Taxables remain on top as sense of uncertainty lingers over muni market

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Municipal bond buyers got their first taste of this week’s new deals on Tuesday while munis traded flat, with yields steady along most of the AAA scales.

"The municipal bond market is little changed," ICE Data Services said, adding that "the high-yield market has a weaker tone."

A continual theme for September has been anemic moves in the municipal AAA scale, according to Eric Kazatsky, senior municipal strategist at Bloomberg Intelligence.

“There have been days when a one basis point move was sprinkled here and there throughout the curve, but the adjustments felt somewhat unsubstantiated,” he said. “Tax-free bonds continue to be anchored in place, giving support to our thought process that the combination of election uncertainty and flip-flopping stimulus talks has left the market somewhat rudderless. These factors combined with news out of Europe concerning rising COVID-19 caseloads have contributed to a risk-off sentiment in U.S. Treasuries that hasn't exactly transferred over to muniland.”

He noted some bright spots in terms of performance continued to be in the taxable municipal space, which is seeing a 0.78% month-to-date return compared to longer-dated corporate bonds that are returning 60 basis points less.

“With returns for tax-exempts pretty uninspiring at just 0.9% month-to-date, attention from both traditional and nontraditional investors continues to follow the hot hand of taxable muni bonds,” Kazatsky said. “Not only have taxable municipals led from a total return standpoint, but the percentage of new sales consumed by tax-free alternatives is the highest since 2010 and doesn't look to abate any time soon.”

He said that the ratio of taxable sales-to-total muni sales is two standard deviations above historical norms.

“It doesn't hurt the case for taxable muni bonds that they still appear cheap compared with like-duration and like-rated credit corporate alternatives and historically have lower default levels,” Kazatsky said.

"In many ways, I think the entire public finance industry is truly in a holding pattern. The entire globe is. How have rates not moved? How can investors stomach sub-0.20% rates for exempts?" a New York trader said. "Taxables have taken hold because it's the only relatively liquid investment out there. High-yield is a grab for any investor who can take a chance on credit quality. The municipal market may be in for an awakening post-election. We can't even bank on a clear winner for the presidency. How do we bank on this market when the leader of the Free World is likely to be a drawn-out electoral process?

"Perhaps smart investors have faith that somehow states and localities will get through this with a little help from the Fed."

Take a look at Maryland GOs, 5s of 2027, trading at 0.52%. They originally priced in March of 2017 at 2.49%. "Do we even need to explain the insanity of a gilt-edged credit trading a third of the yield from more than three years ago?" the trader said.

Primary market
JPMorgan Securities priced and repriced Atlanta’s (Aa3/NR/AA-/NR) $364.935 million of airport general revenue refunding bonds to lower yields.

The $239.38 million of Series 2020A bonds not subject to the alternative minimum tax were repriced as 5s to yield from 0.40% in 2024 to 1.27% in 2030.

The $125.555 million of Series 2020B AMT bonds were repriced to yield from 0.67% with a 5% coupon in 2024 to 1.57% with 5% and 2% coupons in a split 2030 maturity.

The non-AMT bonds had been tentatively priced as 5s to yield from 0.48% in 2024 to 1.32% in 2030 while the AMT bonds had been tentatively priced to yield from 0.75% with a 5% coupon in 2024 to 1.62% with 5% and 2% coupons in a split 2030 maturity.

Goldman Sachs priced and repriced the Puerto Rico Housing Finance Authority’s (NR/AA-/NR/NR) $249.55 million of capital fund modernization program refunding bonds for Puerto Rico public housing projects to lower yields.

The deal was repriced as 5s to yield 0.283% in 2020, 0.55% in 2021, 0.61% in 2022, 0.67% in 2023, 0.77% in 2024, 0.89% in 2025, 1.05% in 2026 and 1.21% in 2027.

The deal had been tentatively priced as 5s to yield 0.305% in 2020, 0.57% in 2021, 0.63% in 2022, 0.69% in 2023, 0.78% in 2024, 0.90% in 2025, 1.06% in 2026 and 1.25% in 2027.

BofA Securities priced the Missouri Health and Educational Facilities Authority’s (A1/A+/NR/NR) $366.915 million of health facilities revenue bonds for Mercy Health.

The bonds were priced as 3s to yield 3.05% and as 4s to yield 2.68% in a split 2050 maturity and as 3s to yield 3.15% and 4s to yield 2.78% in a split 2053 maturity.

Goldman Sachs priced the Children's Hospital Medical Center’s (Aa2/AA/NR/NR) $200 million of Series 2020DD taxable bonds for the Cincinnati Children's Hospital Medical Center. The bonds were priced at par to yield 2.82% in a 2050 bullet maturity.

Citigroup priced the Northside Independent School District, Bexar County, Texas’ (Aaa/NR/AAA/NR) $200 million of variable-rate unlimited tax school building bonds. The issue is backed by the Permanent School Fund guarantee program. The bonds were priced at par to yield 0.70% in 2050 with a mandatory put date in 2025.

In the competitive arena, the Virginia Public School Authority (Aaa/AAA/AAA/) sold $106.51 million of Prince William County Series 2020 limited tax special obligation school financing general obligation bonds.

A group including JPMorgan as senior manager won the bonds with a true interest cost of 1.4283%. Members of the group included Piper Sandler, Estrada Hinojosa and Academy Securities. The bonds were priced to yield from 0.14$ with a 4% coupon in 2021 to 1.99% with a 2% coupon in 2040.

Public Resources Advisory Group and PFM Financial Advisors were the financial advisors. McGuireWoods and Norton Rose were the bond counsel.

Since 2020, the PSA has sold about $5 billion of debt with the most issuance occurring in 2015, when it sold $683 million of bonds.

On Wednesday, Raymond James & Associates is set to price Louisiana’s $435 million of refunding bonds.

In the competitive arena, the Massachusetts School Building Authority will sell $395 million of Series 2020C taxable senior dedicated sales tax refunding bonds on Wednesday. PFM Financial Advisors is the financial advisor; Mintz Levin is the bond counsel.

Moody’s: Muni VRD, CP transactions rise
Municipal variable-rate demand bonds and commercial paper transactions, which are rated by Moody’s Investors Service, doubled in the second quarter of 2020, the rating agency said on Tuesday.

Banks committed almost $8 billion of credit and liquidity support facilities, Moody’s said, double the $4 billion issued in the first quarter, but still lower than the $8.6 billion quarterly average for 2019.

Moody’s said the increase reflected strong overall municipal volume as well as lower costs of variable-rate issuance given exceptionally low short-term rates.

Bank of America remained the leading provider of credit and liquidity support in the second quarter, Moody’s said, bit TD Bank issued the most new commitments. U.S. banks were the most active during the quarter, providing facilities to support over 70% of all transactions.

As a result of the market disruption caused by the coronavirus pandemic, some gas prepayment transactions were delayed indefinitely, according to Moody’s.

“After rating three gas prepayment transactions in both the final quarter of 2019 and first of 2020, we did not rate any in the second quarter as the coronavirus’ effects on the financial markets continued,” Moody’s said. “The financing structure, however, remains attractive for banks as a cost-effective funding mechanism.”

However, the number of Moody's-rated tender option bond trusts continued to increase.

With the shortage of new VRDBs on the market and the SIFMA Municipal Swap Index averaging 0.21% in the second quarter, TOBs remained an attractive alternative for investors seeking securities with short effective maturities and bank support,” Moody’s said.

Secondary market
Some notable trades Tuesday:

King County, Washington 5s of 2022 at 0.34%-0.20%. Harford County, Maryland 5s of 2023 at 0.35%, 0.27%, 0.22%.

Texas A&M 5s of 2026, trading at 0.46%.

Washington GOs, 5s of 2036 at 1.33%.

Texas waters, 4s of 2045 at 1.83%-1.82%.

Twenty-five year bonds sub-2% has become the new normal. "But is that normal? The whole argument that UST might need to go negative is real. Foreign currencies have and the US needs to recognize that the Fed might have to move in that direction if we're going to keep this economy humming," the New York trader said.

High-grade municipals were unchanged Monday, according to final readings on Refinitiv MMD’s AAA benchmark scale. Yields were flat in 2021 and 2022 at 0.12% and 0.13%, respectively. The yield on the 10-year muni was flat at 0.83% while the 30-year yield remained at 1.58%.

The 10-year muni-to-Treasury ratio was calculated at 127.7% while the 30-year muni-to-Treasury ratio stood at 112.1%, according to MMD

The ICE AAA municipal yield curve showed all maturities steady, with the 2021 maturity at 0.12%, the 2022 maturity at 0.13%, the 10-year maturity at 0.80% and the 30-year at 1.60%. The 10-year muni-to-Treasury ratio was calculated at 130% while the 30-year muni-to-Treasury ratio stood at 112%, according to ICE.

The IHS Markit municipal analytics AAA curve showed yields unchanged in the 2021 and 2020 maturities which yielded 0.15% and 0.16%, respectively. The 10-year muni rose one basis point to 0.88% and the 30-year was up one basis point to1.62%.

The BVAL AAA curve showed the yield on the 2021 maturity unchanged at 0.11%, the 2022 maturity unchanged at 0.13%, the 10-year steady at 0.80% and the 30-year flat at 1.59%.

Treasuries were stronger as stock prices traded mixed.

The three-month Treasury note was yielding 0.10%, the 10-year Treasury was yielding 0.64% and the 30-year Treasury was yielding 1.41%.

The Dow fell 0.20%, the S&P 500 decreased 0.20% and the Nasdaq was unchanged.

Lynne Funk contributed to this report.

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Primary bond market Secondary bond market Coronavirus Virginia Public School Authority Taxable bonds