Buyers see more supply as prices steady; retail investors nab Mass. GO bonds

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Secondary action took a backseat to the primary again on Wednesday as more supply slipped into the market, led by deals from Bay State issuers. Inflows continue, with ICI reporting another $2.9 billion.

Munis remained little changed as participants count down the days to the end of the first half of the year and the upcoming July 4 holiday.

Primary market
Demand in the buy-side community on Wednesday was sufficient enough to absorb the available supply amid a backdrop of solid activity, positive and stable mutual fund flows, and overall seasonal appetite, according to Chris Brigati, head of municipal trading at Advisors Asset Management.

“Seasonally, demand seems to be quite good and the fact that supply was compromised for at least 30 days provides the backdrop for a balance between supply and demand,” he said. “We may be in a ‘new normal’ for the time being in terms of investors’ behavior.”

“Portfolio managers have cash to put to work in the market and [separately managed account] cash appears to be interested in staying invested and even seeking opportunity,” Brigati said.

The primary has been front and center of the municipal bond market in June as the quarter comes to a close, according to Kim Olsan, senior vice president at FHN Financial.

“One interesting feature that has developed this month as yields remain low and supply has grown is the more prevalent use of sub-3% coupons in competitively bid sales than in negotiated pricings,” Olsan said. “Of tax-exempt issues this month $100 million or greater (non-AMT), 85% of competitive sales implemented a 2%-range coupon in at least one maturity, as compared to just 22% of negotiated issues.”

She said the disparity came from different processes between negotiateds and competitives — but it was also due to buyers’ knocking down coupons for additional concession.

Olsan added that some structures were finding fewer buyers at published prices — “namely high-grades with minimal spread to AAA spots as yield fatigue becomes more apparent. Both the 10- and 30-year spot have traded below 1% and 2%, respectively, since early May — forcing a more patient inquiry approach.”

Brigati said that sectors, market performance, credit and ratios are being impacted by the pandemic, but that there is value and opportunity with the right credit analysis.

Better credits and/or those that are not expected to be as negatively impacted from COVID-related economic shutdowns are “quite strong,” Brigati said.

“There appears, however, to be a bifurcation and a definitive line-in-the-sand regarding interest in lower-rated credits,” he said, adding that some are receiving “good” interest, only at adjusted yields to account for the added risk. “The most challenged credits, on the other hand, are having a tougher time being traded and may experience limited liquidity when investors look to sell.”

Credit research, and understanding the underlying fundamentals of an issuer is of “paramount importance” in the current market, and recognizing the stronger credits allows investors to uncover value, according to Brigati.

Hospitals are naturally impacted by COVID-19, however, there are stable issuers and/or those with better fundamental economics that can provide value, he noted.

“In this area, we are finding some solid A-rated issuers whose yields have adjusted higher with the market, but still have solid underlying financials,” he said.

Meanwhile, impact to air travel has caused a significantly cheapening of airport revenue bonds, according to Brigati.

“Given the increased discussion regarding federal government support in this area, the larger airports that generally had the most passenger traffic prior to the crisis should be expected to come out of this better than smaller locales,” he said.

Overall, ratio volatility has stabilized from early in the pandemic, and municipal ratios should maintain their current level for the near future as the impact from COVID-19 continues, according to Brigati.

For example, 10-year triple-A municipals were around 75% of Treasuries prior to the crisis, peaked at 360% in March, and have been between 100% and 130% for the better part of the past month, Brigati said.

“Since the peak in ratios in late March, municipals have significantly outperformed,” Brigati said. “By comparing performance, however, from mid-February until now, Treasuries have actually outperformed municipals by a significant margin.”

“The fact that ratios are still high versus historical norms is an easy barometer to demonstrate this point,” he explained, adding that he doesn’t expect further outperformance in the immediate future.

“The credit component of municipals and their lower liquidity, as compared to Treasuries, appears to continue to command a yield premium,” Brigati said. “With continued concerns about the economy returning to normal operations and COVID issues remaining unanswered, I see little reason for munis to continue to close the gap versus Treasuries."

Wednesday's deals
BofA Securities priced for retail Massachusetts’ (Aa1/AA/AA+/NR) $671.495 million of tax-exempt general obligation and GO refunding bonds.

The Series 2020B GO refunding bonds were priced for retail to yield from 0.38% with a 5% coupon in 2024 to 1.13% with a 4% coupon in 2031. The Series 2020D GOs were priced for retail to yield from 0.65% with a 5% coupon in 2026 to 2.09% with a 3% coupon in 2039; a 2048 term bond was priced to yield 1.86% with a 5% coupon.

Barclays Capital priced the Northeastern University (Aa1/NR/NR/NR) in Massachusetts’ $300 million of corporate CUSIP refunding bonds.

The taxables were priced at par to yield Barclays Capital priced at par to yield 2.894% in 2050, 145 basis points above the comparable Treasury security.

Barclays also priced the Massachusetts Development Finance Agency’s $104.935 million of tax-exempt revenue refunding bonds for the university.

The tax-exempts were priced with 5% coupons to yield from 0.39% in 2022 to 1.13% in 2028 and from 1.31% in 2030 to 1.67% in 2035.

Piper Sandler priced the Ysleta Independent School District, Texas’ (Aaa/AAA/NR/NR) $346 million of taxable unlimited tax refunding bonds. The bonds were backed by the Permanent School Fund guarantee program.

The $270.77 million of Series 2020B bonds were priced at par to yield from 2.057% in 2034 to 2.48% in 2040 and 2.73% in 2045. The capital appreciation bonds were priced as zeros to yield from 0.64% in 2020 to 2.657% in 2033.

The $74.825 million of Series 2020A taxables were priced to yield from 0.49% with a 5% coupon in 2020 to 1.807% at par in 2031.

Citigroup priced Collin County, Texas’ (Aaa/AAA/NR/NR) $199 million of limited tax tax-exempt permanent improvement bonds and taxable refunding bonds.

The $151.765 million tax-exempts were priced to yield from 0.24% with a 5% coupon in 2021 to 1.99% with a 3% coupon in 2040. The $47.28 million of taxable were priced at par to yield from 35 basis points above Treasuries in 2021 to 120 basis points above Treasuries in 2032.

Piper Sandler priced the Salem-Keizer School District No. 24J of Marion and Polk Counties, Ore.’s (Aa1/AA+/NR/NR) $270.908 million of GOs. The bonds are backed by the Oregon School Bond Guaranty Act.

Raymond James & Associates priced the Florida Housing Finance Corp.’s (Aaa/NAF/NAF/NAF) $100 million of homeowner mortgage revenue bonds not subject to the alternative minimum tax.

The bonds were priced at par to yield from 0.50% and 0.55% in a split 2022 maturity to 1.90% and 1.95% in a split 2030 maturity, 2% I n 2032, 2.15% in 2035, 2.40% in 2040, 2.60% in 2045 and 2.75% in 2050. A PAC was priced to yield 1.34% with a 3.50% coupon in 2051.

JPMorgan Securities priced Wisconsin’s (Aa1/AA/NR/AA+) $133.84 million of GO forward delivery refunding bonds of 2021.

The issue was priced with 5% coupons to yield from 0.84% in 2026 to 1.30% in 2031.

And the Academy Award goes to Wells Fargo Securities, which priced the California Infrastructure and Economic Development Bank’s (Aa2/NR/MR/NR) $99.62 Million of revenue refunding bonds for the Academy of Motion Picture Arts and Sciences Obligated Group.

The deal was priced as a 2029 bullet maturity to yield 1.38% with a 5% coupon.

Piper Sandler received the official award on the Birmingham Airport Authority, Ala.’s (A3/AA/A-/NR) $102.13 million of airport revenue refunding bonds. The deal was insured by Build America Mutual Assurance Co. The bonds were priced to yield from 1.02% with a 5% coupon in 2023 to 2.60% with a 4% coupon in 2040.

ICI: Muni bond funds see $2.9B inflow
Long-term municipal bond funds and exchange-traded funds saw combined inflows of $2.942 billion in the week ended June 17, the Investment Company Institute reported Wednesday.

It marked the seventh week in a row the funds saw inflows. In the previous week, muni funds saw inflows of $4.186 billion, ICI said.

Long-term muni funds alone had an inflow of $2.426 billion in the latest reporting week after an inflow of $3.486 billion in the prior week.

ETF muni funds alone saw an inflow of $516 million after an inflow of $700 million in the prior week.

Taxable bond funds saw combined inflows of $16.026 billion in the latest reporting week after inflows of $21.378 billion in the prior week.

ICI said the total combined estimated inflows from all long-term mutual funds and ETFs were $8.007 billion after inflows of $40.812 billion in the previous week.

Secondary market

On MMD’s AAA benchmark scale, yields were mostly unchanged. Yields on the 2021 and 2023 maturities were steady at 0.25% and 0.27%, respectively. The yield on the 10-year GO muni roise two basis points to 0.90% while the 30-year yield was unchanged at 1.63%.

The 10-year muni-to-Treasury ratio was calculated at 130.4x% while the 30-year muni-to-Treasury ratio stood at 112.4%, according to MMD.

The ICE AAA municipal yield curve showed yields were unchanged, with the 2021 and 2022 maturities at 0.230% and 0.238%, respectively. Out longer, the 10-year maturity was steady at 0.856% while the 30-year was flat at 1.647%.

“Municipal bonds are little changed on moderate volume,” ICE Data Services said in a market comment. “In high-yield, bonds are slightly stronger.”

ICE said that Puerto Rico bonds were mixed, with PREPA bonds higher while the Commonwealth 8% GOs due 2035 were off by ¾ point.

ICE reported the 10-year muni-to-Treasury ratio stood at 134% while the 30-year ratio was at 112%.

The IHS Markit municipal analytics AAA curve showed the 2021 maturity yielding 0.22% and the 2022 maturity at 0.27% while the 10-year muni was at 0.91% and the 30-year stood at 1.66%.

The BVAL AAA municipal yield curve showed yields were unchanged, with the 2021 and 2022 maturities at 0.190% and 0.24%, respectively. Out longer, the 10-year maturity rose one basis point to 0.84% while the 30-year was flat at 1.65%.

Munis were little changed on the MBIS benchmark and AAA scales.

Treasuries were stronger as stocks traded lower.

The three-month Treasury note was yielding 0.153%, the 10-year Treasury was yielding 0.691% and the 30-year Treasury was yielding 1.445%.

The Dow fell 2.67%, the S&P 500 decreased 2.60% and the Nasdaq declined 2.26%.

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Primary bond market Secondary bond market Municipal bond funds Commonwealth of Massachusetts State of Texas