Municipal bonds were little changed on triple-A benchmarks but a diverse set of issuers in the primary saw their deals repriced to lower yields with strong investor demand while ICI reported another week of robust inflows.
Pennsylvania sold $1.046 billion of general obligation bonds in the competitive market to richer levels after already trading up in the secondary, as it has been about 10 basis points through a three-month average.
BofA Securities won the $1.046 billion tax-exempt and taxable GOs. The $550 million exempt portion saw 5s of 2022 yield 0.22%, 5s of 2026 at 0.51%, 5s of 2031 at 1.19%, 3s of 2036 at 1.65% and 2s of 2041 at 2.08%.
The taxables, $496 million, priced at par, saw 2021 yield 0.125%, 2026 at 1.20% and 2031 at 2.05%.
For a comparison, gilt-edged Seattle, Washington, (Aaa/AAA/AAA/) sold $144 million of tax-exempt general obligation bonds to BofA Securities. Bonds in 2022 with a 5% coupon yield 0.09%, 5s of 2026 at 0.48%, 5s of 2031 at 1.02%, 4s of 2036 at 1.26% and 4s of 2041 at 1.48%.
The spread between Pennsylvania and Seattle in five years is a mere three basis points while in 10 years it's a 17 basis point difference.
New issues in the negotiated market were oversubscribed as the North Texas Tollway Authority saw as much as quarter of a percentage point bump in a repricing.
“I think the additional spread, albeit not much, that should come with an A1 to A2 credit will be well received by a yield-starved market,” according to JB Golden, executive director and portfolio manager at Advisors Asset Management.
J.P. Morgan Securities LLC priced $453 million of system revenue and refunding second tier bonds, Series 2021B for the North Texas Tollway Authority (A2/A//). Bonds were repriced by seven to 25 basis points lower. Bonds in 2025 with a 5% coupon yield 0.34% (-15), 5s of 2026 at 0.51% (-13), 5s of 2031 at 1.21% (-10), 4s of 2036 at 1.53% (-23), 4s of 2041 at 1.73% (-25), 3s of 2046 at 2.25% (-7) and 3s of 2051 at 2.32% (-5).
Golden said roads represent a sector that “took it on the chin” last year in the COVID-related sell-off, but the sector has improved significantly over the last several quarters as travel restrictions have eased.
“Infrastructure, such as toll roads, represent a nexus between the building economic growth and a political backdrop that is the best I have ever seen for the municipal asset class,” Golden said.
“With a proposed $2 trillion infrastructure package in the works, a market that is hungry for supply and yield, a very robust economic backdrop, and a sector on the rebound, I would expect even the subordinate bonds to be very well received."
The prospect for a noticeable uptick in long-term volume could greatly improve the constrained supply in the backdrop of record-setting fund flows and continued federal aid, Golden said.
Strong fund flows and economic strength continue to prop up the market and investors continue to pour money into the funds with the Investment Company Institute Wednesday reporting another week of inflows with $2.063 billion coming into long-term municipal bond mutual funds, after $2.517 billion the previous week. This is the eighth week of inflows with only one week of outflows so far in 2021 and a total of more than $35 billion inflows for the year.
ICI also reported $789 million of inflows into exchange-traded funds for the week ending April 29, after $450 million of inflows the week prior.
Municipal to UST ratios closed at 62% in 10 years and 69% in 30 years on Wednesday, according to Refinitiv MMD, while ICE Data Services had the 10-year at 62% and the 30 at 70%.
Elsewhere in the negotiated market, Loop Capital Markets priced $228.6 million of capital facilities lease-appropriation bonds, $150 million of Series MHF, serials 2022-2031 and $78.6 million of Series ABF, serials 2022-2041 for the state of Ohio (Aa2/AA/AA/). Bonds were repriced to lower yields by three to six basis points. Bonds in 2022 with a 5% coupon yield 0.10% (-3), 5s of 2026 at 0.52% (-5), 5s of 2031 at 1.14% (-6). The second series saw bonds in 2022 with a 5% coupon yield 0.11% (-3), 5s of 2026 at 0.59% (-5), 5s of 2031 at 1.15% (-6) 5s of 2036 at 1.38% (-5) and 5s of 2041 at 1.58% (-5).
Morgan Stanley & Co. LLC repriced $215.8 million of Central Valley water system revenue bonds for the California Department of Water Resources (Aa1/AAA//). Bonds in 2022 with a 5% coupon yield 0.20% (-1bp from initial wires), 5s of 2026 at 0.44% (-1), 5s of 2031 at 0.97% and 4s of 2035 at 1.24%.
J.P. Morgan Securities LLC repriced tax-exempt certificates of participation for the School Board of Palm Beach County, Florida, (Aa3//AA-/). Bonds in 2035 yield 1.44%, 5s of 2036 at 1.48% and 5s of 2040 at 1.64%.
Scales
On Refinitiv MMD’s AAA benchmark scale, yields were steady 0.09% in 2022 and 0.12% in 2023. The yield on the 10-year at 0.99% and the 30-year at 1.58%.
The ICE AAA municipal yield curve showed yields at 0.09% in 2022 and 0.13% in 2023, the 10-year at 0.99%, while the 30-year stayed at 1.57%.
The IHS Markit municipal analytics AAA curve showed yields steady at 0.10% in 2022 and 0.13% in 2023, the 10-year at 0.95% and the 30-year 1.59%.
The Bloomberg BVAL AAA curve showed yields steady at 0.06% in 2022 and 0.08% in 2023, with the 10-year steady at 0.95%, and the 30-year yield steady at 1.58%.
The three-month Treasury note was yielding 0.02%, the 10-year Treasury was yielding 1.58% and the 30-year Treasury was yielding 2.25% near the close. Equities were mixed with the Dow gaining 97 points, the S&P 500 rising 0.07% and the Nasdaq off 0.37% near the close.
Fed officials back Powell
Don't expect the Federal Reserve to taper any time soon, as the Federal Reserve officials who spoke Wednesday see recovery far from complete, inflation not an issue, and the economy in need of accommodative policy.
While all of the speakers — Federal Reserve Bank of Chicago President Charles Evans, Federal Reserve Bank of Boston President Eric Rosengren, Federal Reserve Bank of Cleveland and Gov. Michelle Bowman — acknowledged the improvement in the economy with the vaccine rollout, they noted the virus hasn’t yet been defeated and the economy has a long way to go to return to pre-pandemic levels and bumps may surface. They were also unified in a belief that inflation will prove to be transitory.
That coincides with the Fed’s statement after its recent board meeting, and Fed Chair Jerome Powell’s position, so tapering shouldn’t be considered at this point. However, Federal Reserve Bank of Dallas President Robert Kaplan last week suggested tapering should be on the table, but no other Fed officials have taken that stance.
“With regard to the Fed, we, as the monetary policy authority, still have some ways to go before we reach our dual mandate goals of maximum and inclusive employment and inflation that averages 2%, Evans said. “We also face many uncertainties and risks on the road ahead.”
The Fed, he noted, said it will continue buying asset at the current pace until “substantial further progress” is made. Those “conditions will not be met for a while,” he said.
“I expect monetary policy will have to remain accommodative for some time to ensure that we meet the policy goals laid out in our new framework.”
Speaking to the media after the speech, Evans said, “I am not in a hurry to make any adjustments. Patience will be an important tool for quite some time,” and he offered no estimates on when tapering discussions could start, with the Fed waiting for data to support a move.
Rosengren agreed, “My perspective is that the emphasis on actual outcomes rather than forecasts of rising inflationary pressures when setting monetary policy appears justified.” But since there’s “noise in the data, it will be important to carefully filter underlying inflation trends as labor markets tighten.”
There remains “significant slack” in the economy, he said, and monetary “policy will remain accommodative until the labor market can consistently help deliver on the Fed’s 2% inflation goal.”
Bowman noted recent growth in momentum in the economic recovery. “Nevertheless, we have further to go to recover from the economic damage inflicted by the COVID-19 pandemic, and risks remain,” she said.
It will take time to determine if consumers return to their old routines or have formed new ones as a result of the pandemic, and she’s concerned about small business’ survival. “It will be several months before we know the final count of permanent small business closures from 2020, but it could be more than we expect,” Bowman added.
Monetary policy, Cleveland’s Mester said, “will need to be very accommodative for some time to support the broadening of the recovery.”
Turning to inflation, there was agreement that the current data show transitory rises, but in the long-term inflation won’t be an issue.
“At this point, the risk that inflation remains persistently above our long-run target of 2% still appears small,” Bowman said.
Mester agreed. “I expect to be deliberately patient unless there is clear evidence that inflation pressures will push inflation to exceed our desired path,” she said. “Given that inflation has run low for so long, some increase in inflation expectations and actual inflation would be a welcome development.”
Evans, Daly and Bowman are voters on the Federal Open Market Committee, while Kaplan, Rosengren and Mester are not.
For economic data released on Wednesday included the Institute for Supply Management’s services PMI, which slipped to 62.7% in April from a record 63.7% in March.
Economists polled by IFR Markets expected a rise to 65.0%.
The business activity/production index fell to 62.7% from an all-time high of 69.4% the prior month.
New orders declined to 63.2% from 67.2%, employment gained to 58.8% from 57.2% and prices gained to 76.8% from 74.0%.
Service sector activity “continues to remain robust, albeit at a surprisingly slower pace,” said Ed Moya, senior market analyst, at OANDA. “Respondents voiced concerns over finding and retaining labor, supply chain challenges, and pricing pressures.” He expects price pressure to continue.
Also, private-sector payrolls added 742,000 jobs in April, after an upwardly revised 565,000 gain a month earlier, ADP reported on Wednesday.
The March climb was first reported as 517,000.
Economists expected 815,000 private-sector jobs to be added.
“During most of the COVID-19 pandemic, ADP report has mostly underperformed the official private payroll numbers and this ADP report supports calls for over a million jobs created with Friday’s nonfarm payroll report,” Moya said. “The closer the U.S. economy is to recovering all lost jobs due to COVID, the sooner the Fed will be forced to start talking about tapering asset purchases.”
Primary market to come, expected to grow
“Federal stimulus lifted a veil of uncertainty surrounding federal aid for state and local municipalities that had permeated the market discussion for much of 2020,” Golden said.
While prior rounds of limited federal stimulus did provide aid to municipalities, the current stimulus plan is more inclusive and widespread, and could lead to increased issuance, he noted.
“The latest round of fiscal spending over half a trillion dollars allocated to municipalities alone is by far one of the largest rounds of direct aid to state and local governments in the history of the country,” Golden said.
The stimulus package coupled with a growing comfort level with the economic backdrop could spur municipalities to begin to increase issuance, Golden said.
He also said the potential for an expansive infrastructure deal could cause the market to trend higher in the coming months and quarters.
“We continue to see robust economic activity as COVID-19 restrictions are lifted and the economy reopens,” he said, noting that existing home prices are at all-time highs and recent service sector survey data from ISM and IHS are touching record levels.
“This supports a very healthy credit backdrop and provides investors with a comfort level in taking on credit risk,” Golden said.
On Thursday, Milwaukee, Wisconsin, (/A/AA-/) is set to sell $118.9 million of general obligation promissory notes at 11 a.m., $30.9 million of general obligation corporate purpose bonds at 11 a.m., $21.9 million of taxable general obligation promissory notes at 11:30 a.m., and $13.6 million of taxable general obligation corporate purpose bonds at 11:30 a.m.
Negotiated pricings scheduled this week
The Main Street Natural Gas, Inc. (Aa2//AA/) is on the day-to-day calendar with $747.1 million of gas supply revenue bonds, serials 2022-2028, a term in 2051, puts due 12/1/2028. RBC Capital Markets Inc. is lead underwriter.
The Washington State Housing Finance Commission (/BBB+//) is set to price $571.961 million of social municipal certificates Series 2021-1 Class X, serial 2035, on Thursday. Citigroup Global Markets Inc. is head underwriter.
The California Infrastructure and Economic Development Bank (A2///) is set to price $281.4 million of California Academy of Sciences index mode sustainability revenue bonds on Wednesday. Series 2018A, Series 2018B, Series 2018C and Series 2018D remarketing. Wells Fargo Securities is bookrunner.
The Maine Health and Higher Educational Facilities Authority (A1/AA/A+/) is set to price on Wednesday $157 million of taxable revenue bonds, Series 2021B, serials 2022-2036, term 2043. Raymond James & Associates, Inc. will run the books.
The Wisconsin Housing and Economic Development Authority (Aa3/AA//) Is set to price $156.3 million of housing refunding revenue bonds, non-AMT, Series 2021 A, $75.5 million of serials 2023-2059, and Series 2021 B, $80.8 million, serials 2045-2051. Wells Fargo Securities is head underwriter.
The L’Anse Creuse Public Schools, Macomb County, Michigan, (/AA//) is set to price $149.7 million of taxable 2021 refunding bonds, insured by the Michigan School Building Qualified Loan Program. J.P. Morgan Securities LLC is head underwriter.
The Riverside Community College District of Riverside and San Bernardino Counties, California, (Aa1///) is set to price $140.6 million of 2021 general obligation refunding bonds on Wednesday. Piper Sandler & Co. is bookrunner.
The American Museum of Natural History (Aa3/AA//) is set to price $135 million of taxable sustainability corporate CUSIP bonds, term 2052. Morgan Stanley & Co. LLC is lead underwriter.
El Paso, Texas, (/AA/AA/) is set to price on Thursday $146.5 million of taxable and tax-exempt general obligation bonds, $105.6 taxable, $40.9 exempts. El Paso will also price $78 million of exempt certificates of participation. J.P. Morgan Securities LLC is bookrunner.
