Muni buyers go on a quest for yield
Buyers saw more municipal supply hit the market on Wednesday as the University of Connecticut’s $240 million general obligation deal attracted wide interest from investors, with yields bumped as much as 15 basis points from the initial institutional pricing.
There is a growing acceptance of lower-rated credits noticeable in the market this week, as at least one deal saw strong demand amid the overall search for yield concession, according to Kimberly Olsan, senior vice president at FTN Financial and guest contributor to Court Street Group Research.
The first of a two-day retail pricing on Monday for the University of Connecticut’s $240 million deal demonstrated the willingness to purchase lower-rated credits, Olsan noted.
Though it was recently downgraded by S&P Global Ratings, the University of Connecticut still saw strong demand for its attractively priced bonds in the deal being negotiated by senior manager Piper Jaffray and officially priced for institutions on Wednesday.
A 5% coupon due in 2029 was offered at 2.53% yield in the first day of the retail order period — 58 basis points above generic, triple-A benchmarks. Olsan noted that the spread range was is about 25 basis points tighter than the issuer’s April 2018 deal.
On a repricing, the 2029 maturity yield was lowered to 2.48%. Maturities past 10 years saw yields lowered by as much as 15 basis points from the initial institutional pricing.
While Pennsylvania is another state with lower-rated revenue bonds that falls into the wider acceptance category among investors, Olsan noted that the state is being assisted with improving revenue conditions and employment growth.
March employment data released by the state’s Department of Labor and Industry showed “record-breaking details,” according to Olsan.
For example, unemployment in the state fell to 3.9% — its lowest rate since record keeping began in 1976, while civilian labor force growth also hit a new high, reaching a total of more than 6.2 million people, Olsan noted.
“The state’s GO credit spread has compressed dramatically,” Olsan said, noting that the highest monthly average spread to triple-A benchmarks was 63 basis points in July 2018.
In the most recent 12-month period, the spread averaged 49 basis points, but currently is implied at 34 basis points.
Overall, the strong retail demand for the Connecticut deal and other new issues came on the heels of Monday’s post-holiday activity, which saw less activity in the secondary market in lieu of waiting for several new-issue pricings.
“Pockets of flows 20-years and longer prodded a marginally better tone, but overall bid volume was held below recent averages,” she said, citing MSRB trade data that revealed that participation was more active in the $1 million and higher category than below that range.
The total volume traded was 13% above the last 30-day period, with 16 years and longer capturing just over half the total, she added.
“Perhaps a softer tone in U.S. Treasuries past 10 years encouraged more probing in tax-exempts; the 10-year U.S. Treasury has closed above 2.50% for all but four days this month,” Olsan said.
On Wednesday, Piper Jaffray priced and repriced the University of Connecticut’s (A1/A+/A) $239.47 million of Series 2019A GOs and refunding GOs after holding a two-day retail order period. The GOs were priced to yield from 1.63% in 2019 to 3.13% in 2038. The refunding GOs were priced to yield from 1.63% in 2019 to 2.39% in 2028. As noted above, demand was fierce.
In March 2018, the University (Aa3/AA-/NR) sold $141.73 million of Series 2018A special obligation student fee revenue bonds. Jefferies priced the deal to yield from 1.50% in 2018 to 3.08% in 2028 and 3.67% in 2043 and 3.61% in 2047. The $3.72 million of 2029 5s were priced at 116.104 to yield 3.20%.
On March 13, 2018, the MMD 2029 muni GO stood at 2.57%.
The 5s last traded on Jan. 30 at 116.39 cents on the dollar to yield 3.05%.
In January 2017, UCONN (Aa3/AA-A+) sold $345.15 million of Series 2017A GO and refunding GOs. Piper Jaffray priced the refunding GOs were priced to yield from 1.05% in 2018 to 2.11% in 2022. The GOs were priced to yield from 1.05% in 2018 to 3.54% in 2037. The $15.56 million of GO 2029 5s were priced at 116.401 to yield 3.08%. On Jan. 11, 2017, the MMD 2029 muni GO stood at 2.34%.
The 5s last traded on March 7 at a high price of 117.831 cents on the dollar, a low yield of 2.484%.
Also on Wednesday, Citigroup priced and repriced the San Diego Unified School District’s (Aa2/NR/AAA) $250 million of dedicated unlimited ad valorem property tax GOs consisting of Series A Election of 2018 and Election of 2018 Series B GOs.
Wells Fargo Securities priced and repriced the Frisco Independent School District, Texas’ (PSF: Aaa/AAA/NR) $266.34 million of unlimited tax school building and refunding bonds.
BofA remarketed the Trinity Health Credit Group’s (Aa3/AA-AA-) $132.98 million of hospital revenue bonds for Franklin County, Ohio and the Idaho Health Facilities Authority.
Wednesday’s bond sales
Bond Buyer 30-day visible supply at $6.87B
The supply calendar is $6.87 billion and is composed of $4.21 billion of competitive sales and $2.66 billion of negotiated deals.
ICI: Muni funds see $1.3B inflow
Long-term municipal bond funds and exchange-traded funds saw a combined inflow of $1.250 billion in the week ended April 17, the Investment Company Institute reported on Wednesday.
It was the 15th straight week the funds saw inflows and followed an inflow of $1.138 billion into the tax-exempt mutual funds in the previous week.
Long-term muni funds alone saw an inflow of $1.127 billion after an inflow of $984 million in the previous week; ETF muni funds alone saw an inflow of $123 million after an inflow of $154 million in the prior week.
Taxable bond funds saw combined inflows of $7.559 billion in the latest reporting week after inflows of $6.675 billion in the previous week.
ICI said the total combined estimated inflows into all long-term mutual funds and ETFs were $12.273 billion after inflows of $13.216 billion in the prior week.
A resilient market
Low supply is inviting a firm backdrop for municipals amid the recent weakness in the broader taxable fixed income market, according to Anthony Valeri, director of investment management Zions Bancorp in San Diego.
The price stability is expected to be a long-term trend and “speaks to the resiliency of the muni market,” Valeri said Wednesday afternoon. “It will be interesting to see to what degree munis will fare better than taxables” for the remainder of 2019.
The weakness that trickled into the municipal market in the second quarter came on the heels of a strong first quarter, but hasn’t harmed the market and is likely to be short-lived, according to Valeri.
He doesn’t expect a lot more change in terms of price or yields in the municipal market in the coming months and said he expects more of an opportunity for coupon-clipping than chasing yields. “Prices are expected to stay stable, and we do not expect a lot of weakness,” he said, noting that yields on high-quality paper could potentially rise 10 to 20 basis points in coming months, “but not much more than that.”
“The concern over an economic slowdown is slowly receding and as that happens there is some pull back in muni pricing,” he said. He is finding the most value in the five- to 15-year range of the yield curve and is not overly concerned about interest rate risk.
“The Fed is on the sidelines and I don’t think inflation is a risk either so I don’t see a ton of movement in interest rates either way.”
He said he feels the intermediate range offers the best balance and protection — if and when the Federal Reserve Board decides to cut rates. While he doesn’t expect that scenario, he said the earliest it could occur is late this year. “That’s our concern rather than a rate increase,” Valeri said.
Munis were stronger on the MBIS benchmark scale Wednesday, which showed yields falling less than one basis points in the 10-year maturity and dropping one basis point in the 30-year maturity. High-grade munis were also stronger, with yields falling one basis point in the 10-year maturity and declining two basis points in the 30-year maturity.
On Refinitiv Municipal Market Data’s AAA benchmark scale, the yield on the 10-year muni GO fell three basis points while the 30-year muni yield dropped six basis points.
"Tax-exempt bond yields ratcheted lower on Wednesday as disappointing economic data releases abroad increased bets that central banks had more work to do in order to stimulate the global economy," Greg Saulnier, research analyst at Refinitiv MMD, said in a market comment. "Meanwhile, the ongoing supply/demand imbalance in the muni market continued to see participants reach further out the curve to find the desired yield."
Treasuries were stronger as stocks traded lower.
The 10-year muni-to-Treasury ratio was calculated at 75.7% while the 30-year muni-to-Treasury ratio stood at 89.1%, according to MMD.
“The muni market is better bid today in line with strength in Treasuries, with the ICE Muni Yield Curve down three basis points from the 10-year and down one basis point to two basis points in the shorter end,” ICE Data Services said in a market comment Wednesday. “High-yield is rallying on low volume with yields down one to three basis points on the day. Tobaccos are yielding two basis points to three basis points less in moderate trading. Taxables are also rallying with yields down more than 4.5 basis points from the five-year to the 10-year.”
Previous session's activity
The MSRB reported 40,433 trades on Monday on volume of $13.07 billion. The 30-day average trade summary showed on a par amount basis of $11.68 million that customers bought $5.57 million, customers sold $3.99 million and inter-dealer trades totaled $2.13 million.
California, Texas and New York were most traded, with the Golden State taking 14.50% of the market, the Empire State taking 13.473% and the Lone Star State taking 10.768%. The most actively traded security was the Puerto Rico Sales Tax Financing Corp. restructured zeros of 2046 which traded 54 times on volume of $61.79 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. Click here for a brief tour of the Workstation, or contact Ziad Saba at 212-803-6079 for more information.