Municipal market gets ready for slim slate

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The municipal bond market gears up for a slimmed down slate as the first half of 2020 winds down. Bonds finished little changed in quiet Monday activity.

“Municipal bonds are little changed to start the week, taking their cue from Treasuries,” ICE Data Service said in a Monday market comment. “So far, the new-issue calendar this week is about half that of last week’s actual number: $6 billion vs. $12 billion. Volumes are consistent with a summer Monday “

Despite this week’s smaller calendar, the recent surge of bond deals could push June’s total past January’s $32 billion figure and make it the most active month of the year, according to said Kim Olsan, senior vice president at FHN Financial.

“Of course, there was a lull in volume from mid-March through most of April, but to some extent current activity is catchup from that period,” Olsan said. “All is not lost for issuers, though, as rates are lower by 90 to 100 basis points from early April and fund flows, combined with a large reinvestment cycle, have rebounded to impressive levels to create a demand-meeting-supply force.”

She said bond buyers must continue to do their homework.

“For buyers it’s a case of weeding through credits and structures and finding the best-yielding alternatives given an uncertain revenue picture across many sectors,” she said. “With several sessions still remaining in June, revenue bonds are outpacing GOs by 57 basis points and within the category specifically, once-shunned healthcare, transportation and industrial development bonds are up nearly 1.50% (Bloomberg Barclay Index).”

Olsan noted that this came as revenue bond issuance was 26% greater than GOs sales so far in 2020.

Primary market
This week's $6 billion new issue calendar is about half the size of last week's hefty slate.

Action kicks off on Tuesday as Barclays Capital gets set to price the Northeastern University (Aa1///) in Massachusetts’ $300 million of corporate CUSIP refunding bonds. Barclays will also rice the Massachusetts Development Finance Agency’s $105 million of tax-exempt revenue refunding bonds for the university.

Citigroup is set to price the Lewisville Independent School District, Texas’ (/AAA/AAA/) $266 million of unlimited tax school building and refunding bonds on Tuesday. The deal is backed by the Permanent School Fund guarantee program.

Piper Sandler is expected to price the Ysleta Independent School District, Texas’ (Aaa/AAA//) $215 million of taxable unlimited tax refunding bonds backed by the PSF. Piper is also expected to price the Barbers Hill Independent School District, Chambers County, Texas’ (Aaa/AAA//) $165 million of unlimited tax school building bonds backed by the PSF.

Piper is also set to price the Birmingham Airport Authority, Ala.’s (A3/AA/A-/) $112 million of airport revenue refunding bonds insured by Build America Mutual Assurance Co.

Additionally Tuesday, BofA Securities is set to price the Western Municipal Water District Facilities Authority, Calif.’s (/AA+/AA+/) $106 million of tax-exempt and taxable water revenue bonds.

The municipal market ended with a constructive tone last week — and the robust new issuance and actively traded secondary market should continue as about $6 billion in tax-exempt supply enters the primary arena this week, according to a new report from Nuveen even if the calendar is half of last week's.

“With the current supply-demand imbalance of net $52 billion of funds available to invest in the municipal market, this should bode well for trading over the next few months,” Bill Martin, head of global fixed income and chief investment officer and John Miller, head of municipals at Nuveen wrote in a Monday report.

They reported that the high-grade municipal market has recovered from the sell-off caused by the coronavirus pandemic — given the primary and secondary flow.

Aside from the volatility during the pandemic, the current market strength is part of the typical activity that occurs this time of the year, the analysts said.

In addition, several federal programs are supporting municipal entities, including subsidies to municipalities directly affected by the pandemic and the Federal Reserve board lending money directly to municipal borrowers through its Municipal Facility Liquidity Facility, Martin and Miller said.

Meanwhile, they said high-yield municipals continue to trail high-grade bonds, as spreads continue to narrow.

“Yields in general are very low, forcing investors to add risk to increase yield,” as positive fund flows continued for the fifth consecutive week, Martin and Miller wrote.

For instance, the recent $1.2 billion New York Urban Development Corporation personal income tax (PIT) revenue bonds deal was oversubscribed and underwriters lowered yields in some maturities before final pricing. In secondary trading, the 5s of 2042 traded in block size at 1.93% compared to an original yield of 2.00%, the analysts noted.

“Combined with heavy seasonal reinvestment cash flows, the market is saturated with strong demand,” causing credit spreads to continue to contract, they said.

“We expect high-yield spreads to continue compressing through the summer,” the analysts added.

Overall, the municipal market is well positioned as the second half of the year soon approaches, according to Martin and Miller.

“This seasonal strength is well entrenched, and we believe it should bode well for the market over the next few months,” the pair wrote.

Secondary market
Some notable trades:

Texas waters 5s of 2022 traded at 0.26%. New York City TFAs, 5s of 2023, yielded 0.48% versus 0.53% to 0.48% Friday.

Texas waters, 5s of 2028 yielded 0.84%. In the 10-year, Harvards, 5s of 2030, traded at 0.91%.

Washington GOs, 5s of 2039, at 1.47%-1.40%.

Texas wtrs 3s of 2040 at 1.85$-1.84% while Friday they were t 1.96%.

Lamar, Texas ISD 4s of 2043 traded at 1.68% while at 1.70% to 1.64%.

On MMD’s AAA benchmark scale, yields were unchanged throughout the curve. Yields on the 2021 and 2023 maturities were steady at 0.25% and 0.27%, respectively. The yield on the 10-year GO muni was flat at 0.88% while the 30-year yield was unchanged at 1.63%.

The 10-year muni-to-Treasury ratio was calculated at 125.0% while the 30-year muni-to-Treasury ratio stood at 111.5%, according to MMD.

The ICE AAA municipal yield curve showed yields were unchanged, with the 2021 and 2022 maturities at 0.230% and 0.233%, respectively. Out longer, the 10-year maturity was steady at 0.845% while the 30-year was flat at 1.646%.

ICE reported the 10-year muni-to-Treasury ratio stood at 128% while the 30-year ratio was at 110%.

The IHS Markit municipal analytics AAA curve showed the 2021 maturity yielding 0.21% and the 2022 maturity at 0.26% while the 10-year muni was at 0.88% and the 30-year stood at 1.63%.

The BVAL AAA municipal yield curve showed yields were unchanged, with the 2021 and 2022 maturities at 0.190% and 0.24%, respectively. Out longer, the 10-year maturity was steady at 0.83% while the 30-year was flat at 1.65%.

Munis were also little changed on the MBIS benchmark and AAA scales.

Treasuries were weaker as stocks traded higher.

The three-month Treasury note was yielding 0.162%, the 10-year Treasury was yielding 0.705% and the 30-year Treasury was yielding 1.464%.

The Dow rose 0.69%, the S&P 500 increased 0.71% and the Nasdaq gained 1.06%.

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