The municipal market was calmly traded and little modified Friday ahead of the Thanksgiving-shortened week, with strong market technicals resulting in more muni outperformance to U.S. Treasuries and corporates.
Triple-A yields barely budged for the ninth consecutive trading session while USTs saw small losses on the short end and small gains 10 years and out.
“November’s technical reprieve brought significant outperformance across the curve in municipals this month,” noted Peter DeGroot, managing director and head of J.P. Morgan’s municipal research and strategy team.
Supply has “declined materially, allowing dealers to take a breather, with their inventories dropping significantly, while retail investors don’t appear to be spooked by rate volatility, lower taxes and possible threats to the tax-exempts, and continued putting money into tax-exempts at a brisk pace,” said Mikhail Foux, managing director and head municipal research and strategy at Barclays.
Tax-exempt ratios at the moment are “more neutral relative to corporates across the curve,” DeGroot said. “On a month-to-date basis, HG municipals have considerably outperformed Treasuries by 26, 17, 24, and 25 basis points in 2-, 5-, 10- and 30-years, respectively.”
The 2-year municipal to UST ratio Friday was at 60%, the five-year at 62%, the 10-year at 66% and the 30-year at 82%, based on Refinitiv Municipal Market Data’s 3 p.m. EST read. ICE Data Services had the two-year at 61%, the five-year at 62%, the 10-year at 66% and the 30-year at 81% at 3 p.m.
“Although the market outlook seems relatively benign within the near term, we don’t think investors have been overly excited by chasing performance, as ratios are fairly unattractive,” Foux said. “In consequence, trading activity has declined materially, and market participants have been focusing more on the first market.”
The brand new-issue calendar Thanksgiving week will are available in at a bit of over $1.4 billion, and investors will probably be left to parse through the month’s new-issue inventories. Bond Buyer 30-day visible supply sits at $6.91 billion.
Net negative supply in December falls to $3 billion from $17 billion this month, resulting in a still supportive technical backdrop and certain muni outperformance in December, “but it is going to be difficult to repeat November’s relative gains,” DeGroot said.
Municipals are returning 0.85% in November and 1.66% 12 months so far, per Bloomberg’s Municipal Index, while high-yield performance endures with November returns at +1.02% resulting in 6.92% returns in 2024. Taxable municipals have followed USTs and corporates with losses this month at -0.27%, moving year-to-date returns to positive 2.14%.
“Historically, municipal performance in December has been strong, especially for high-grade munis, which haven’t lost money in any December previously decade, with a mean monthly return of 0.9%; and, in our view, this 12 months will probably be no different,” Foux said.
High-yield performance has been “more spotty (especially in 2021, when the HY index lost nearly 2%), but the common return on this month over the past decade remains to be positive at 0.4%,” Foux noted.
Looking forward to macroeconomic data, Foux said third-quarter core PCE “will probably be closely watched and can provide additional input into the subsequent [Federal Open Market Committee] meeting; at this point, a 25bp rate cut is priced in by fed fund futures with only a 55% probability, making the end result relatively uncertain.”
“On the whole, the U.S. economy seems to have done relatively well in Q3, with the economic surprise index trending higher since early September and now in positive territory,” Foux said. “In consequence, our economists forecast a solid Q3 2024 GDP print of two.8%, indicating that onerous landing is unlikely any time soon.”
For municipals, “we might not be surprised if the market gets richer in December (especially within the second half of the month), but we remain cautious looking forward to 2025, because the trading environment will likely remain difficult, and valuations removed from attractive,” Foux said.
“As we glance to December, while tax-exempts not flash value versus taxable fixed-income, we’re reminded of the market’s propensity to outperform in December and January, and particularly after presidential election years,” DeGroot said.
“Absolute yields proceed to look attractive within the context of the trading range over the past three years and our longer-term projections for lower rates next 12 months,” DeGroot said.
And long-dated municipal market rates are still attractive from a historical perspective, and the tax-exempt net-supply backdrop is favorable, “we just like the performance profile over the balance of the 12 months and into 1Q25, assuming some stability within the rates market,” DeGroot added.
Primary to return:
The Katy Independent School District, Texas, (Aaa/AAA//) is on the day-to-day calendar with $220.28 million of unlimited tax refunding bonds, PSF guarantee. BOK Financial Securities, Inc.
The Aerotropolis Regional Transportation Authority, Colorado, (nonrated) is about to cost Tuesday $205.25 million of special revenue bonds, terms 2044, 2054. Jefferies LLC
The Westfield Washington Multi-School Constructing Corp., Indiana, (/AA+//) is about to cost Tuesday $188.61 million of ad valorem property tax first mortgage bonds, Indiana State Aid Intercept Program, serials 2027-2044. Stifel, Nicolaus & Company, Inc.
The Westfield Washington Multi-School Constructing Corp., Indiana, (/AA+//) can also be set to cost Tuesday $115.205 million ad valorem property tax first mortgage bonds, Series 2024 B, Indiana State Aid Intercept Program, serials 2027-2044. Stifel, Nicolaus & Company, Inc.
The Illinois Finance Authority is about to cost $150 million of CenterPoint Joliet Terminal Railroad Project tax-exempt surface freight transfer facilities revenue bonds, Series 2020, remarketing, Truist Securities Inc.
The Illinois Finance Authority can also be set to cost $100 million of CenterPoint Joliet Terminal Railroad Project tax-exempt surface freight transfer facilities revenue bonds, Series 2016, remarketing. Truist Securities Inc.
The Ohio Water Development Authority (/AAA//) is about to cost $102.02 million of water development refunding revenue bonds, fresh water revolving fund Series 2024B, serials 2025-2042. Jefferies LLC.
The State of Latest York Mortgage Agency (Aa1///) is about to cost Tuesday (retail order period Monday) $88.08 million of homeowner mortgage revenue social bonds, non-AMT, terms 2039, 2044, 2049, 2054. Barclays Capital Inc.