City of Angels set for $1.78 billion note sale as short-term rates hover near record lows
Municipal bond buyers look forward to this week’s new-issue slate of bonds, which has a focus on taxable deals and Far West issuers.
Investors continue to have faith in the muni market as they invested billions in bond funds for the eighth week in a row.
Municipal bond prices were little changed ahead of the $7.4 billion calendar as triple-A benchmarks held stable.
Retail demand swells amid crisis impacts
Continued strong demand and fund flows amid July reinvestment created a brisk climate for the municipal market on Monday, traders and managers said.
“We've certainly hit the summer season with benchmark yields remaining unchanged for about two weeks,“ Dan Urbanowicz, director, senior portfolio manager at Washington Crossing Advisors, LLC.
This week's total issuance is expected to be slightly higher-than-usual for the week after the July 4th holiday, Urbanowicz said, but it will continue to have a significant portion priced as taxable, “even after we saw record monthly taxable issuance in June.”
“With a wide variety of issuers pricing this week, we should see better price discovery and expect spreads to remain low,” he added.
Meanwhile, constructive technicals and strong demand for municipals in the backdrop of a broadening scope of credit concerns amid other impacts of COVID-19 should last through the summer, according to Jeffrey Lipton, managing director and head of municipal and fixed income research at Oppenheimer & Co.
At the same time, the household sector continues to hold the largest chunk of the $3.7 trillion municipal bond market as they have for the past 15 years, Lipton said.
“Seasonal demand and a supportive bid-side for quality assets against a backdrop of effective policy intervention that has tempered credit concerns have kept munis to a fairly stable trading range,” he said in his weekly report on July 2.
With state and local governments facing swelling budgetary deficits, outsized draws on reserve balances, and diminished utilization and operational performance tied to revenue enterprises, demand remains resilient, he wrote.
“There is ample deployable cash that is eager to get invested in munis and this is evident by seven consecutive weeks of positive mutual fund flows, with $1.475 billion and $1.71 billion respectively deposited during the two most recently reported periods,” he said.
At 46%, the individual household sector is the largest holder of municipal bonds for the first quarter of 2020, while mutual funds, including money market funds, closed-end funds, and exchange traded funds, held 26%, Lipton noted.
“Retail ownership of munis, either on an individual basis or through proxies, approaches 75% of aggregate holdings,” he said.
In the current market, retail investors are demanding more safety and quality and underscoring the need for bond insurance as they did in the recent past with other market crises.
“With the onset and duration of the Great Recession of 2008-2009, there was a downward shift in individual household ownership that extended beyond the contraction and continues through today, although there appears to be some stabilizing forces at play,” Lipton wrote.
With the reduced insurance coverage altering investment perception — particularly among retail buyers — there is a growing allocation to mutual funds, he said.
Credit is also being impacted by the pandemic and affecting investment sensitivity.
“Prior to the COVID-19 induced recession, municipal credit was being elevated by record economic recovery and was generally secure with upgrades outpacing downgrades, state reserve accounts funded at cyclical highs, defaults and bankruptcy filings well-contained, and bond insurance penetration at about 6%-8%,” Lipton wrote.
“The unexpected recession with all of the tax and revenue displacement brought on by the national economic suspension has made bond insurance that much more relevant,” he said.
Lipton noted that the primary market has been active, but secondary insurance coverage has also been accelerating as institutional investors desire to better insulate their portfolios from possible credit erosion, “which at the very least could mitigate downgrade risk.”
He expects the current bond insurance trends are likely to continue through the second half of 2020 and into next year as state and local budgetary balance remains challenged and revenue enterprises continue to experience operational shortfalls. The trend should strengthen if credit spreads widen out, he noted.
“In our view, the degree of credit volatility will likely be influenced by the levels of federal assistance administered through the CARES Act and subsequent congressional relief legislation,” Lipton wrote. “Theoretically, any appreciable growth in new-issue insured penetration could slow muni allocations into mutual fund complexes as individual households display greater ease with the insurance wrap and possibly become more inclined to make direct investments.”
On Tuesday, JPMorgan Securities and Morgan Stanley as lead managers will price the City of Los Angeles, Calif.’s (MIG1/SP1+/NR/NR) of tax and revenue anticipation notes.
Short-term rates have been near record low levels. On Monday's AAA scales, the one-year note year was recorded at 0.25% by MMD, 0.22% by ICE and 0.19% by BVAL.
Academy Securities and Cabrera Capital Markets ate co-managers on the deal while Montague DeRose and Omnicap are the financial advisors and Squire Patton Boggs is the bond counsel.
JPMorgan will also price on Tuesday the Asante Health System Obligated Group’s (NR/A+/A+/NR) $450 million of taxable revenue and refunding bonds for the Medford Hospital Facilities Authority, Ore.
RBC Capital Markets is expected to price on Tuesday the Bi-State Development Agency of the Missouri-Illinois Metropolitan District’s (Aa2/AA-/NR/AA+) $171 million of tax-exempt and taxable combined lien mass transit sales tax appropriation refunding bonds.
In the competitive arena Tuesday, the Tarrant County College District, Texas, is selling $265.98 million of limited tax general obligation bonds.
PFM is the financial advisor; McCall Parkhurt and the State Attorney General are the bond counsel.
Coming up on Wednesday, RBC is expected to price the Tacoma School District No. 1, Pierce County, Wash.'s (Aaa/AA+//) $432 million of taxable GOLT refunding bonds.
The deal is backed by the Washington state credit enhancement program.
Lipper reports $1.1B inflow
Investors remained bullish on municipal bonds and continued to put cash into bond funds in the latest reporting week.
In the week ended July 1, weekly reporting tax-exempt mutual funds saw $1.065 billion of inflows, after inflows of $1.474 billion in the previous week, according to data released by Refinitiv Lipper Thursday.
It was the eighth week in a row that investors put cash into the bond funds.
Exchange-traded muni funds reported inflows of $385.850 million, after inflows of $286.184 million in the previous week. Ex-ETFs, muni funds saw inflows of $679.370 million after inflows of $1.187 billion in the prior week.
The four-week moving average remained positive at $1.752 billion, after being in the green at $1.787 billion in the previous week.
Long-term muni bond funds had inflows of $426.080 million in the latest week after inflows of $768.699 million in the previous week. Intermediate-term funds had outflows of $9.068 million after outflows of $26.351 million in the prior week.
National funds had inflows of $1.044 billion after inflows of $1.275 billion while high-yield muni funds reported inflows of $119.298 million in the latest week, after inflows of $46.020 million the previous week.
Some notable Monday trades:
University of Texas 5s of 2021 traded at 0.46%-0.45%. Maryland GOs, 5s of 2027, traded at 0.68%.
King County Washington School District #414, 4s of 2027, traded at .073%.
Forsyth County, Georgia, 5s of 2031, at 0.96%. New York City TFAs, 4s of 2045, at 2.25%.
Readings on MMD’s AAA benchmark scale were 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 was flat at 0.90% while the 30-year yield was steady at 1.63%.
The 10-year muni-to-Treasury ratio was calculated at 131.6% while the 30-year muni-to-Treasury ratio stood at 113.0%, according to MMD.
The ICE AAA municipal yield curve showed short yields steady at 0.220% and 0.227% in 2021 and 2022, respectively. It was the same story out longer, with the 10-year maturity flat at 0.849% while the 30-year was steady at 1.650%.
ICE reported the 10-year muni-to-Treasury ratio stood at 132% while the 30-year ratio was at 112%.
The IHS Markit municipal analytics AAA curve showed the 2021 maturity yielding 0.27% and the 2022 maturity at 0.30% while the 10-year muni was at 0.91% and the 30-year stood at 1.66%.
The BVAL curve showed the 2021 maturity flat at 0.19% and the 2022 unchanged at 0.24%. BVAL calculated the 10-year muni unchanged at 0.84% while the 30-year was steady at 1.65%.
Munis were little changed on the MBIS benchmark and AAA scales.
Treasuries were weaker as stocks traded up on bullish news from China. Tech stocks lead equities higher.
The three-month Treasury note was yielding 0.157%, the 10-year Treasury was yielding 0.687% and the 30-year Treasury was yielding 1.444%.
The Dowrose 1.38%, the S&P 500 increased 1.28% and the Nasdaq gained 1.92%.
“Credit spreads grinded tighter [last week] as yields have largely remained anchored at current levels,” Wells Fargo Securities said in a Monday market comment. “As a result credit outperformed with BBB's and high-yield offering 25 basis points and 14 basis points of excess return week-over-week, respectively.”
Wells Fargo added that taxable bonds were performing well.
“Taxable munis continue offer value at spreads of +31 basis points compared to investment-grade corporates and have outperformed tax-exempts by 500 basis points year to date,” Wells Fargo said.
Bond Buyer indexes unchanged
The weekly average yield to maturity of the Bond Buyer Municipal Bond Index, which is based on 40 long-term bond prices, remained at 3.63% in the week ended July 2.
The Bond Buyer's 20-bond GO Index of 20-year general obligation yields was unchanged at 2.21% from the previous week.
The 11-bond GO Index of higher-grade 11-year GOs was steady at 1.74%.
The Bond Buyer's Revenue Bond Index was flat at 2.63% from the prior week.