Muni primary market awakens as yields continue to fall

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Yields in the municipal market fell by as much as 10 basis points Tuesday as issuers begin to test the primary market with dealers opening up their balance sheets after weeks of inactivity.

The Portland School District No. 1J, Multnomah County, Oregon, (Aa1/ AA+/NR/NR) hit the market with a sale that had been postponed from last week.

It was the largest competitive deal seen in several weeks and sources said the deal was well spoken for. The 10-year yielded 1.59% but the largest tranche was $54 million in the one year, 5s of 2021, which were priced at 1.19%, just about 15 basis points above AAA benchmarks.

Several other new issues came to market with yields that fell mostly in line with their credit profiles relative to benchmarks. Citi took indications of interest on Texas Public Finance Authority’s (Aaa/AAA/NR/NR) $472.705 million of Series 2020 taxable general obligation and refunding bonds.

“From what we can see and our conversations with market participants, muni buying is being driven by a couple of different factors: municipal to U.S. Treasury ratios are still historically very cheap, absolute gross yields are high enough to catch the attention of some crossover types, outflows have abated (large customer bid-wanted lists have ceased as capital to meet cash needs has been raised), and lastly if the Fed does come in to purchase munis, considering the lack of supply for the past three weeks, there will be no offer side,” said Greg Saulnier, municipal analyst at Refinitiv.

Saulnier, however, said in the backdrop, “the risk-on bias coupled with a disappointing $40 billion three-year note auction and talk of potentially issuing a COVID 19-related Treasury bond weighed on rates."

The MMD muni to taxable ratio was 133.0% on the 10-year and 128.4% on the 30-year. On Monday, the muni to taxable ratio was 220.9% on the 10-year and 178.8% on the 30-year.

As the market awaits news from the Federal Reserve on its plans to purchase municipal bonds, several participants said that whatever program the Fed creates, it can always alter. At this point, the Fed has complete authority to create programs that it sees will fit its portfolios and it is being cautious of which credits and durations to take on. And while this has caused confusion for the market, many sources said the Fed has the resources to back up the muni market and will, however perhaps not on longer-duration and lower-rated debt.

“Muni issuers must continue to operate despite revenue uncertainty,” said Peter Hayes, head of BlackRock's municipal bonds group, and Sean Carney, head of municipal strategy in a Monday report. “Some segments will face daunting financial challenges and Federal support may be insufficient.”

Trading in the secondary market showed constructive moves with high-grade names again moving yields lower.

Maryland GOs in 2021, 5s of 2021, were traded in blocks at 1.03% while yesterday they were at 1.10% to 1.05%. Washington GOs, 5s of 2021 landed at 1.06%. Out in the 10-year range, Forsyth County School District, Georgia 5s of 2030, traded at 1.43%-1.42%. On Friday, they were at 1.68%. New York EFCs, 5s of 2020 traded at 1.25%-1.20%. New York City TFAs, 5s of 2034, traded at 2.31%-2.30%. Monday they traded at 2.49%. TFAs, 5s of 2039, traded at 2.47% to 2.46%.

Secondary market
Muni yields fell on the Refinitiv Municipal Market Data’s AAA benchmark scale, the yield on the 10-year muni GO fell 10 basis points to 1.38% while 30-year decreased 10 basis points to 2.19%.

The MMD muni to taxable ratio was 133.0% on the 10-year and 128.4% on the 30-year.

On the ICE muni yield curve late in the day, the 10-year yield was down 10 basis points to 1.44% while the 30-year was also down 10 basis points to 2.17%.

BVAL saw the 10-year fall eight basis points to 1.43% and the 30-year dropping 10 basis points to 2.19%.

“Munis continue to improve as part of the general migration back to risk assets globally,” ICE Data Services said in a market comment.

Yields on the ICE muni curve were down five basis points on the front end to as much as 10 basis points on the intermediate and back ends of the curve. The curve has flattened to 112 basis points from one- to 30-years

“Muni percentage of Treasury yields are falling once again, but remain well above the relatively high levels of even a month ago,” ICE said. “Taxable yields are higher, in line with Treasuries.”

Trading volume picked up after a relatively light Monday.

ICE said that in Puerto Rico, the big movers include the COFINA 5% revenue bonds [CUSIP: 74529JPX] of 2058 were up 3.049 to $92.091 and the PRASA 5.25% revenue bonds [CUSIP: 745160RC] of 2042 were up 1 ¼ points to $92 ½.

Primary market
The Portland School District No. 1J, Multnomah County, Oregon, (Aa1/ AA+/NR/NR) hit the market with a sale that had been postponed from last week.

The district competitively sold $441.32 million of Series 2020 unlimited tax general obligation bonds issued under the Oregon School Bond Guaranty Act.

BofA Securities won the bonds with a true interest cost of 1.8945%. The issue was priced to yield from 1.19% with a 5% coupon in 2021 to 2.76% with a 3% coupon in 2037.

“Reports are that the deal is very well spoken for,” Peter Franks, MMD senior market analyst, said in a market comment. “[The] 5s 6/2025 at 1.24% +10 bps, 5s 6/2030 at 1.59% +10 bps, 3s 2035 (30c) at 2.62% +23 bps to the MMD 3% curve and 3s 6/2037 (30c) at 2.76% also +23 bps to the MMD 3% curve.”

Piper Sandler was the financial advisor; Hawkins Delafield was the bond counsel. Proceeds will finance capital costs of the district.

Citigroup priced and repriced Michigan’s (Aa2/AA+/NR/NR) $103.61 million of Series 2020A state trunk line fund refunding bonds.

The deal was repriced to yield from 1.26% with a 5% coupon in 2020 to 1.40% with a 5% coupon in 2026.

Citi also took indications of interest on the Texas Public Finance Authority’s (Aaa/AAA/NR/NR) $472.705 million of Series 2020 taxable general obligation and refunding bonds.

Indications ranged from 135 basis points above the comparable U.S. Treasury in 2020 to 225 basis points above the comparable Treasury in 2035 and 200 basis points in 2039.

Wells Fargo Securities priced and repriced Richmond, Va.’s (Aa1/AA/AA/NR) $138.55 million of Series 2020A tax-exempt public utility revenue bonds to cut yields.

The deal was repriced to yield from 1.18% with a 5% coupon in 2023 to 3.03% with a 3% coupon in 2041; a 2045 term bond was priced to yield 3.09% with a 3% coupon and a 2050 term was priced to yield 2.81% with a 4% coupon.

Wells also priced Richmond’s $180 million of Series 2020B taxable public utility revenue refunding bonds.

The deal was priced at par to yield from 1.63% in 2021 to 3.045% in 2035 and 3.537% in 2043.

BlackRock: Headwinds turning to tailwinds
While municipal bonds will face strains due to the fallout from the COVID-19 pandemic, some sectors of the market will fare better than others, according to a report released Monday by BlackRock.

“Issuers with solid balance sheets will need to draw down reserves to meet obligations,” they wrote. “Safety net hospitals, senior living facilities, mass transit and airports with limited resources will require funding from the states and municipalities they serve. Non-rated stand-alone projects may experience significant credit deterioration.”

Hayes and Carney said recent market dislocations have led to attractive buying opportunities, but cautioned that investors need to be very selective.

High-yield credits would be the most vulnerable to stress, they said, citing retirement communities, nursing homes, casinos, hotels, regional trains, shopping centers and resource recovery plants.

“Overleveraged local governments and small private universities are also likely to struggle, along with airports, toll roads, mass transit and rural/single-site hospitals. States and cities that rely heavily on tourism, narrow sales and personal income taxes, and oil prices will be strained, as well as those with poorly funded pension systems,” they wrote.

“The good news is that most states and municipalities were in excellent fiscal health before the crisis. We expect ongoing stability in high-quality states as well as school districts and local governments as property taxes have proven resilient in past downturns,” they said. “Essential services such as power, water and sewer are protected segments. State housing authority bonds also should not be impacted.”

Hayes and Carney said that while munis are a high-quality asset class, there would be a small rise in the number of defaults.

“A prolonged recession would likely mean a pickup in the number of defaults, although the aggregate market value should be marginal and concentrated within high yield and non-rated,” they wrote. “Credit quality within investment grade will remain strong even if ratings migrate from AA to A.”

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