Dislocations in trading, pricing remain in municipal market

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The municipal secondary was steady according to AAA benchmarks but several trades pointed to dislocations on several high-grade names.

Market participants indicated the dislocations were likely attributable to month-end accounting issues.

The primary saw two deals from California, a San Diego water deal and a City and County of San Francisco GO offerings, both priced with bumps in a repricing. The yields on the original pricing were cheap, according to some traders, who said it was “unsurprising” because the deal was “priced to go.”

Lipper reported $1.26 billion of outflows out of municipal bond mutual funds, signaling this market is not fully stable yet and retail is not yet ready to engage.

What it all points to is that the market is seeing a steady upward yield trend and higher gross yields are attracting buyers again, sources said.

Meanwhile, the Municipal Securities Rulemaking Board Thursday released trading statistics for the first quarter of 2020 that “reflect significant disruption.”

“Trading volume reached highs not seen since 2008, with par amount traded totaling about $1 trillion,” the MSRB said. “Retail trade activity, measured as trades of $100,000 or less, declined while institutional trades of more than $1 million increased compared to the first quarter of 2019.”

There still was a relatively quiet tone in the market Thursday spurred by a range of technical issues, from month-end accounting and financing to spread widening, price volatility and the COVID-19 impact on businesses and the economy, sources said.

“It’s a day with scales unchanged, but certainly a wariness in the muni markets,” John R. Mousseau, president and chief executive officer and director of fixed income at Cumberland Advisors, said Thursday afternoon.

“There’s clearly a hangover from Mitch McConnell's statement from last week,” he added, pointing to the U.S. Senate Majority Leader’s comments on April 22 that cash-strapped states impacted by COVID-19 declare bankruptcy.

“The big question is do we ramp back to 95% economic activity pre-crisis — which is still a recession — or to 80% of pre-crisis, which is near Depression levels,” Mousseau said.

“It’s fairly quiet,” a day ahead of cities and counties re-opening restaurants and stores to jump-start the economy in Texas, according to Pete Stare, municipal underwriter at Hilltop Securities in Dallas.

“I think the market has a decent tone to it, but the problem is we have been through 10 days or so that the MMD curve has been cut to higher yields,” he said.

“You either have to cut the price to get deals done, or start at a concession to the market to get the attention of the buy side,” Stare said, noting that is especially true for relatively smaller deals under $50 million.

“The bellwether names are getting done and not being heavily oversubscribed,” he said, pointing to this week’s $1.1 billion New York Power Authority deal. “It wasn’t a riot, but was a successful transaction that was not terribly oversubscribed.”

“Once you get north of $100 million you can usually attract the buyers to look at the deal but it depends on credit and price,” Stare said.

He said spreads have widened out because the market doesn’t believe the triple-A curve is where it should be, and many are being cautious and sitting on the sidelines.

“Today you have month end, so that’s one of the reasons the market is quiet — people are squaring away their books,” he said.

Secondary trading on the short end, NY EFCs, 5s of 2021, traded at 1.13%-1.09% Missouri Highway and transit revs, 5s of 2023, traded at 1.16%. Brazenport, Texas ISD, 5s of 2029 traded at 1.72%-1.67%. They traded on Tuesday at 1.54%-1.51%. Maryland GOs, 5s of 2031, traded at 1.56%-1.55%. Tuesday they traded at 1.60%-1.59%.

Meanwhile, Wisconsin green revenue bonds from last week’s sale, 5s of 2032, traded at 1.81% in an inter-dealer trade. The original yield was 1.50%.

Washington GOs, 5s of 2033, traded at 1.96%. But to see how yields have fallen since the height of the March sell-off, it traded in blocks at 3.12%-3.14%.

Out longer, New York City TFAs, 4s of 2044, traded at 3.07%-3.06%. 3s of 2047 traded at 3.12%-3.07%.

A Southern California water, 5s of 2049, traded at 2.43%-2.45%.

Primary market

Morgan Stanley priced $223 million of water revenue bonds for the Public Facilities Financing Authority of the City of San Diego (Aa2/NR/AA/AA+).

Bonds with a 5% coupon in 2020 yielded 0.82% after a 10 basis point bump. The 5s of 2030 came at 1.67%, 8 basis points lower than original pricing wire. 4s in 2045 yielded 2.68%, a 15-basis-point move lower and the 3s of 2049 yielded 3.07%, seeing a 5-basis-point bump.

JP Morgan priced $167 million of general obligation refunding bonds for the City and County of San Francisco (Aaa/AAA/AA+).

The 5% coupon 2021 yielded 0.76% (10 basis points lower in re-pricing), the 5s of 2030 yielded 1.57% (also 10 basis points lower) and the 4s of 2035 yielded 2.27% (nine basis points lower).

Overall, larger deals are getting much of the attention, even though it lacks conviction and is on “soft ground,” according to a New York trader.

“The market was pleased to see the Power Authority transaction go well on Wednesday … we needed that,” he said Thursday afternoon.

Other large deals on tap — such as the $672 million New York Metropolitan Transportation Authority offering — were pushed to next week and a trader said the deal will be “challenging.”

The Series 2020C climate-bond certified transportation revenue green bonds are part of a larger $7.3 billion borrowing through 2023 backed by new revenue to help fund the MTA’s $51.5 billion five-year plan — its largest ever.

“But, as the nation opens back up, debt service coverage should improve from the nearly non-existent levels now,” he said.

Secondary market data

Muni yields were little changed as April came to a close, although the extreme front end of the curve continued to inch lower, according to ICE Data Services.

“The muni percent of Treasury yields are ending the month better than when they started with shorter maturities showing significant improvement while the rest of the curve eked out marginal gains,” ICE said.

Treasury yields were drifting lower ahead of next week’s quarterly refunding announcement. Treasury is expected to add a 20-year bond to its auction lineup. The Treasury 20-year, the first since 1986, had been set to debut later this year, but increased funding requirements due to COVID-19 looks likely to have pushed forward the schedule.

On Refinitiv Municipal Market Data’s AAA benchmark scale, the yield on the 10-year muni was 1.46% and the 30-year was 2.28%.

The MMD muni to taxable ratio was 235.5% on the 10-year and 179.5% on the 30-year.

On the ICE muni yield curve late in the day, the 10-year yield was 1.47% while the 30-year was 2.27%.

The ICE muni to taxable ratio on the 10-year was 249% and the 30-year was 172%.

Muni money market funds see outflows
Tax-exempt municipal money market fund assets fell $2.02 billion, bringing total net assets to $137.21 billion in the week ended April 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 decreased to 0.11% from 0.18% in the previous week.

Taxable money-fund assets increased $74.71 billion in the week ended April 28, bringing total net assets to $4.515 trillion.

The average, seven-day simple yield for the 797 taxable reporting funds declined to 0.18% from 0.22% in the prior week.

Overall, the combined total net assets of the 984 reporting money funds rose $72.69 billion to $4.652 trillion in the week ended April 28.

This article was written by Chip Barnett, Christine Albano and Lynne Funk.

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