Municipals were steady to firmer in spots Friday ahead of a holiday-shortened week and a light new-issue calendar. U.S. Treasuries closed out weaker and equities ended the week with small gains.

Triple-A yields were little changed to bumped by up to four basis points, depending on the curve, while U.S. Treasuries saw yields rise by as much as eight basis points on the short end.

Muni-UST ratios fell on the day’s moves. The three-year muni-UST ratio on Friday was at 65%, the five-year at 70%, the 10-year at 76% and the 30-year at 92%, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the three at 66%, the five at 70%, the 10 at 78% and the 30 at 94% at a 4 p.m. read.

Although Treasury yields declined early in the week, they changed course after hawkish Fed commentary throughout, noted Barclays PLC.

With St. Louis Fed President James Bullard saying policymakers should raise interest rates to at least 5% to 5.25% and Minneapolis Fed President Neel Kashkari saying the Fed is still targeting 2% inflation, it is an “open question of how far they are going to have to go with interest rates,” Barclays said.

In the past several weeks, “munis have been outperforming when Treasuries rallied, and even more so when they were selling off,” Barclays strategists Mikhail Foux, Clare Pickering and Mayur Patel said in a weekly report.

Month-to-date, high-grade tax-exempts are up 3.6%, while high yield is up 4.9%, possibly among the best-ever performances for municipals over two weeks, they said.

“Ironically, the current tax-exempt rally is not getting much love — with [investment grade] still down close to 10% and HY down about 14%, we see virtually no chance for munis to recover from the losses recorded in the first 10 months of the year,” they said.

By Friday, munis were little changed but had been on fire over the past couple of days, said Christopher Lanouette, an investment manager and fixed-income trader at CIBC Private Wealth US.

“It seems like a confluence of factors: a massive rally in Treasuries in the wake of the softer-than-expected [Consumer Price Index] report, technicals becoming favorable going into yearend with supply pretty low and reinvestment needs being steady, and the reversal in fund flows,” he said. “When you put all that together, it creates a food fight.”

The Municipal Securities Rulemaking Board noted this year broke the record for total trading volume, with Lanouette noting one day last week was the biggest week since before the pandemic.

Next week, issuance will be light with only a few deals on the calendar and munis should stay steady, he said.

“It’s pretty quiet and from a technical standpoint, it’s going to be favorable going into yearend, with the holiday next week, and then we’re into December and Christmas, and the calendar shuts down,” he said. “That’s probably going to sustain through yearend absent any big moving from Treasuries.”

Munis should be status quo through the end of December, though he notes that is somewhat dependent on fund flows. This week saw fund flows turn positive, as investors added $605 million to mutual funds the week ending Wednesday, according to Refinitiv Lipper.

There may also be some risk of some tax loss selling.

But, from a technical standpoint, munis will remain relatively low bid, he said.

“With slow supply, light positioning and some early signs of fund outflows abating (although we would still need to see a confirmation after this week’s first inflow since August), we could see this muni rally continuing for some time, as the long end still has some juice versus USTs,” Barclays’ strategists noted.

If the asset class becomes richer by the end of 2022, Barclays strategists “would use this as an opportunity to lighten up exposure,” as they expect Q123 to be quite volatile.

Meanwhile, they noted trading activity remains solid and might “pick up in the next several weeks, as more and more investors will be focused on tax-loss swapping.”

This year is already the most active since 2010 for trading volume, with 1½ months to go this year.

“While risky assets have rallied across the board since late August, one muni market segment has been clearly lagging — taxable munis,” they said. “They are currently trading flat to the corporate index and might still have some room to perform in the coming weeks.”

Calendar drops to $723M
Investors will be greeted Monday with a new-issue calendar estimated at $722.8 million.

There are $609.3 million of negotiated deals on tap and $113.5 million on the competitive calendar.

The negotiated calendar is led by $505 million of gas supply revenue bonds from the Tennergy Corporation, Tennessee. Other notable deals are $207 million from the Utah Telecommunication Open Infrastructure Agency and $200 million from the Massachusetts Housing Finance Agency.

Livingston Township, New Jersey, leads the competitive calendar with $41 million of bond anticipation notes.

Secondary trading
New York City TFA 5s of 2023 at 2.78%-2.75%. Maryland 5s of 2024 at 2.75% versus 2.78% Thursday. North Carolina 5s of 2025 at 2.78% versus 2.82% Thursday.

Washington 5s of 2029 at 2.91%-2.89%. Triborough MTA Bridges and Tunnels 5s of 2029 at 2.94%. California 5s of 2030 at 2.88%.

Maryland 5s of 2036 at 3.27%-3.26%. San Antonio, Texas, waters 5s of 2040 at 3.73%-3.68%. Washington 5s of 2040 at 3.47% versus 3.62% Thursday.

New York Dorm PITs 5s of 2046 at 4.10% versus 4.14% Thursday. California 5s of 2052 at 3.85%-3.84% versus 3.91% Thursday.

AAA scales
Refinitiv MMD’s scale was unchanged: the one-year at 2.74% and 2.75% in two years. The five-year at 2.81%, the 10-year at 2.91% and the 30-year at 3.59%.

The ICE AAA yield curve was bumped up to four basis points: 2.74% (-2) in 2023 and 2.76% (-4) in 2024. The five-year at 2.80% (-4), the 10-year was at 2.94% (-2) and the 30-year yield was at 3.72% (flat) at a 4 p.m. read.

The IHS Markit municipal curve was little changed: 2.74% (unch) in 2023 and 2.76% (unch) in 2024. The five-year was at 2.80% (unch), the 10-year was at 2.91% (unch) and the 30-year yield was at 3.59% (unch) at a 4 p.m. read.

Bloomberg BVAL was bumped a basis point in spots: 2.75% (unch) in 2023 and 2.79% (unch) in 2024. The five-year at 2.81% (unch), the 10-year at 2.88% (unch) and the 30-year at 3.59% (-1) at 4 p.m.

Treasuries closed out weaker.

The two-year UST was yielding 4.529% (+8), the three-year was at 4.297% (+8), the five-year at 4.009% (+7), the seven-year 3.928% (+6), the 10-year yielding 3.822% (+5), the 20-year at 4.148% (+5) and the 30-year Treasury was yielding 3.922% (+4) at the close.

Primary to come:
The Tennergy Corporation, Tennessee, (Baa1///) is set to price next week $504.505 million of gas supply revenue bonds, Series 2022A. Goldman Sachs & Co.

The Utah Telecommunication Open Infrastructure Agency (/AA-//) is set to price Tuesday $207.340 million of sales tax and telecommunications revenue refunding bonds, Series 2022, serials 2023-2035, terms 2037, 2040 and 2040. KeyBanc Capital Markets.

The Massachusetts Housing Finance Agency (Aa1/AA+//) is set to price Monday $200 million of taxable social single-family housing revenue bonds, Series 226, serials 2023-2034, terms 2037, 2042, 2047 and 2052. Citigroup Global Markets.

Newark, New Jersey is set to price Tuesday $110 million of Mulberry Pedestrian Bridge mass transit access tax revenue. NW Capital Markets.

Competitive:
Livingston Township, New Jersey, is set to sell $40.832 million of bond anticipation notes, Series 2022, at 11 a.m. eastern Tuesday.