Demand for munis is reemerging, as new issues see 'decent' demand
Trading in the secondary market saw AAA benchmark yields rise by three to five basis points but the primary market showed signs of life with several larger new deals getting done at appropriate levels given current market conditions as the coronavirus continues to ravage state and local credit quality. The municipal market weakened a little but that did not prevent new issue deals from coming in and pricing, as demand for the asset class seems to be gaining steam.
Meanwhile, more issuers are opting to go the private placement route. The DC Water Authority completed a forward direct purchase with JP Morgan to refund almost $300 million of outstanding 2012 debt. The issuer said the private placement locked in a 2.18% total interest cost to be recognized in July 2022.
The primary market is functioning, though, and participants said that issuers can get deals done.
“I think buyers are finally starting to get comfortable at the new levels which we are at,” said one New York trader. “The deals today saw decent demand, which should give the rest of this week’s issues renewed optimism.”
The market has stabilized somewhat over the last several days, despite a sluggish new-issue market where supply remains below historic levels, according to Dan Heckman, senior fixed-income strategist at U.S. Bank Wealth Management.
“Wide bid and ask prices still exist and weaker credits are certainly still not trading as well as better credit quality issuers,” he said. “Spreads in general continue to tighten.”
With the backdrop of these market technicals, he said demand has reemerged as participants get comfortable with where yields have settled.
“Client interest — individual and institutional — is there,” Heckman said.
Meanwhile, he said he believes the Federal stimulus will aid the market, but is most needed to provide liquidity and relief to smaller issuers, as well as those municipalities struggling with revenue shortfalls.
A series of market dynamics appear to have gripped attention and stalled more active flows, according to said Kim Olsan, senior vice president at FHN Financial.
“Whether it’s the inertia in the muni curve as yields haven’t budged past seven years in five days, ultra-low U.S. Treasury yields creating outsized but largely irrelevant relative value (once above 150% the figures lose impact) or the state of the oil market defying long-standing principles, there seems to a search for some catalyst to draw in more activity,” she said. “Overall trade flows as reported by the MSRB show more sellers trying to exit wider-trading names even as overall totals decline to under $15 billion daily par value traded.”
She noted that in Monday’s session the single-A category saw 33% less volume, or the smallest decline in activity across the credit curve.
“That condition is likely being caused by month-end approaching as well as many sectors (and select regions in the U.S.) still trading at strained levels,” Olsan said. “An overall yield decline this month has meant that what were 4% yields or higher at the height of the sell-off in more-stressed categories have fallen by as much as 200 basis points and created less incentive for cross-over interest to develop, narrowing the pool of potential buyers in these categories.”
She added that inquiry for both tax-exempt and taxable structures leans heavily toward “clean” names—long-standing AA and AAAs and/or essential service credits—whose ratings are least jeopardized until regional economies are brought back closer to normal levels.
Secondary trading did show some concessions Tuesday. Austin Texas GOs, 5s of 2021, traded at 0.92%-0.82%. Washington GOs, 5s of 2022, traded at 0.96%-0.95%. Washington Suburban Sanitation District, 5s of 2027, traded at 1.07%-1.05%. Friday, they traded at 1.03%. NYC TFAs, 4s of 2045, traded at 2.65%-2.59%. Klein, Texas ISD 3s of 2049, traded at 2.58%-2.53% from the original 2.60%. Iowa Finance Authority green bonds, 5s of 2049, traded at 2.08%-1.94%.
“Supply is still being managed into specific market demand but with a growing number of project-revenue credits slated for pricing,” she said. “Among negotiated sales there is a two-part University Pittsburgh Medical Center (A2/A) issue with indicative 10-year yields +120/AAA BVAL—a widening of about 80 basis points from comparable deals in February.”
In the interest of preserving credit quality with commitments in recent weeks, most state GOs have become more of a go-to allocation for liquidity, according to Olsan.
Barclays priced Maryland Health and Higher Educational Facilities Authority’s (A2/A/A/ ) $191.235 million of revenue bonds for UPMC.
The deal was priced as 5s to yield 2.32% in 2030 and 3.5s to yield 3.70% and as 4s to yield 3.50% in a split 2050 maturity.
RBC priced Katy, Texas Independent School District’s (Aa1/AA/ / ) $174.885 million of unlimited tax school building bonds. The deal is insured by permanent school fund guarantee program.
The deal was priced as 5s to yield 1.30% in the 2030 maturity and as 4s to yield 2.40% in the 2050 maturity.
Barclays received the verbal award on the Public Utility District No. 1 of Chelan County, Washington’s ( /AA+/AA+/ ) $135.105 million of consolidated system revenue and refunding bonds featuring non-alternative minimum tax/governmental, non-AMT/ private activity bonds and AMT bonds.
The deal was priced as 5s to yield 1.40% in 2030 and the long-bond (2039) maturity was priced as 4s to yield 2.22%.
Citi received the written award on South Carolina State Housing Finance and Development Authority’s (Aaa/NR/NR/NR) $115 million of mortgage revenue bonds.
The 2030 maturity was priced at par to yield 2.10% and the 2050 maturity was priced as 4s to yield 2.10%.
In the competitive arena, Metro, Oregon (Aaa/AAA/ / ) sold $110 million of general obligation bonds which were won by Citi with a true interest cost of 2.3871%.
It was priced as 5s to yield 1.36% in 2031 and matures serially to 2040, where the last maturity is priced as 2.625s to yield 2.61%.
On Wednesday, Riverside County, California's (A2/AA/ / ) $720.945 million of pension obligation bonds is still slated to be priced.
Meanwhile, the DC Water Authority completed a forward direct purchase with JP Morgan to refund almost $300 million of outstanding 2012 debt. The issuer said the private placement locked in a 2.18% total interest cost to be recognized in July 2022. “This is among the lowest average interest rates for any refunding deal in DC Water’s history,” the issuer said.
“We acted quickly to secure this private market opportunity,” said DC Water CEO and general manager David L. Gadis. “Swift action by our Board of Directors and the financing team enabled us to capture these historically low rates.”
“Refinancing now saves us about $3.8 million annually from Fiscal Year 2022 to Fiscal Year 2037,” added DC Water Chief Financial Officer Matthew Brown. “We repay our debt service from our operating budget, which is one component that drives rate increases. Therefore, savings like these benefit our ratepayers in future budgets.”
In mid-March, there was an uptick in private placements, bank loans and lines of credit as issuers sought alternatives to a primary market that was all but shut down as markets reeled from the COVID-19 pandemic.
Just last week, as states scramble to assess cash-flow and borrowing needs amid the pandemic, Massachusetts noted it was about to close on a working capital borrowing facility of more than $1 billion with a syndicate of banks led by Bank of America, state Treasurer Deborah Goldberg said.
Massachusetts was scheduled to issue bonds the week of March 16, but pulled the deal due to market conditions that effectively turned off the primary new issue bond market.
Secondary market data
Munis were slightly weaker on the MBIS benchmark scale Tuesday, with yields rising by a basis point in the 10-year maturity and by three basis points in the 30-year maturities. On the MBIS AAA scale, munis were also slightly weaker with yields increasing by one one basis point in both the 10-year maturity and 30-year maturity.
On Refinitiv Municipal Market Data’s AAA benchmark scale, the yield on both the 10-year muni and 30-year were four basis points higher to 1.11% and 1.94%, respectively.
The MMD muni to taxable ratio was 192.0% on the 10-year and 166.0% on the 30-year.
On the ICE muni yield curve late in the day, the 10-year yield was up one four basis points to 1.17% while the 30-year was also higher by four basis points to 1.95%.
The ICE muni to taxable ratio on the 10-year was 216% and the 30-year was 162%.
BVAL saw the 10-year moved up three basis points to 1.17% and the 30-year high by four basis points to 2.03%.
The IHS muni curve saw the 10-year rose to 1.18% and the 30-year increased to 1.95%.
Stocks were negative again as Treasury yields were lower.
The Dow Jones Industrial Average fell 2.33%, the S&P 500 index decreased 2.77% and the Nasdaq was down 3.03%.
The three-month Treasury was yielding 0.097%, the Treasury two-year was yielding 0.205%, the five-year was yielding 0.334%, the 10-year was yielding 0.579% and the 30-year was yielding 1.164%.
Secondary trading did show some concessions Tuesday. AUstin Texas GOs, 5s of 2021, traded at 0.92%-0.82%. Washington GOs, 5s of 2022, traded at 0.96%-0.95%. Washington Suburban Sanitation District, 5s of 2027, traded at 1.07%-1.05%. Friday, they traded at 1.03%. NYC TFAs, 4s of 2045, traded at 2.65%-2.59%. Klein, Texas ISD 3s of 2049, traded at 2.58%-2.53% from the original 2.60%. Iowa Finance Authority green bonds, 5s of 2049, traded at 2.08%-1.94%.
Lynne Funk contributed to this report.