Municipal bond yields fall again on Fed hopes, potential coronavirus plateau

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The municipal market again saw yields fall across the curve, dropping as much as eight basis points on the short end Monday and up to 15 on the long end.

The market is anticipating the Federal Reserve to step in as a buyer of last resort for munis, though how much, which credits, and what durations are still cloudy.

The Fed has already begun to buy variable rate demand obligations and has helped the short end of the market recover after massive mid-March losses of at least 2%.

“The overall dynamic of the market has been helped by the opening of the Federal Reserve's Money Market Mutual Fund Liquidity Facility, which opened on March 23 and as of Wednesday, April 1, had lent out $52.67 billion,” said Patrick Luby, senior municipal strategist at CreditSights. “The Fed does not report specific details of the different types of collateral they have accepted, but the SIFMA Index fell sharply again this week as did the available supply of VRDOs, so we are assuming that much of the MMLF activity has been in variable rate municipals.”

The SIFMA Index was set at 1.83% on Wednesday, down from 4.71% the prior week and the high of 5.20% on March 18.

VRDOs offered on Bloomberg's short-term offering system fell to $3.1 billion as of the close on Thursday.

Monday isn’t a typical day that issuers sell bonds, so on the sidelines they remained, though more deals are showing up on the calendar and this week may become the testing ground for reopening the primary as participants gauge volatility and rates.

Meanwhile, municipal bond mutual funds lost $42.2 billion in assets in March, according to Luby’s latest estimated total.

The pace of outflows from municipal bond mutual funds and ETFs was much slower in the week ended April 1 than in the last several weeks.

There still is concern with how retail investors will react when they see the first quarter decline in mutual fund NAVs, Luby said.

Trading showed a lot of high-grade names trading across the curve on Monday, moving benchmark yields lower. Georgia, Maryland, North Carolina, Texas GOs were trading in large blocks and lower yields, particularly on the one-year mark. One-year North Carolina GOs traded in blocks at 1.10%-1.09% about on par with benchmark yields. Fairfax County, Virginia GOs traded at 1.52% in 10 years, through some AAA benchmarks.

Out long, New York City TFAs with 3% and 4% coupons were also trading in blocks at lower yields.

Meanwhile, returns in March showed that the market was hit hard. Short maturities gave up 0.50% and are just into the positive for 2020.

Intermediate and long structures moved into the negative for the year, with maturities past 20 years suffering a 5.57% loss in March.

High-yield bore the brunt of pain, posting a loss of 11% in March, said Kim Olsan, senior vice president at FHN Financial.

“A risk-off theme during the selloff caused the bidside to all but disappear,” she said, though she noted that taxable munis gave back 6.21% but have held on to “impressive gains made in January and February, finishing the quarter up 1.17%.”

Tax-exempt money market mutual funds, which lost more than $5 billion in assets in each of the prior two weeks pulled in $6.2 billion in the week ended Wednesday.

Meanwhile, Olsan noted that Illinois GOs are still dislocated and trading at much wider spreads from earlier in the year, just on the heels of getting a negative watch from S&P Global Ratings. The 5s due 2034 traded in late March at +272/AAA and other intermediate maturities have moved wider than +300/AAA. Current levels contrast with an active 5% due 2031 that traded mid-February +80/AAA. Real yields above 5.25% could entice crossover buying, especially for 21%-bracket corporate accounts where the taxable equivalent yield approaches 7%, she said.

Primary market

On Tuesday, Citigroup is expected to price the Texas Public Finance Authority’s (Aaa/AAA/NR/NR) $483 million of Series 2020 taxable general obligation and refunding bonds.

Wells Fargo Securities is set to price Richmond, Va.’s (Aa1/AA/AA/NR) $180 million of Series 202B taxable public utility revenue refunding bonds and $131 million of Series 2020A tax-exempt public utility revenue bonds.

There are also a few deals coming up on the competitive calendar.

On Wednesday, Memphis, Tenn., is competitively selling $212.04 million of Series 2020 unlimited tax general obligation improvement refunding bonds.

PFM Financial Advisors and ComCap Partners are the financial advisors. Butler Snow and Carpenter Law are the bond counsel.

Proceeds will be used to pay for outstanding commercial paper and to current refund certain outstanding debt.

Memphis last sold comparable bonds competitively on April 17, 2018 when BofA Securities won $309 million of GOs with a true interest cost of 3.5638%.

Secondary market
Muni yields fell on the Refinitiv Municipal Market Data’s AAA benchmark scale, the yield on the 10-year muni GO fell 15 basis points to 1.48% while 30-year decreased 15 basis points to 2.29%.

The MDD muni to taxable ratio was 220.9% on the 10-year and 178.8% on the 30-year.

On the ICE muni yield curve late in the day, the 10-year yield was down 14 basis points to 1.55% while the 30-year was also down 14 basis points to 2.27%.

BVAL saw the 10-year fall 16 basis points to 1.51% and the 30-year dropping 14 basis points to 2.29%.

On the IHS Markit AAA scale, the 10-year was at 1.56% and the 30-year was 2.28%.

There was a better tone in the muni market on Monday, ICE Data Service said in a market comment.

The ICE muni curve yields were six to 11 basis points lower out to five-years and 12 to 15 basis points lower out the rest of the curve.

The one- to 30-year yield spread was 119 basis points, ICE said, down about five basis points from the previous trading session.

“The muni percentage of Treasury yield is falling significantly today, but still remains at extremely elevated levels as compared to even a month ago,” ICE Data Services said. “Taxable yields are higher, in line with Treasuries. Puerto Rico bonds are steady.”

ICE said trading volumes were lower, but in line with a pre-COVID-19 Monday.

Chip Barnett contributed to this report.

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