Fund flows plummet, high-yield sees outflows

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Municipals were mostly steady on a day when U.S. Treasuries sold off and equities rallied in a risk-on trade from debt-ceiling news in Washington while Refinitiv Lipper reported a mere $37 million of fund inflows and a near half-billion of high-yield outflows.

Triple-A benchmarks were little changed on the day with Refinitiv MMD cutting the 2- to 5-year one basis point, while leaving the rest of the curve unchanged. ICE Data services saw one basis point cuts on the 10- and 30-year, Bloomberg BVAL saw one basis point cuts in spots while IHS Markit was little changed.

The UST 10-year hit 1.57% and the 30 at 2.126% near the close. The moves higher brought ratios back from near 80% highs on the 10-year.

The 10-year municipal-to-UST ratio is at 74% and the 30-year at 79%, according to Refinitiv MMD. ICE Data Services had the 10-year at 72% and the 30 at 80%.

For 31 consecutive weeks, investors put cash into municipal bond mutual funds but saw just $37.68 million added in the latest reporting period while high-yield funds saw $460 million of outflows after $103 million of outflows a week prior.

Par value posted for sale is ticking higher as sellers lock in the current yield set while they can, noted Kim Olsan, senior vice president of FHN Financial. Fund flows, she said, are correlated. Lower inflows — and potential outflows — are worth watching for any further decline and “what it might mean for new-issue and secondary inventory distribution,” she said.

The negative flow report from high-yield “is interesting but it is not enough to signal to me that there is a widespread change in sentiment,” said Patrick Luby, senior municipal strategist at CreditSights. “The recent negative flows could be a consequence of the Sept. 30 closure of Nuveen’s NHMAX to new investors — which could have led some investors to move out of HY.”

Luby also noted the two largest high-yield exchange-traded funds — HYD and HYMB — have had mixed flows the past two weeks.

“I do not believe that there is much more room for high-yield spreads to tighten further, but the higher average coupon rates (and cash flows) in the high-yield market versus investment-grade munis are likely to continue to appeal to a lot of the exiting high-yield fund shareholders,” Luby said.

In the primary, BofA Securities priced for the Omaha Public Power District, Nebraska, (Aa2/AA//) $381.5 million and $57.305 million of electric system revenue bonds. The first series saw 3s of 2/2040 at 2.18%, 3s of 2041 at 2.21%, 3s of 2046 at 2.46%, 5s of 2046 at 1.98% and 4s of 2051 at 2.21%, callable Aug. 1, 2030. The second saw 5s of 2/2023 at 0.21% and 4s of 2046 at 2.16%, callable Aug. 1, 2030.

BofA Securities priced for Lee County, Florida, (A2//A/A+/) $215.695 million of AMT airport revenue bonds with 5s of 10/2022 at 0.33%, 5s of 2026 at 0.91%, 5s of 2031 at 1.69%, 4s of 2036 at 2.14%, 4s of 2041 at 2.35%, 5s of 2046 at 2.35% and 4s of 2051 at 2.58%.

Refinitiv Lipper reports $37M inflow
In the week ended Oct. 6, weekly reporting tax-exempt mutual funds saw $36.870 million of inflows, Refinitiv Lipper said Thursday. It followed an inflow of $408.056 million in the previous week.

Exchange-traded muni funds reported inflows of $143.779 million, after inflows of $154.991 million in the previous week. Ex-ETFs, muni funds saw outflows of $106.909 million after inflows of $253.065 million in the prior week.

The four-week moving average remained positive at $812.742 million, after being in the green at $1.075 billion in the previous week.

Long-term muni bond funds had outflows of $343.991 million in the latest week after inflows of $77.576 million in the previous week. Intermediate-term funds had inflows of $223.059 million after inflows of $106.188 million in the prior week.

National funds had inflows of $125.426 million after inflows of $357.439 million while high-yield muni funds reported outflows of $459.622 million in the latest week, after outflows of $102.940 million the previous week.

Secondary trading
Trading was mixed. Alabama 5s of 2022 traded at 0.11%. Washington 5s of 2023 at 0.16%.

Washington Suburban Sanitation District 5s of 2028 at 0.84%. King County, Washington, 5s of 2028 at 1.00%.

Maryland 5s of 2032 at 1.23%, the same as Wednesday.

New York City TFA 5s of 2034 at 1.57%.

AAA scales
According to Refinitiv MMD, short yields were steady at 0.13% in 2022 and up one basis point 0.21% in 2023. The yield on the 10-year was steady at 1.16% while the yield on the 30-year was also steady at 1.68%.

The ICE municipal yield curve showed bonds fall one in 2022 to 0.13% and one in 2023 to 0.18%. The 10-year maturity rose one to 1.12% and the 30-year yield rose one to 1.71%.

The IHS Markit municipal analytics curve showed short yields steady at 0.14% and 0.19% in both 2022 and 2023. The 10-year yield sat at 1.13% and the 30-year yield steady at 1.67%.

The Bloomberg BVAL curve showed short yields steady at 0.16% and 0.16% in 2022 and 2023. The 10-year yield was steady at 1.14% and the 30-year yield sat at 1.69%.

In late trading, Treasuries were softer as equities were up.

The 10-year Treasury was yielding 1.57% and the 30-year Treasury was yielding 2.126%. The Dow Jones Industrial Average gained 322 points, or 0.94%, the S&P rose 0.96% while the Nasdaq was up 0.96%.

Is the Fed wrong about inflation?
For more than a decade, the Federal Reserve was unable to stimulate inflation to its 2% target and now inflation seems to be much higher, but the Fed is convinced that once the pandemic ends inflation will slow.

But not everyone agrees with the Fed on inflation.

“The Fed has been wrong about inflation since the great financial crisis failing to reach their 2% target despite the easiest monetary policy in memory,” said Nancy Tengler, chief investment officer at Laffer Tengler Investments. “Now the Fed is wrong again but this time to the upside.”

Transitory inflation would have disappeared in “a few months,” she said, but it’s been “stickier and higher” than expected. “Twice since spring, the Fed has had to raise their inflation expectation. And, they are still behind.”

While Fed intervention allowed the economy to quickly rebound after last year’s economic shutdown, “perhaps the Fed stayed too easy for too long,” Tengler mused. “Or, maybe Chair [Jerome] Powell’s laser focus on jobs over inflation will be a mistake of equally epic proportions. Letting inflation run hot is risky business.”

Supply chain issues “will persist,” she predicted, which will add to inflationary pressures. The drought in western states will push up food and energy prices. “Let’s not even contemplate Washington spending plans at this point,” she said.

“Though this isn’t our base case, the Fed may be forced to raise rates modestly sooner than expected,” Tengler said. “Our base case, for the record, is that the Fed may never be able to raise rates again given the growth trajectory in U.S. debt.”

But, the question of whether the Fed was correct about inflation “is becoming less relevant,” said Drew Peterson, vice president and research analyst at Appleton Partners, “it was predicated on a reopening economy with COVID behind us. Instead, Delta continues to depress demand at home and supply abroad.”

And with companies expected to pass along price increases, “there is a good chance PPI will flow into lingering consumer inflation as COVID continues to disrupt the global economy.”

The Fed’s dual mandate includes maximum employment. Peterson noted, “Labor supply is confounding markets as well.”

Anecdotal evidence suggests the end of added unemployment benefits has not produced the rush of job seekers that was expected, he said.

Initial jobless claims declined to a seasonally adjusted 326,000 in the week ended Oct. 2 from an upwardly revised 364,000 a week earlier, first reported as 362,000. Economists polled by IFR Markets expected 350,000 claims.

“There is no consensus on why the workforce is failing to return to pre-pandemic levels, although BLS survey data suggests pandemic related concerns are at least partially to blame,” Peterson said.

But job cuts, as reported by Challenger, Gray & Christmas were the lowest for a quarter since 1997, said Mark Hamrick, senior economic analyst at Bankrate.

“The expected path forward for the job market and the broader economy is considered to be fairly upbeat,” he said. “Still, a higher-than-normal degree of uncertainty remains.”

And while the economy was expected to be past COVID at this point, “supply chain challenges and the Delta variant provided new plot twists which slowed the recovery,” Hamrick said.

“While there are encouraging signs on the COVID front, supply chain issues may be persistent,” he said. “The result is inflation at a higher pace than income improvement for many households, damaging to personal finances.”

Consumer credit rose $14.4 billion in August following an upwardly revised $17.3 billion increase in July, first reported as a $17.0 billion gain.

Economists expected credit to be $18.0 billion higher.

Chip Barnett contributed to this report.