The one-year AAA rated municipal normal obligation bond benchmark yields 2.49% properly above the 11-year at 2.37%, so the quick finish of the muni yield curve remains to be inverted because it has been since early December,” she mentioned.

“For debtors, charges are nonetheless extraordinarily favorable: the 10-year muni benchmark yield is 2.29% and the 30-year is at 3.35%. For the reason that banking disaster occasions started, the 10-year yield has fallen 32 foundation factors and the 30-year is down 23 foundation factors,” Mileszko mentioned, including, “Mutual bond fund inflows are nonetheless constructive on a year-to date foundation with excessive yield funds taking within the highest internet at $1.17 billion.”

GOs or income bonds: Which is safer?
“Many buyers imagine GO bonds are inclined to have decrease credit score threat than income bonds do, as GO bond funds are funded by a lot broader and extra diversified sources of potential earnings streams than income bonds,” John Bonnell, portfolio supervisor and managing director at Thornburg Funding Administration, mentioned in a latest weblog put up.

“It is a widespread fable and we imagine it will possibly lead buyers astray when they’re evaluating the true dangers of GO vs. income bonds,” he says.

Bonnell cited two cases of stress — Detroit and Puerto Rico as an instance his level.

“The Detroit chapter story serves as a useful lesson for municipal bond market members,” he mentioned. “In July 2013, Detroit filed the most important municipal chapter in U.S. historical past, defaulting on a number of hundred million {dollars} of its GO bonds. The town continued to maintain important providers working and was in a position to make 100% of its funds on water and sewer income bonds.” He mentioned the ensuing payout construction helped disprove the long-held perception that GO bonds have been the most secure municipal safety on the market.

The Puerto Rico debt disaster, Bonnell mentioned, serves as one other instance the place funds to GO bondholders should not as sure as one may suppose.

“In 2016, the Puerto Rico authorities decidedly advised its collectors it could not fulfill its GO debt obligations of roughly $800 million, though these bonds have been explicitly backed with a ‘constitutional precedence’ when issued,” he mentioned. “On this case, the unlucky consequence for GO bondholders was vital haircuts of their restoration.”

The differential in dangers and earnings stability between GOs and income bonds can fluctuate significantly, Bonnell mentioned, relying on the authorized standing of what’s pledged for compensation and the values and priorities of these in cost on the time the bond is due.

Every bond, whether or not GO or income, should be fastidiously examined on a case-by-case foundation with a discriminating eye, he mentioned.

“Whereas GO defaults have been uncommon traditionally, when governments do go into chapter 11, the greenback quantity of debt defaulted on may be fairly giant compared to income bonds,” Bonnell wrote. “In different phrases, though GO bonds are inclined to have larger credit score rankings and default much less, once they do default, the injury is much higher than that of income bonds.”

He famous income bonds should not with out their dangers as they make up the bigger % of defaults.

“Nevertheless, regardless of their larger frequency of default, the full default loss is often much less extreme,” he mentioned.

NYC deal acquired warmly
New York Metropolis mentioned Thursday that it acquired good response to the largest sale of the week — its $1.19 billion of normal obligation bonds that went off on Wednesday.

The difficulty was comprised of $950 million of tax-exempt fixed-rates and $240 million of taxable fixed-rates. Proceeds are getting used to fund capital initiatives.

The town mentioned it acquired over $698 million of orders through the one-day retail order interval and virtually $1.77 billion of orders through the institutional order interval, which made the deal two instances oversubscribed.

Given investor demand for the tax-exempts, yields have been minimize one foundation level in 2025 and 2026, two foundation factors in 2035 and 2036, three foundation factors in 2037 and 2038, two foundation factors in 2045 and 2047 and by one foundation level in 2050. Closing yields ranged from 2.32% in 2025 to 4.31% in 2050.

The bonds have been underwritten by lead supervisor RBC Capital Markets. BofA Securities, Citigroup, J.P. Morgan Securities, Jefferies, Loop Capital Markets, Ramirez & Co., Siebert Williams Shank and Wells Fargo Securities have been co-senior managers.

The town additionally competitively offered $240 million of taxables, which attracted 11 bids. Wells Fargo received the bonds with a real curiosity price of 4.665%.

Main market
Two large offers are popping out of the Golden State within the upcoming week together with giant gross sales from a Pennsylvania issuer.

Topping the brand new concern slate is the state of California’s (Aa2/AA-/AA/) $2.56 billion GO bond providing. BofA Securities is ready to cost the $1.38 billion of latest cash and $1.18 billion of refunding GOs on Tuesday.

Individually, the Metropolis and County of San Francisco Public Utilities Fee (Aa2/AA/NR/NR) is coming to market with $998.56 million of wastewater income bonds.

BofA and Goldman Sachs are set to cost the PUC’s $536.60 million of Collection 2023A sewer system enchancment program (SSIP) inexperienced bonds, $285.25 million of Collection 2023B non-SSIP GOs and $176.72 million of Collection 2023C SSIP refunding inexperienced bonds on Wednesday.

In the meantime, the aggressive market is devoid of any gross sales over $100 million.

The most important concern going up for bid is coming from the Plymouth-Canton Neighborhood Faculties in Michigan (Aa2///), which can promote $87.5 million college constructing and web site GOs on Wednesday. PFM Monetary Advisors is the monetary advisor; Miller Canfield is the bond counsel.

Upcoming calendar
Different giant negotiated offers on the negotiated slate embody a spate of well being care points.

The College of Pittsburgh Medical Middle will promote (UPMC: A2/A/A/) $400 million of taxable income bonds (company CUSIP). Underwriter: RBC Capital Markets. Pricing: Tuesday.

The Pennsylvania Financial Growth’s Financing Authority will concern (A2/A/A/) $439.2 million of UPMC income bonds, Collection 2023A, Subseries 2023A-1 (time period charge mode) and Subseries 2023A-2 (mounted charge mode). Underwriter: RBC Capital Markets. Pricing: Tuesday.

And the Pennsylvania EDFA may even promote $90.55 million of Collection 2023B UPMC refunding income bonds. Underwriter: Barclays Capital. Pricing: Tuesday.

Georgetown College A3/A-//) plans a sale of $300 million of Collection 2023 taxable fixed-rate bonds. Underwriter: Barclays Capital. Pricing: Wednesday.

Durham County, North Carolina, (Aa1/AA+//) will promote $172.79 million of Collection 2023A restricted obligation refunding bonds with revenues pursuant to an installment financing settlement between Durham Financing Corp. and the county. Underwriter: PNC Capital Markets. Pricing Wednesday.

The Colorado Housing and Finance Authority will concern (Aaa/AAA//) $104.84 million of taxable Class I Collection F-1 single-family mortgage bonds. Underwriter: RBC Capital Markets. Pricing: Tuesday.

There are just a few offers over $50 million on the aggressive slate.

Alief Impartial Faculty District, Texas’ $79.89 million of Collection 2023 limitless tax college constructing bonds backed by the Everlasting Faculty Fund Assure program, will likely be promoting Monday.

King County, Washington’s (Aaa/AAA/AAA/) $76.87 million of Collection 2023A restricted tax GO and refunding bonds, will promote Tuesday.

Brookhaven, New York’s $59.45 million of Collection 2023 public enchancment bonds, will likely be promoting Wednesday.

Darien, Connecticut’s $72.42 million of bond anticipation notes, will promote Thursday.