Steadiness persists while Refinitiv Lipper reports heavy HY inflows

Bonds

Municipal high-grade benchmarks were little changed for the fourth day as U.S. Treasuries improved, as did equities, and Refinitiv Lipper reported heavy high-yield inflows.

Fund inflows continue to be in positive territory with Refinitiv reporting $725 million of total inflows into municipal bond mutual funds for the week ending May 19. High-yield funds made up $648.7 million, or more than 89% of the total. This follows $750 million and $487 million of inflows, respectively, the week prior, marking another week where high-yield makes up a majority of inflows. The highest inflows on record were $1.3 billion on April 14.

The expectation for higher taxes and a solid credit picture is keeping municipal investors engaged, brushing off larger market concerns of inflation or longer-term credit weakness.

For now, “it appears that muni investors are being driven more by the advent of higher taxes and less by the threat of rising inflation, which is having a more significant impact upon the Treasury market,” said Jeff Lipton, managing director of credit research at Oppenheimer Inc.

Investors are also paying attention to anything with incremental yield.

“We suspect that longer duration and weaker quality credits will continue to outperform the broader muni index for the time being, and so we encourage careful security selection for yieldier names,” Lipton noted.

Lipton noted that the improving credit outlooks for nearly all sectors continues, but “credit distinctions tend to be clouded by technical-driven market conditions which have tightened spreads, pushed ratios down to historic levels, and have generated rather full valuations,” he wrote. “If we get to the point where technicals become less compelling with spreads gapping out and ratios normalizing, the fundamental analytical assessment process will have more of an impact.”

Lipton also said he is advising investors to pay close attention to the muni/Treasury relationship “where an extended downward repricing of the Treasury yield curve could escort muni yields higher in sympathy, thus presenting a potential buying opportunity.”

Municipal to UST ratios closed at 62% in 10 years and 67% in 30 years on Thursday, according to Refinitiv MMD. ICE Data Services saw ratios on the 10-year at 61% and the 30-year at 68%.

In the negotiated market, the last large deal of the week closed with bumps in scales. J.P. Morgan Securities LLC repriced $244 million of general obligation bonds for the Maricopa County Special Health Care District, Arizona, (Aa3//AA-/) with bumps of four to 10 basis points. Bonds in 2022 with a 5% coupon yielding 0.12% (-6), 5s of 2026 at 0.67% (-4), 5s of 2031 at 1.28% (-4) and 4s of 2035 at 1.52% (-10).

Secondary trading and scales
Secondary trading showed San Francisco 5s of 2022 at 0.11%. New Mexico 5s of 2024 at 0.26%. Washington 5s of 2025 at 0.38%. Anne Arundel County, Maryland, 5s of 2025 at 0.46%. Loudoun County, Virginia, 5s of 2026 at 0.57%.

Maryland 5s of 2027 at 0.71%-0.70%, the same as Tuesday. North Carolina 5s of 2027 at 0.65%. Wisconsin 5s of 2030 at 1.02%. University of Texas 5s of 2031 at 1.12%-1.11% versus 1.12% on April 12.

New York Dorm PIT 5s of 2033 at 1.35%, New York City TFA 5s of 2037 at 1.79%-1.78% versus 1.84% Friday. NYC TFA 5s of 2038 at 1.89%-1.88%.

Iowa Public Finance Authority 5s of 2046 at 1.62%.

On Refinitiv MMD’s AAA benchmark scale, yields were steady across the curve at 0.10% in 2022 and 0.14% in 2023, the 10-year stayed at 1.01% and the 30-year at 1.58%.

The ICE AAA municipal yield curve showed yields at 0.11% in 2022 and 0.16% in 2023, the 10-year stayed at 1.01% while the 30 sat at 1.59%.

The IHS Markit municipal analytics AAA curve showed yields at 0.10% in 2022 and 0.13% in 2023, the 10-year sat at 0.98% and the 30-year at 1.57%.

The Bloomberg BVAL AAA curve showed yields steady at 0.08% in 2022 and 0.10% in 2023, 0.98% in the 10-year and the 30-year sat at 1.59%.

The 10-year Treasury was yielding 1.63% and the 30-year Treasury was yielding 2.34% near the close. Equities rose with the Dow up 210 points, the S&P 500 rose 1.10% and the Nasdaq gained 1.80%.

Economic indicators
Thursday’s data suggest the economy is bouncing back, but offer no clue whether inflationary pressures will persist, analysts said.

“Today’s reports together are consistent with an economy meaningfully rebounding, and while there is clearly inflationary pressure today, it is far from certain these pressures will prove to be more than transitory,” said Scott Ruesterholz, portfolio manager at Insight Investment.

Initial jobless claims fell to a pandemic low of 444,000 on a seasonally adjusted annual basis in the week ended May 15 from an upwardly revised 478,000 a week earlier, first reported as 473,000.

Economists polled by IFR Markets expected 450,000 claims in the week.

Continued claims rose to 3.751 million in the week ended May 8 from a downwardly revised 3.640 million a week earlier, initially reported as 3.655 million.

Economists expected 3.640 million continued claims.

With employers reporting difficulty finding qualified workers, fewer layoffs occurred, with businesses, and the number collecting “some type of unemployment assistance declined nearly 900,000 to 15.98 million,” he said.

Ruesterholz sees “considerable improvement” in the labor market, with April’s below-expectations employment report “likely a blip rather than a sign of deceleration.”

Also released Thursday, the Federal Reserve Bank of Philadelphia’s manufacturing report on business showed slower growth in the sector in May, while the price indexes hit 40-year highs.

The general activity index dropped to 31.5 in May from 50.2 in April.

Economists predicted a 43.0 read.

The prices paid index climbed to 76.8 — its highest level since March 1980 — from 69.1 and the prices received gained to 41.0 — its highest level since May 1981 — from 34. The expectations for prices paid slid to 66.7 from 71.5, which for prices received the index dropped to 58.4 from 63.6.

In special questions, respondents said they expect to raise prices 5.0% on average in the next 12 months, higher than the 4.0% average of their responses for expected inflation. Respondents said they raised prices 2.3% in the past 12 months.

“While prices are rising today, it’s encouraging that the manufacturer’s six-month forward pricing expectations declined a bit,” Ruesterholz said. “We see much of today’s inflationary pressures as being driven by supply chain issues and commodities, rather than a more persistent rise in prices and it seems manufacturers agree.”

Separately, the Leading Economic Index grew 1.6% in April to 113.3 after a 1.3% gain a month earlier, while the coincident index climbed 0.3% to 104.1 after a 0.9% increase a month earlier, and the lagging index rose 1.8% to 104.7 after a 3.7% decline a month earlier, the Conference Board reported Thursday.

Economists estimated the leading index would increase 1.4%.

LEI has is above pre-pandemic levels, according to Ataman Ozyildirim, senior director of economic research at the thinktank. “While employment and production have not recovered to their pre-pandemic levels yet, the U.S. LEI suggests the economy’s upward trend should continue and growth may even accelerate in the near term.”

The gain in LEI was “driven by labor market improvement as well as buoyant financial markets and despite supply chain restraints that held back other components,” said Wells Fargo’s Tim Quinlan, senior economist and Hop Mathews, economic analyst.

While labor market constraints should lessen, supply issues could restrain other sectors, “which could continue to put upward pressure on prices, especially if demand remains strong,” they said. “We believe the overall story remains positive and look for robust growth over the next few quarters.”

Ruesterholz noted the growth shows the economy is gaining momentum. “The combination of pent-up demand from consumers, factories working through backlogs, and a robust housing market should enable the economy to expand potentially 10% in Q2, passing its pre-COVID level of GDP, a significant benchmark on the road to recovery,” he said.

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