The municipal market is 'too tight' with credit differentiation not being differentiated

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Municipals were stronger on Thursday as the market saw the last of the week’s big offerings hit the screens led by a Dallas/Fort Worth taxable deal and the Colorado note sale.

Muni yields fell by as much as three basis points, according to readings on the AAA muni scales. However, some traders and analysts said this market is too tight given COVID-19 threats.

"How are we seeing high-grades and lower-rated, riskier credits trading like this?" a New York trader said. "There has to be a point when participants edge back away from this and let the market correct. Rates are ridiculously low."

"Equities are the same," she said. "When you have entire markets just betting on a recovery that is yet to be seen or is really unknown, it's unsettling."

Georgia GOs, 5s of 2025 at 0.23%-0.22%. Utah GOs, 5s of 2026, at 0.28%-0.27%. King County, Washington SD #410, 5s of 2026 at 0.39%-0.41%.

Collin County, Texas Community College revs, 5s of 2030, at 0.84%-0.83%.

Bellwether Maryland GOs, 5s of 2031, at 0.75%, last trading at 0.80%-0.79% on July 22.

Houston Port Authority 3s of 2039 trading at 1.71%, originally sold at 1.78%.

"We do know that munis are generally a safe bet in the long game, however we cannot have rates fall this low without some consternation," she said.

Another New York trader said that longer-duration is the way to look.

"The short end is so overcrowded right now with retail eyeing that end," he said.

Then the market faces Gov. Andrew Cuomo saying Thursday the fallout from the economic effects of COVID-19 had postponed a $3 billion environmental bond issue.

"We had talked about an environmental bond issue of $3 billion dollars. I proposed it. It passed in the budget. It was subject to a certification by the Division of Budget, I believe, that the finances made that prudent. We are going to postpone the environmental bond issue for one year. The financial situation now is unstable,” Cuomo said on a telephone call with reporters.

“As everyone knows, we are waiting to see what the federal government provides in aid. We are waiting to see what happens with the economy. We are waiting to see when the revenues come back to the state and that economic engine really starts turning,” Cuomo said.

“Nobody can tell you that today, so we are going to postpone the environmental bond issue, hopefully one year to next year. But I don’t think it would be financially prudent to do it at this time. The New York City economic situation is very murky.”

It's debatable but some sources say retail investors remain bullish on muni bonds. For the 12th straight week, muni bond funds saw inflows, with Refinitiv Lipper reporting investors put $1.8 billion of cash into the mutual funds in the week ended July 29.

Primary market
Morgan Stanley priced the cities of Dallas and Fort Worth, Texas’ (A1/A/A+/AA) $1.194 billion of Series 2020C taxable joint revenue refunding bonds for Dallas Fort Worth International Airport.

The deal was priced at par to yield from 1.041% (90 basis points above the comparable U.S. Treasury) in 2023 to 2.896% (235 basis points above Treasuries) in 2036 and to yield 3.089% (190 basis points above Treasuries) in 2040 and to yield 2.919% (173 basis points above Treasuries) in 2050.

An indications of interest wire on Wednesday showed the deal was at about 110 basis points above Treasuries in 2023 to 235 basis points above in 2036, 200 basis points above in 2040 and 190 basis points above in 2050.

In the competitive arena, Colorado sold $600 million of Series 2020 general fund tax and revenue anticipation notes.

Four groups won the TRANs:

  • JPMorgan Securities won $250 million with a bid of 4%, a premium of $8,435,000, an effective rate of 0.186010%;
  • Morgan Stanley won $100 million with a bid of 4%, a premium of $3,375,000, an effective rate of 0.184910% and won $100 million with a bid of 4%, a premium of $3,375,000, an effective rate of 0.184910% and won $25 million with a bid of 4%, a premium of $843,500, an effective rate of 0.186010%;
  • Wells Fargo Securities won $100 million with a bid of 4%, a premium of $3,374,000, an effective rate of 0.186010%; and
  • RBC Capital Markets UBS Financial Services won $25 million with a bid of 4%, a premium of $844,000, an effective rate of 0.183820%.

Stifel was the financial advisor and Sherman & Howard was the bond counsel.

The state sold $410 million of Series 2020A education loan program TRANs on Tuesday.

On Wednesday, Morgan Stanley priced the California Department of Water Resources’ (Aa1/AAA/NR/NR) $1.059 billion of tax-exempt and taxable water system revenue bonds for the Central Valley project.

“The bonds were well received by the market. The $544.2 million tax-exempt Series BB bonds received over $1.3 billion in total orders, with $280 million from retail accounts, while the $515.2 million federally taxable Series BC bonds received over $2.6 billion in total orders,” according to a release from the state treasurer’s office.

California State Treasurer Fiona Ma said the refunding bonds are expected to save $55.6 million in debt service costs over the next 15 years, or $47.3 million on a present value basis. The all-in true interest cost was 1.27%.

Money market muni funds fall $699M
Tax-exempt municipal money market fund assets fell $699.3 million, bringing total net assets to $121.98 billion in the week ended July 27, according to the Money Fund Report, a publication of Informa Financial Intelligence.

The average seven-day simple yield for the 187 tax-free and municipal money-market funds remained at 0.4% from the previous week.

Taxable money-fund assets decreased $12.50 billion in the week ended July 28, bringing total net assets to $4.384 trillion.

The average, seven-day simple yield for the 788 taxable reporting funds dropped to 0.04% from 0.05% in the prior week.

Overall, the combined total net assets of the 975 reporting money funds fell $13.20 billion in the week ended July 28.

Secondary market
Municipals were stronger on Thursday, according to final readings on Refinitiv MMD’s AAA benchmark scale.

MMD reported yields on the 2021 and 2023 GO munis were down two basis points to 0.11% and 0.13%, respectively. The yield on the 10-year GO muni dropped three basis points to 0.67% while the 30-year yield fell three basis points to 1.39%.

The 10-year muni-to-Treasury ratio was calculated at 123.8% while the 30-year muni-to-Treasury ratio stood at 116.1%, according to MMD.

The ICE AAA municipal yield curve showed short yields falling one basis point to 0.110% in 2021 and 0.122% in 2022. The 10-year maturity was down two basis points to 0.651% and the 30-year was off two basis points to 1.422%.

ICE reported the 10-year muni-to-Treasury ratio stood at 130% while the 30-year ratio was at 116%.

The IHS Markit municipal analytics AAA curve showed the 2021 maturity yielding 0.10% and the 2022 maturity at 0.13% while the 10-year muni was at 0.67% and the 30-year stood at 1.40%.

The BVAL AAA curve showed the 2021 maturity yielding 0.08%, down two basis points and the 2022 maturity at 0.11%, also down two, while the 10-year muni was at 0.64%, down three and the 30-year stood at 1.40%, down three.

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

Treasuries were stronger as stock prices traded mixed.

The three-month Treasury note was yielding 0.101%, the 10-year Treasury was yielding 0.550% and the 30-year Treasury was yielding 1.198%.

The Dow fell 0.85%, the S&P 500 decreased 0.42% and the Nasdaq gained 0.47%.

MMA: Muni defaults hit $5B in 2020
Four more payment defaults push the year-to-date total to 50, affecting $5.0 billion of outstanding municipals (or 49 affecting $2.4 billion excluding Puerto Rico)," Matt Fabian, a partner at Municipal Market Analytics, wrote in a weekly default comment.

Drilling down, he looked at muni conduit issuers.

“The Wisconsin Public Finance Authority contributes heavily to impairments and defaults. In the last three years, PFA borrowers have accounted for 10.1% of payment defaults (15 of 148) and 7.8% of all impairments (31 of 400). Year to date in 2020, PFA represents 12.0% of payment defaults (6 of 50) and 7.4% of impairments (9 of 122),” Fabian wrote. “This is well in excess of any other conduit issuer, the next closest being Capital Trust Agency in Florida, with roughly half the defaults and impairments of PFA.”

He said the coronavirus played a role in driving defaults.

“The data make sense: the first wave of pandemic problems center on high-yield projects, and thus borrowers brought to market via the aggressive underwriting of PFA are more prone to setbacks,” Fabian said. “On the other hand, as August impairments begin to swell with reports of COVID-driven covenant violations (or worse) by healthcare providers filing quarterly statements, PFA’s lead should shrink, slightly.”

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Primary bond market Secondary bond market Municipal bond funds State of California California Department of Water Resources City of Dallas, TX City of Fort Worth, TX Dallas Fort Worth International Airport Board State of Colorado