Are the banks back? — Investor spreads are now relatively tight. This is certainly true for Fannie Mae DUS and possibly for Ginnie Maes as well. Though this past week had a general lack of supply, it nevertheless had optimism that bank buyers will come back next year.
To be sure, this “playbook” has been dusted off and reshelved multiple times in 2024. But this time truly could be different—U.S. banks seem to be making progress on improving their balance sheets. According to a recent Bloomberg article, for the first time since the 2023 regional banking crisis, nearly all the banks that make up the KBW Bank Index (which includes 24 bank stocks representing America’s largest money centers, as well as regional banks and thrift institutions) reported that their unrealized losses shrank in the third quarter.
Remember: The primary trigger for the 2023 crisis was the low-rate investments purchased in 2020 to 2021, which later collapsed in value when the Federal Reserve (Fed) hiked rates by 525 basis points (bps) from March 2022 to July 2023. Unrealized losses can be held on paper until depositors make substantial withdrawals that require a bank to sell investments to raise cash, sometimes at fire sale prices.
The recent loosening of the proverbial noose around the banks’ neck is welcomed by all participants in our market—but especially for issuers of Ginnie Mae project loans. Those banks remain elusive so far, according to our contacts. Yet the hope is that with this gradual cleansing of their balance sheets, banks’ appetite for Ginnie Mae real estate mortgage investment conduits (REMICs) will increase. And with that growing appetite, we expect Ginnie Mae spreads to contract (for more on this, see last week’s Talking Points).
Fannie Mae DUS loans, on the other hand, have fared well throughout most of this year’s bond market volatility. That is because the structure and liquidity profile of Fannie MBS is different from Ginnie Mae REMICs. As a result, DUS spreads have reached near decade-long tights recently.
Municipal bond market refresh — Earlier this year, Talking Points discussed municipal bond funds, AAA-rated tax-exempt-to-taxable ratios, and the reemergence of pre-financial crisis bond structures. We also wrote throughout the year about volatility leading up to both the November election and the recent Federal Open Market Committee (FOMC) meetings.
As Figure 1 shows, new-issue municipal bond issuance in 2024 has been considerably higher than a year ago, with total issuance year to date more than 41% higher compared to 2023. Muni bond volume had been building throughout 2024, with the principal amount of bonds increasing every month from January through June. Volume declined to a year-to-date low in July only because borrowers took a breather during the week of July 4.
Beginning in August, muni borrowers set out to price the majority of their remaining 2024 bond deals before market volatility increased around the FOMC’s September rate cut launch and the November election. New-issue volume was running at, or near, $50 billion per month in August and September, before spiking to more than $61 billion in October (it was $39 billion in October 2023). Before October 2024, monthly muni-bond volume had touched the $60 billion mark only twice since 2017.
Despite the surge in volumes, spreads have generally tightened this year, due to increased investor demand. The inflows and outflows for municipal bond funds are a good barometer of investor demand. Significant flows into funds generally lead to tighter spreads, while significant outflows generally result in wider spreads. This year monthly muni-bond fund flows have been positive in nine of 11 months and have exceeded every corresponding month from 2023 (Figure 2).
Figure 2: Muni-bond fund inflows and outflows, 2023 vs. 2024
Benchmark, tax-exempt, municipal market data (MMD) rates increased throughout October—mostly in conjunction with the rise of U.S. Treasury yields, but also in response to the amount of muni-bond issuance that flooded the market. For example, housing-bond issuance was substantial: 12 MTEBs and 22 cash-collateralized deals priced in October. The spread over MMD on some types of structures (such as one- to three- year, cash-collateralized, housing bonds) increased by up to 20 bps in October.
On the flip side, spreads held relatively steady on longer-duration paper (such as 16- to 19-year Fannie Mae enhanced MTEB housing bonds). Figure 3 shows a cash-collateralized deal that priced at the beginning of October, compared to one that priced in early November, a day before the November election. The spread differential over MMD was 21 bps.
In the near term, we expect the muni bond market to be tested with another rush of tax-exempt housing bonds through the week before Christmas. That would allow borrowers to determine whether the market overreacted in October. Additionally, participants in the municipal bond market need to assess possible impacts from the agenda of the incoming President and Republican-led Congress.
If President Trump’s first term was any indication, participants should brace for a bumpy ride. For example, if we look back to 2017, the first version of the Tax Cuts and Jobs Act proposed the elimination of tax-exempt qualified private activity bonds. Further, any hope that tax-exempt advance refundings could come back into play is now a long shot, given the Republican election sweep. But for now, the tax-exempt municipal bond market remains attractive for funding upcoming projects relative to taxable transactions.
FROM THE DESK
Agency CMBS — There were no major movements last week. Spreads were biased marginally tighter with Ginnie Maes about one to two bps better; Fannie Mae DUS spreads were flat or to two bps tighter.
Municipals — AAA tax-exempt yields were slightly lower throughout the yield curve, week over week. Spreads tightened on cash-collateralized deals after several weeks of widening spreads. Spreads on those one to three year bonds went from +/- 60 bps in early October to +/-90 bps by mid-November to finally tightening by about 10 bps last week.
Municipal bond funds had a 20th straight week of inflows last week, with $1.3 billion arriving ($22.09 billion of inflows year to date). The high-yield fund subset also continued to see inflows, with $609 million arriving (30th straight week of inflows).
The information contained herein, including any expression of opinion, has been obtained from, or is based upon, resources believed to be reliable, but is not guaranteed as to accuracy or completeness. This is not intended to be an offer to buy or sell or a solicitation of an offer to buy or sell securities, if any referred to herein. Lument Securities, LLC may from time to time have a position in one or more of any securities mentioned herein. Lument Securities, LLC or one of its affiliates may from time to time perform investment banking or other business for any company mentioned.
