Maryland GOs price through AAA benchmarks; Ratios 'dominate' rates

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It was a busy day in the primary, as the markets continue to deal with crosscurrents of COVID-19 and election results.

“After the anomaly we saw on Tuesday when munis deviated from Treasuries, things are getting back to normal today,” a New York trader said. “Yesterday it was as if munis and treasuries were not related and today, it is back to normal with them being siblings.”

At least for one day the equity markets did not seem to be as concerned about COVID-19.

“Despite more negative reports, more reported cases and even more deaths — markets aren’t moving like they normally would on this news,” the trader said. “We got the rate cut by the Fed and Super Tuesday results to drown out the noise for at least one day.”

In light of Tuesday’s emergency half-a-point rate cut by the Federal Reserve, Pramod Atluri, fixed income portfolio manager at Capital Group, said he believes the Fed may not be done and may ease rates further if financial conditions continue to tighten, perhaps even as soon as their next meeting later this month.

“This could provide even more upside for fixed income from here. Overall, this recent volatility shows how powerful interest rates can be to diversify a portfolio,” he said. “Over the past two weeks, as equities have fallen more than 10%, 10-year Treasuries have increased over 5%. Even at low rates, bonds are more than just the yield that they generate — when yields fall they can produce returns well above their current yield and can help protect investors from the current market volatility.”

Secondary market
Munis were mixed on Wednesday on the MBIS benchmark scale, with yields falling two basis points in the 10-year and rising by less than one basis point in the 30-year maturity. High-grades were stronger, with yields on MBIS' AAA scale decreasing by three basis points in the 10-year maturity and by no more than one basis point in the 30-year maturity.

Munis were steady on Refinitiv Municipal Market Data’s AAA benchmark scale, as the yield on both the 10-year and 30-year muni GO were unchanged at 0.96% and 1.56%, respectively.

The 10-year muni-to-Treasury ratio was calculated at 96.8% while the 30-year muni-to-Treasury ratio stood at 95.5%, according to MMD.

“Last night we witnessed the greatest three-day rise in the 10-year muni/Treasury ratio since MMD has been in business,” said Peter Franks, senior market analyst, Refinitiv. “Tuesday, March 3 the muni/ratio increased to 96.3% from 72.3% on Feb. 27.”

The three-day change of 23.98%, was greater than the 22.10% change that took place from Dec. 14 to 17 of 2008. There are nine instances of big three-day jumps and they all occurred back during the 2008-2009 financial crisis.

“Ratios should dominate rates,” said Kim Olsen, senior vice president of municipal bond trading at FHN Financial. “The 5-, 10- and 30-year spots have moved dramatically higher against their UST counterparts.”

She added that after dipping below 65% between January and February, five-year high grades are now trading above 75% to Treasuries. Intermediate munis have moved close to 85% to the 10-year UST and at the long end ratios exceed 90%.

“All three ranges sit two-five ratios above their annual averages,” Olsen said. “Specific to bonds 10 years and longer, current ratios have entered more historical ranges that are considered buy signals. Ultra-low rates—still well inverted to floaters—need to be considered in the context of cross-market comparables and the likelihood of ongoing tax-exempt demand.”

Stocks surged after presidential candidate Joe Biden had himself a Super Tuesday and is leading the delegate count over Bernie Sanders. Treasury yields were still moving lower, including the 10-year still under 1%.

The Dow Jones Industrial Average was up about 3.31%, the S&P 500 index was higher by 3.03% and the Nasdaq gained roughly 2.54% late in the session Wednesday.

The three-month Treasury was yielding 0.721%, the Treasury two-year was yielding 0.645%, the five-year was yielding 0.738%, the 10-year was yielding 0.994% and the 30-year was yielding 1.638%.

Block trading of high-grade Maryland GOs, 5s of 2024, traded at 0.74%. Maryland GOs, 5s of 2031, traded at 1.09%-1.07%. 5s of 2032 traded at 1.12% Tuesday. Other high-grades inside 10 years were moving AAA benchmarks, including Delaware GOs, 5s of 2024 trading at 0.76%-0.71%. North Carolina GOs, 5s of 2026, traded at 0.70% Wednesday and 0.72% Tuesday. Mecklenberg County, NC 5s of 2026 traded at 0.76%-0.75%. Tuesday, they traded at 0.80%. Out long, New York City TFAs, 4s of 2045, traded at 1.99%.

Another trade showing the short end richer: Wake County, NC GOs, 5s of 2022, traded at 0.76%-0.74%.

"Airport and airline-related bonds remain under pressure, continuing a trend that began Monday, due to the coronavirus-related travel slowdown,” ICE Data Services said in a market comment. “Names most affected include those that have significant Asian traffic (San Francisco, Los Angeles), those with significant leisure travel exposure (New Orleans, Florida airports) and both (Hawaii).”

Primary market
RBC Capital Markets priced New York City’s (Aa1/AA/AA/NR) $860.125 million of fiscal 2020 general obligation bonds. The city on Tuesday added a paragraph about COVID-19 to its preliminary official statement on the GO deal.

The deal was priced as 5s to yield 1.21% in the 2030 maturity and as 4s to yield 2.15% in the 2050 maturity. That is 25 basis points above the MMD benchmark scale on the 10-year and 59 basis points above the MMD on the 30-year.

During the two-day retail order period for the tax-exempts, New York City said it received $77 million of orders from individual investors, out of which about $65 million was usable.

During the institutional order period, the city received around $4.4 billion of priority orders, representing 5.5 times the bonds offered for sale to institutional investors.

Given strong investor demand from institutions, yields were reduced by one basis point in 2024 through 2027, two basis points in 2036 maturity, five to seven basis points in 2037 through 2044 and one to three basis points for maturities in 2045 through 2050.

The city also competitively sold $500 million of taxable fixed-rate bonds, made up of two subseries.

The first subseries of around $308 million attracted nine bidders, with UBS winning with a true interest cost of 1.572%. The second subseries of around $192 million attracted eight bidders, with Morgan Stanley winning with a TIC of 2.138%.

Staying in the competitive arena, Maryland (Aaa/AAA/AAA/ ) with its top-tier ratings sold a total of $779.27 million of GO and taxable GO bonds in four separate sales. Yields across the curve on the deals were well through AAA benchmarks.

Morgan Stanley won $245.055 million of GO bonds with a true interest cost of 0.887%.

Morgan Stanley also won $249.945 million of GO bonds with a TIC of 1.8469%.

Bank of America Securities won $234.27 million of GO bonds with a TIC of 0.7177%.

Wells Fargo won $50 million of taxable GO bonds with a TIC of 0.9126%.

"The appetite was strong for Maryland bonds, which should reset the scales," said one east coast trader. "Maryland saw yields below the benchmark scale, while NYC was above the scale."

Wells Fargo priced Utah Transit Authority’s (Aa2/AA/AA) $216.650 million of federally taxable sales tax revenue refunding bonds.

Goldman Sachs priced the Dormitory Authority of the State of New York’s (Aaa/AAA/ / ) $150 million of revenue bonds for Columbia University.

Wells Fargo priced the Board of Trustees of Northern Illinois University’s (NR/AA/NR/NR) $127.715 million of auxiliary facilities system refunding revenue bonds. The deal is insured by Build America Mutual.

JP Morgan priced Dallas Area Rapid Transit’s (Aa2/AA+/NR/AAA) $115.220 million of senior lien sales tax revenue refunding taxable bonds.

ICI: Muni funds see $3.04B inflow
Long-term municipal bond funds and exchange-traded funds saw a combined inflow of $3.044 billion in the week ended Feb. 26, the Investment Company Institute reported on Wednesday.

It was the 60th straight week of inflows into the tax-exempt mutual funds reported by ICI. The previous week, ended Feb. 19, saw $2.643 billion of inflows into the funds.

Long-term muni funds alone had an inflow of $2.431 billion after an inflow of $2.357 billion in the previous week; ETF muni funds alone saw an inflow of $613 million after an inflow of $286 million in the prior week.

Taxable bond funds saw combined inflows of $206 million in the latest reporting week after revised inflows of $12.245 billion in the previous week.

ICI said the total combined estimated outflows from all long-term mutual funds and ETFs were $11.860 billion after inflows of $16.207 billion in the prior week.

The biggest laggard of the week was equities, which saw an outflow of $13.916 billion this past week, after an inflow of $276 million the week before.

Previous session's activity
The MSRB reported 39,736 trades Tuesday on volume of $14.877 billion. The 30-day average trade summary showed on a par amount basis of $12.65 million that customers bought $6.41 million, customers sold $4.16 million and interdealer trades totaled $2.09 million.

California, Texas and Ohio were most traded, with the Golden State taking 14.547% of the market, the Lone Star State taking 11.274% and the Buckeye State taking 9.353%.

The most actively traded security was the Buckeye Tobacco Settlement Financing Authority’s senior refunding bonds 2020 B-2 CL 2, 5s of 2055, which traded 27 times on volume of $88.850 million.

Data appearing in this article from Municipal Bond Information Services, including the MBIS municipal bond index, is available on The Bond Buyer Data Workstation.

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