Overview
Geopolitical concerns continue to weigh on the bond market despite last week’s announcement of a two-week ceasefire between the US and Iran. This morning, tensions are elevated following a break-down of peace talks in Pakistan over the weekend. As a result, rate volatility in the bond market remains high with inflation continuing to pressure rates. Last week’s release of the core personal consumption expenditures index by the Bureau of Economic Analysis for February indicated an increase in prices of 0.4% from January, in-line with analyst expectations. Last Friday’s release of the consumer price index indicated that inflation surged 0.9% in March, the fastest pace in nearly four years. Furthermore, spiking fuel and fertilizer prices have economists anticipating continued inflationary pressures.
Munis outperformed Treasuries last week amid continued support as inflows of $866 million were added to municipal bond funds last week, according to LSEG Lipper Global Fund Flows. Although the Treasury market was largely unchanged with as slight sell-off past 10-years, munis rallied for all maturities across the curve with the biggest moves from five to 15-years. As a result, municipal/Treasury ratios are meaningfully lower than they were last week, with ratios generally 3% richer. Furthermore, relative yields for municipal bonds have now fallen through important reference points in several spots along the yield curve. Ratios for 5-year municipal yields are now under 65% of Treasuries and 10-year ratios are now below 70% of Treasuries. On the long-end, 30-year municipal yields have now fallen below 90% of Treasuries.
Insights and Strategy
Despite last week’s moves, the steepest slopes along the municipal yield curve continue to reward extending duration. Investors are rewarded for extending out the yield curve with appealingly steep yields with the yield differential between 2-year and 10-year munis, now around 66 bps, which is over double the spread at the end of last year. On the long-end, the yield curve becomes increasingly flat past 20-years, with a total slope of 26 bps from 21-30-years. For investors seeking to maximize curve positioning with relative value, the 18 to 21-year part of the municipal yield curve has become very tempting with slopes of 12 to 13-bps per year. While ratios past 20-years remain attractively priced relative to Treasuries, the yield curve is very flat over these longer tenors. Due to the flat tail, municipal bond investors can currently buy maturities under 20-years that yield almost 90% of the 30-year curve.
This week, US state and local governments are expected to sell more than $14 billion of bonds. Notable deals include: City of Austin Airport System, which plans to sell $1.18 billion of revenue bonds; Banner Health Obligated Group, which is scheduled to sell $990.2 million; and, Southern California Public Power Authority is expected to offer $770 million. HJ Sims will also be in the market with Lifespace Communities, Inc., which is expected to include $98,490,000 in bonds. This week, we expect the markets will be closely following the producer price index for the month of March which is scheduled for release on Tuesday.
Herbert J. Sims & Co. Inc. is a SEC registered broker-dealer, a member of FINRA, SIPC. The information contained herein has been prepared based upon publicly available sources believed to be reliable; however, HJ Sims does not warrant its completeness or accuracy and no independent verification has been made as to its accuracy or completeness. The information contained has been prepared and is distributed solely for informational purposes and is not a solicitation or an offer to buy or sell any security or instrument or to participate in any trading or investment strategy, and is subject to change without notice. All investments include risks. Nothing in this message or report constitutes or should be construed to be accounting, tax, investment or legal advice.