Bonds

Munis defy rising USTs, but Lipper reports first outflows since Nov.

Municipal bonds strengthened across the yield curve Thursday, diverging from rising U.S. Treasuries and a large sell-off in equities after Federal Reserve Chairman Jerome Powell tried to calm investor concerns over inflation and rising rates to no avail.

Refinitiv Lipper reported the first outflows since Nov. 4 at $600 million after $37 million of inflows the previous week, ending a 16-week streak. High-yield funds took an even larger hit, with $722 million of outflows reported after $330 million last week.

The outflows were unsurprising given the large sell-off of more than 40 basis points and uncertainty from retail investors.

However, triple-A muni benchmarks fell two to five basis points Thursday with the biggest drop in bonds in 2023-2028.

And since the correction took hold on Feb. 16, the 10-year AAA spot (and investors) largely found a comfort level between 1.08% and 1.15%, about 41 basis points above the 2021 low of 0.67%. By contrast, the 10-year UST hit a closing high yield of 1.54% on Thursday — or 62 basis points off its low closing yield when it started 2021 at 0.92%.

Ratios fell again with muni yields Thursday. The 10-year muni/UST was reported at 72% and the 30-year at 77%, according to Refinitiv MMD. ICE Data Services showed ratios at 70% in 10 years and 78% in 30. Bloomberg BVAL had the 10-year at 77% and the 30 at 83%.

“It may be that muni/UST ratios in the 70%-80% range past five years will hold for a period of time now that buyers are being better compensated on a raw yield basis,” said Kim Olsan, senior vice president at FHN Financial.

Since municipal yields have reset higher by 30 to 40 basis points after hitting the lows earlier in February, the market has stabilized somewhat compared to just last week, helped by improved valuations versus other fixed income, according to Ashton Goodfield, head of municipal bonds at DWS Group.

“Although bids wanted remain elevated, bonds are being well-absorbed, and inquiries are re-emerging,” she said Wednesday. She pointed to the “robust” demand for the New York City GO deal as evidence of the continued market strength.

“Sustained stabilization depends on retail investors’ reactions to negative February and year-to-date returns — and whether that leads to fund outflows,” Goodfield said.

In the primary market Thursday, Mississippi (Aa2/AA/AA/) priced $169 million of tax-exempt unlimited tax general obligation bonds. Raymond James ran the books and repriced the deal with bonds in 2030 with a 5% coupon yielding 1.21% (6 basis points lower than an initial pricing wire), 5s of 2031 at 1.27% (-9), 4s of 2036 at 1.70% (-10) and 3s of 2040 at 2.06% (-5). Bonds in 2034 and 2035 with 4% coupons were repriced 14 and 15 basis points lower.

Wells Fargo priced $119 million of taxable GO refunding bonds for Mississippi. All bonds priced at par with bonds in 2021 at 0.097%, 2026 at 0.977%, 2030 at 1.844%.

In the competitive market, the Florida Department of Transportation sold $183 million of unlimited tax general obligation bonds. Bonds in 2022 with a 5% coupon yield 0.08%, 5s of 2026 at 0.53%, 5s of 2031 at 1.14%, 2s of 2036 at 1.79% and 2s of 2041 at 1.98%.

Secondary market
Trading clearly showed the move to lower rates. San Francisco City and County 2s of 2022 traded at 0.13%-0.10%. Harris County, Texas, 5s of 2022 at 0.11%-0.09%. Henrico County, Virginia, 5s of 2023 traded at 0.18% versus 0.20% Wednesday. Georgia GO 5s of 2023 at 0.19%-0.17%.

California GO 5s of 2024 at 0.29%. Ohio water 5s of 2025 at 0.41%-0.40%. Maryland GO 5s of 2025 at 0.40%-0.41%.

New York City TFA 5s of 2026 at 0.67%. TFAs in 2027 at 0.82%. Baltimore County, Maryland, 5s of 2027 at 0.68%-0.65%. Washington 5s of 2029 at 1.04%. Baltimore County 5s of 2030 at 1.06%-1.05%.

University of Washington 5s of 2032 at 1.23% versus 1.28% Wednesday. Portland, Oregon, 2s of 2033 at 1.56%-1.50% versus 1.55% original. Baltimore County 4s of 2037 at 1.66%-1.58% versus 1.65% original. Austin, Texas, water 5s of 2039 at 1.61%.

New York EFC 3s of 2050 at 2.38%-2.37%.

Massachusetts GO 5s of 2050 at 1.98% versus 2.04%-2.01% Tuesday.

High-grade municipals were stronger across the curve, according to final readings on Refinitiv MMD’s AAA benchmark scale. Short yields fell two basis points to 0.08% in 2022 and 0.15% in 2023. The 10-year fell five basis points to 1.10% and the 30-year at 1.77%.

The ICE AAA municipal yield curve showed short maturities falling three basis points to 0.08% in 2022 and 0.14% in 2023. The 10-year declined two basis points to 1.08% while the 30-year yield slid three to 1.79%.

The IHS Markit municipal analytics AAA curve showed yields down three to 0.09% in 2022 and to 0.14% in 2023 while the 10-year fell three to 1.07% and the 30-year to 1.75%.

The Bloomberg BVAL AAA curve showed yields down two to 0.09% in 2022 and to 0.16% in 2023, while the 10-year fell three to 1.08%, and the 30-year yield dropped two to 1.80%.

The three-month Treasury note was yielding 0.09%, the 10-year Treasury 1.44% and the 30-year Treasury was yielding 2.25% near the close. Equities sold off with the Dow down 467 points, the S&P 500 down 1.71% and the Nasdaq dropped 2.45%.

Refinitiv Lipper reports $600M outflow
In the week ended March 3, weekly reporting tax-exempt mutual funds saw $600.044 million of outflows. It followed an inflow of $37.683 million in the previous week.

The last time the funds saw outflows was on Nov. 4, 2020, when investors withdrew $954 million.

Exchange-traded muni funds reported inflows of $181.222 million, after outflows of $327.487 million in the previous week. Ex-ETFs, muni funds saw outflows of $786.266 million after inflows of $365.170 million in the prior week.

The four-week moving average remained positive at $1.008 billion, after being in the green at $1.554 billion in the previous week.

Long-term muni bond funds had outflows of $667.421 million in the latest week after outflows of $237.902 million in the previous week. Intermediate-term funds had inflows of $69.248 million after inflows of $224.436 million in the prior week.

National funds had outflows of $455.823 million after inflows of $22.570 million while high-yield muni funds reported outflows of $721.728 million in the latest week, after outflows of $330.188 million the previous week.

Economy: Powell message stays the same
As expected, Federal Reserve Board Chairman Jerome Powell reiterated that the Fed will stay on the sidelines until there’s “substantial further” progress on its dual mandate of maximum employment and stable prices, which will “take some time.”

Powell dismissed rising yields in the bond market, saying he would be concerned by a “disorderly” conditions or persistent tightening in financial conditions, but since the Fed looks at many aspects of the economy, it wouldn’t necessarily act based on one market’s changes.

While the economic “outlook is becoming more positive,” he told the Wall Street Journal’s jobs summit by livestream, he repeated the Fed will not taper its $120 billion of asset purchases a month until there is “substantial further progress” toward its goals, and it would have to be “actual” not expected.

In order for the Fed to consider rate hikes, he said, it will have to see sustainable inflation of 2% and maximum employment. “There’s a lot of ground to cover before we get” there, Powell said.

While transient inflation is expected since last year’s Spring numbers were quite low, and also when the economy fully reopens, “I expect we will be patient.”

The economy is better than was expected a year ago when the virus first hit, he said, noting no one expected vaccines to be available so quickly.

And despite risks, he said he expects job creation to pick up in the coming months, although the nation won’t reach maximum employment this year.

Initial jobless claims climbed to 745,000 in the week ended Feb. 27 from 736,000 a week earlier.

The Feb. 20 number was revised up from 730,000.

Economists polled by IFR Markets expected a rise to 760,000.

Continuing claims slid to 4.295 million in the week ended Feb. 20 from 4.419 million a week before.

The four-week average declined to 790,750 in the week ended Feb. 27 from 807,500 a week earlier.

The increase in claims “reflects some catch-up after winter storms delayed filings in the middle of February,” according to Sarah House, senior economist at Wells Fargo Securities. “While the President’s Day holiday has also interjected some noise to recent weeks’ figures, the four-week average dropped to the lowest level since early December,” she said. “In short, initial jobless claims are finally indicating that the jobs picture is beginning to firm up again after a rough winter.”

Edward Moya, senior market analyst at OANDA, said, “The deep freeze impacted is still being unwound in this week’s reading, but still shows that claims have stabilized.”

With the employment report expected to show jobs added. “A disappointing nonfarm payroll report,” he said, “could mean the difference of a couple hundred billion dollars in the size of President Joe Biden’s COVID relief bill.”

But, the stimulus, rather than the employment report may capture the market’s attention, according to Scott Ruesterholz, portfolio manager at Insight Investment. “While the labor market has largely flatlined since November, markets are not particularly focused on the jobs situation in February, particularly given fiscal stimulus that has insulated the incomes of millions,” he said.” Instead, investors are looking to the outlook with the potential for a return to normal inflection points quickly approaching.”

As states lift or ease restrictions, “the direction of travel over the next two months won’t move in a straight line,” Ruesterholz said. But with rising vaccination levels, “demand for travel, leisure, and recreation” will also grow.

“This combination can provide a virtuous circle of accelerating economic growth and significant job growth, during the second and third quarters,” he said.

Also released Thursday, quarterly productivity fell 4.2% in the fourth quarter, less than the 4.8% in the prior estimate for the quarter, after a 4.2% increase in the third quarter.

Unit labor costs gained 6.0%, less than the 6.8% gain in the preliminary report, after a 9.6% drop in the third quarter.

Economists expected a 4.7% fall in productivity and 6.7% higher unit labor costs.

Separately, factory orders rose 2.6% in January after a 1.6% gain in December, and above the 2.1% rise expected by economists.

Orders for non-defense capital goods excluding aircraft, considered a harbinger of business spending plans on equipment, rose 0.4% in January.

Christine Albano contributed to this report.

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