Funds on fire as muni/UST ratios fall to 1980s-level lows

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Municipal yield curves held steady Thursday as municipal bond mutual funds saw another week of inflows, ratios fell to record lows in 10-years and spread compression continues, leaving investors to search for any incremental yield in a supply-starved market.

Municipal to U.S. Treasury ratios dropped to record lows Thursday with ratios at 63% in 10 years and 71% in 30 years, according to Refinitiv MMD. ICE Data Services, which has not been reporting them as long, had ratios at 61% in 10 years and 73% in 30.

MMD notes the previous all-time low for the 10-year Muni/UST ratio is 65.25% reached on August 6, 1984.

New issues from Detroit and the Nassau County Interim Finance Authority saw ample demand with Detroit repricing as much as 30 basis points lower from a morning scale on longer-term debt. Bonds in 2046 with a 5% coupon repriced to 2.33% versus 2.63% earlier Thursday and 5s of 2050 fell to 2.37% from 2.67%. Bumps of 10 to 22 basis points were seen on bonds in 2030-2041.

Continuing the large fund flows trend, Refinitiv Lipper reported $1.58 billion of inflows into municipal bond mutual funds for the week ending Feb. 3 after inflows of $2.79 billion the week prior, marking the 13th week in a row in positive territory. Long-term inflows were $1.2 billion and high-yield saw $610 million of inflows, while intermediates saw $87 million of outflows.

Spread compression on A-rated and BBB-rated general obligation bonds is telling. Ten-year A-rated GOs have tightened four basis points since early November while 10-year BBB-rated paper has tightened 32 basis points, according Refinitiv MMD.

New deals see ample demand
“There is a lot of money on the sidelines going to work on new issues,” a New York municipal manager said. However, a lot of the demand is intermediate and long focused. “It’s still a challenge in the front of the market with the low yields. Once you get to below the 0.20% level you lose retail,” he said.

Goldman, Sachs & Co. LLC priced for institutions $575 million of sales tax-secured bonds for the Nassau County Interim Finance Authority (/AAA/AAA/). Bonds in 2029 with a 5% coupon yield 0.63%, 5 bps lower than retail pricing, 5s of 2031 at 0.86%, 2 bps lower, 5s of 2035 at 1.04%, 5 lower, and 4s of 2035 yield 1.15%, 10 bps lower than retail.

BofA Securities repriced $175 million of unlimited tax exempt and taxable social bonds for Detroit (Ba3/BB-//) with as much as 30 basis point lower yields from original pricing wires. The $135 million exempt series saw bonds in 2030 with a 5% coupon yield 1.91% (10 bps lower from earlier wire), 5s of 2031 at 1.99% (10 lower), 5s of 2036 at 2.22% (12 lower), 4s of 2041 at 2.47% (22 bps lower), 5s of 2046 at 2.33% (30 lower), and 5s of 2050 at 2.37% (30 bps lower).

The $40 million taxable series, priced at par, saw bonds in 2022 at 0.125%, 2026 at 0.375%, 2030 at 0.875% and 2034 at 0.875%.

TD Securities priced $131 million of taxable unclaimed property special revenue refunding bonds, $64 million Series 2021 (I-49 North Project) and $67 million Series 2021 (I-49 South Project) for the State of Louisiana (A1/A+//). All bonds priced at par: 2021 at 0.245%, 2026 at 1.059%, 2031 at 1.879%, 2033 at 2.079% and 2035 at 2.279%.

And rates should not rise anytime soon, as inflation should remain “subdued” this year, although higher than it’s been in a while, according to Ned Davis Research Senior U.S. Economist Veneta Dimitrova.

The firm expects inflation to rise about 2.2% this year, despite a “temporary spike” in the spring as a result of the effects of the COVID-19 pandemic on inflation last spring.

This will keep the Federal Reserve on hold as it attempts to reach an average inflation level of 2%. Officials have said they will let the economy run a bit hot to make up for misses in the past a decade, leading economists to speculate inflation will have to be 2.5% for a time to counteract the below 2% rates seen previously.

“Upward price pressures are building as the economy recovers,” she said in a webcast, but those are tempered by labor market and output slack. Commodity prices, which have been rebounding, the V-shaped manufacturing recovery and a weak dollar all create inflationary pressure.

“Inherent uncertainty about the future” stems from globalization and demographics that could be inflationary or disinflationary depending on how they work out.

And while the year will see increased price pressures, she said, “the magnitude remains questionable.” But longer-term, she said she’s in the “lower inflation camp.”

As for the indicators released Thursday, initial jobless claims fell to 779,000 in the week ended Jan. 30 from a downwardly revised 812,000 a week earlier, first reported as 847,000.

Economists polled by IFR Markets expected a decline to 830,000 in the week.

The four week average dipped to 848,2500 in the week ended Jan. 30 from 849,500 a week before.

Continuing claims fell to 4.592 million in the week ended Jan. 23 from 4.785 million a week earlier. Economists expected a 4.750 million level.

This was the third week in a row claims declined. “While still elevated, the ongoing improvement in claims suggests layoffs have slowed, a positive sign for the labor market as well as the broad-based recovery effort,” said Stifel Chief Economist Lindsey Piegza. “As Federal Reserve Chairman Jerome Powell noted during last week’s policy meeting, the economy still remains well below the Federal Open Market Committee’s targets for full employment – as well as stable 2% inflation. However, steps in the right direction are encouraging that the U.S. economy could and will eventually return to a stronger jobs position amid a widespread vaccination effort to contain the virus.”

The numbers suggest “layoffs are slowing as the number of new COVID cases continue to fall,” said Scott Anderson, chief economist at Bank of the West. “We expect jobless claims will continue to drift lower in the months ahead as the more stringent business restrictions are lifted and another pandemic aid package flows through the economy.”

“Approaching the one-year mark of the pandemic, it is quite striking that new claims remain so elevated,” said Mark Hamrick, senior economic analyst for Bankrate. While the headline number is the lowest since the end of November, he said, “a year earlier it was just above 200,000 new claims.”

With January employment data set for release Friday, “many key sectors of the economy remain in deep jobs deficits compared to pre-pandemic levels,” Hamrick said. “While attention appropriately gravitates to the epicenters of loss such as leisure and hospitality (bars and restaurants), travel related businesses and retailing, the devastation stretches well beyond those sectors to include health care, manufacturing and construction. There’s been plenty of pain to go around.”

Also released Thursday, productivity dropped at a 4.8% pace in the fourth quarter after rising 5.1% a quarter earlier. Unit labor costs rose 6.8% in the quarter after a 7.0% drop in the third quarter.

Economists expected a 2.9% drop in productivity and a 3.6% gain in unit labor costs.

Separately, factory orders grew 1.1% in December after a 1.3% increase a month earlier, while excluding transportation, orders rose 1.4% in the month after a 1.1% climb in November.

“The manufacturing recovery has been leading the way with solid consumer and business demand, the need to rebuild depleted inventories, and the weaker dollar all helping out,” Anderson said. “The inventory/shipments ratio fell again to 1.39 months, highlighting the need for factories to continue ramping up production. Factory orders for December have nearly returned to pre-pandemic levels and were just marginally (-0.8%) below year ago levels.”

Secondary market data
High-grade municipals were steady, according to final readings on Refinitiv MMD’s AAA benchmark scale. Short yields were at 0.09% in 2022 and 0.10% in 2023. The 10-year stayed at 0.73% and the 30-year was flat at 1.38%.

The ICE AAA municipal yield curve showed short maturities steady at 0.09% in 2022 and 0.11% in 2023. The 10-year was at 0.70% while the 30-year yield sat at 1.40%.

The IHS Markit municipal analytics AAA curve showed yields at 0.09% in 2022 and 0.10% in 2023 while the 10-year remained at 0.68% and the 30-year yield at 1.37%.

The Bloomberg BVAL AAA curve showed yields at 0.08% in 2022 and 0.10% in 2023, while the 10-year was flat at 0.69%, and the 30-year yield steady at 1.42%.

The three-month Treasury note was yielding 0.09%, the 10-year Treasury was yielding 1.13% and the 30-year Treasury was yielding 1.91% near the close. Equities saw gains for a third day with the Dow up 253 points, the S&P 500 rose 0.81% and the Nasdaq gained 0.96%.

Christine Albano contributed to this report.

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