Election Day: Munis steady as America makes its choices
As voters across the nation went to the polls on Tuesday, the municipal bond market remained cool, calm and collected with participants waiting patiently on the sidelines ahead of the results. Top-quality munis finished steady across most of the curve, with yields remaining flat on AAA scales.
“The betting window will be closing in a few short hours, then it will be wait and see as to the outcome of the election,” said Peter Franks, Refinitiv MMD senior market analyst. “The question of course is will it be swift or will it be drawn out. A contested election could reverse today's activity.”
But the U.S. economy was on a solid footing going forward, nonetheless, and issuers will still be heading to market this year.
“Regardless of the election result, the U.S. economy is on the path to recovery. The pace will be affected by the timing and magnitude of additional fiscal stimulus, and that hinges on the election outcome,” said Jason Draho, head Asset Allocation Americas at UBS Global Wealth Management. “But the bounce-back in manufacturing, the strength of consumer spending, and Federal Reserve accommodation all support a continual recovery.”
Muni issuers will still be looking to access the market regardless of the election outcome, as cash requirements and continued low rates may fuel an end-of-year sales rebound, according to Eric Kazatsky, senior municipal strategist at Bloomberg Intelligence.
“October's rush to market by many issuers to avoid post-election volatility can only go so far, as the door has been shut on further stimulus,” he said. “With the Senate adjourning and the door shutting on further stimulus, investors worried about the U.S. having to finance another several trillion dollars in spending can take a proverbial chill pill.”
He noted that long-dated Treasury rates headed higher throughout October, rising almost 20 basis points before easing slightly in the past week. But he said that when looking at tax-exempts, there was no unified direction.
“Ratios in the front end of the muni curve have cheapened, but it may be hard to find investors who really care all that much,” he said. “Ordinarily, muni to Treasury ratios of 144% would be exciting; however, rates of 15 basis points, act as a sobering counterbalance.”
The market on Tuesday felt like it was a ghost town as extreme quiet reigned amid Election Day uncertainty, according to two muni experts.
“It’s very quiet,” said a New Jersey trader Tuesday afternoon. “Everyone is waiting for the results.”
He described the market as unchanged to firm — in the backdrop of virtually no deals or secondary market activity to speak about — as millions headed to the polls in the much anticipated presidential race.
“A few customers pulled offerings and there nothing pricing,” he said. “Accounts are on the sidelines. There’s a lot of cross currents and potential volatility so people are laying low and being patient.”
He said he couldn’t even predict if the market would be back to normal on Wednesday.
A New York underwriter described the market as completely shut down, with Treasuries weaker and no trading or deals happening in the midst of the election.
“The market is on hold completely because of the election,” he said, noting the absence of supply on the heels of last week’s bonanza.
“I’m not even sure if tomorrow will be any better after the outcome,” he added.
Both sources said investors will be glued to social media or their TV screens until the election results are in — as opposed to participating in the municipal market with so much uncertainty.
“This week will of course be all about Trump versus Biden and House and Senate races that will overshadow everything else,” Peter Block, managing director of credit research at Ramirez & Co. wrote in a weekly report.
“The Fed announces its monetary policy decision on Thursday, which is expected to be no change to the Fed funds rate at 0%-0.25%,” Block said. Economic data is headlined by the October jobs report on Friday, expected at plus 600,000 and a decline in the unemployment rate to 7.7% from 7.9% in September.
“Munis closed out October with the largest monthly gross supply on record of $80 billion, as issuers pulled transactions forward to get ahead of what is expected to be chaotic, yet monumental elections this week,” Block wrote, adding that he expects gross supply in November-December to total only $54 billion, for a 2020 total of $468 billion — a 16% year over year increase.
“This week’s gross supply is virtually nonexistent due to the election,” Block added, with visible net supply over the next 30 days estimated at negative $15.1 billion — reflecting $21.6 billion of maturities and calls and $6.5 billion of announced supply. “The secondary remains well bid as bid-wanted and trading remains at average levels,” Block wrote. “Dealer inventory remains light ahead of the election.”
BofA Securities priced the Maine Turnpike Authority’s (Aa3/AA-/AA-/NR) $130 million of Series 2020 turnpike revenue bonds.
The bonds were priced to yield from 0.56% with a 5% in 2026 to 2.31% with a 3% coupon in 2040. A 2045 maturity was priced as 4s to yield 2.28% while a split 2050 maturity was priced as 5s to yield 2.13% and as 4s to yield 2.33%.
Citigroup, FHN Financial Capital Markets, Siebert Williams Shank and UBS Financial Services were co-managers on the deal.
Maine Turnpike is not a frequent issuer, selling nearly $650 million of bonds since 2010. The most issuance occurred in 2012 and 2018 when it issued $150 million of debt in each of those years.
Some notable trades on Tuesday:
San Antonio Texas ISD 5s of 2022 traded at 0.26%-0.20%. Maryland GOs, 5s of 2022, at 0.25%. Harvard 5s of 2025 traded at 0.44%-0.43%. Lower Merion SD Pennsylvania 5s of 2027 at 0.76%-0.75%.
Baltimore County, Maryland GOs 5s of 2031 traded at 1.04%-0.86%. Georgia GOs, 5s of 2031 at 1.04%. NYC TFA 5s of 2031 traded at 1.52%-1.51%. Maryland GOs 5s of 2032 at 1.15%.
Maryland GOs 5s of 2035 traded at 1.37%. Cypress Fairbanks Texas ISD 2.25s of 2045 traded at 2.40%-2.30%. Goose Creek Texas ISD 4s of 2050 traded at 2.26%.
On Tuesday, high-grade municipals were steady, according to final readings on Refinitiv MMD’s AAA benchmark scale. Short yields in 2021 and 2022 were flat at 0.21% and 0.22%, respectively. The yield on the 10-year muni was unchanged at 0.94% while the yield on the 30-year remained at 1.71%
The 10-year muni-to-Treasury ratio was calculated at 106.7% while the 30-year muni-to-Treasury ratio stood at 103.6%, according to MMD
“The municipal bond market is sitting on the sidelines, waiting for election results for further direction,” ICE Data Service said Tuesday. “Trade volumes are slightly above yesterday’s level. After October’s huge issuance month, this week’s calendar is very small, again election related.”
The ICE AAA municipal yield curve showed short maturities were steady in 2021 and 2022 at 0.21% and 0.23%, respectively. The 10-year maturity was flat at 0.93% and the 30-year was unchanged at 1.73%.
The 10-year muni-to-Treasury ratio was calculated at 105% while the 30-year muni-to-Treasury ratio stood at 104%, according to ICE.
The IHS Markit municipal analytics AAA curve showed short yields flat at 0.17% and 0.18% in 2021 and 2022, respectively, with the 10-year unchanged to yield 0.95% and the 30-year steady at 1.72%.
The BVAL AAA curve showed the yield on the 2021 and 2022 maturities rising by one basis point, while the 10-year was steady at 0.92% and the 30-year flat at 1.73%.
Treasuries were weaker as stock prices traded higher.
The three-month Treasury note was yielding 0.09%, the 10-year Treasury was yielding 0.88% and the 30-year Treasury was yielding 1.66%.
The Dow rose 2.12%, the S&P 500 increased 1.87% and the Nasdaq gained 1.89%.