Municipal bond yields rally after large deals get done

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The municipal market saw yields grind lower Thursday by as much as seven basis points on the short end. Triple-A benchmark yields on the long end declined four basis points.

Yields on all triple-A benchmark curves out to nine years are now below 1%. The largest bumps were again on the very short end of the curve.


Utah brought a surprise AAA general obligation deal that saw yields bumped six or seven basis points in a repricing while more inflows were reported.

Refinitiv Lipper reported municipal bond funds inflows of $581.943 million in the week ended May 13 after experiencing $408.424 million of outflows in the previous week.

For municipals, the positives are a return to primary market flows, an abatement of massive fund outflows and favorable cross-market yields past five years. These have combined to offer secondary bid-sides further incentive to rally, taking both intermediate and long yields essentially back to early April’s lows, according to Kim Olsan, senior vice president at FHN Financial.

“Whereas March became a buyer’s market, the current cycle has swung back toward sellers’ favor—at least where high grades are concerned.”

Firmness on Thursday and prospects for continued technical strength kept the municipal market activity brisk.

“The municipal market is well bid today as yields continue to drop in a grinding fashion,” Michael Pietronico, chief executive officer at Miller Tabak Asset Management, said Thursday.

“It appears investors are anticipating a very strong technical environment over the next few months and are allocating cash accordingly,” he added. “Given the ‘chatter’ about the possibility of negative rates we expect the very short end of the market to remain superbly bid.”

Although Federal Reserve Chair Jerome Powell said on May 13 he would avoid using negative interest rates to stoke the economy in response to the impact of COVID-19, the Fed said in late April it would keep its benchmark interest rates near zero in response to the pandemic climate.

The promise of keeping interest rates as low as possible for as long as possible, combined with a cheap municipal to Treasury ratio, has also added to the strength of the market, according to Robert Roffo, managing director of R&C investment Advisors LLC.

MMD’s 10-year muni-to-Treasury ratio was calculated at 168.5% while the 30-year muni-to-Treasury ratio stood at 143.0%. ICE’s 10-year muni-to-Treasury ratio was calculated at 181% while the 30-year muni-to-Treasury ratio stood at 141.0%.

Roffo said firmness continued in the municipal market with the bid side up about two basis points at midday as demand for this week’s new-issuance and news of continued government assistance combined with market technicals helped buoy the climate.

Large deals priced earlier this week — the $850 million New York Transitional Finance Authority offering and the $800 million Illinois general obligation sale — enhanced investor opinion and overall market strength, Roffo said.

“The strong demand for the TFA and Illinois deals exhibited that investors still have confidence that large issuers that have access to capital markets will weather this coronavirus storm.”

“The extra yield the deals offered was an additional benefit that will pay off over time in this extremely low-rate environment,” he added.

Trading picked up and high-grades were driving AAA benchmarks lower.

The New York Environmental Facilities Authority 5s of 2021 traded early in the morning at 0.36%-0.35%. Maryland GOs 5s of 2024 traded at 0.67%-0.66%. Forsyth County, NC 3s of 2028 traded at 1.14%-1.13%. Wisconsin green GOs, 5s of 2032, traded at 1.29%. Fairfax County, VA GOs 5s of 2032, traded at 1.29% also. Northwest Texas ISD, 4s of 2036 traded at 1.75%-1.68%. Texas waters, 4s of 2044, traded at 2.00%. Lubbock, Texas ISD, 4s of 2050 traded at 2.07%.

Primary market
RBC Capital Markets priced for institutions the Dormitory Authority of the State of New York’s $464.805 million of revenue bonds for the school districts revenue bond financing program.

The DASNY deal is made up of four tranches consisting of $386.4 million of Series A bonds, $57.345 million of Series B bonds, $14.35 million of Series C bonds and $6.71 million of Series D bonds.

All bonds are insured under the New York State Aid Intercept Program with the Series A and D bonds being also insured by Assured Guaranty Municipal.

The largest tranche, the Series A bonds, were priced to yield from 0.87% with a 5% coupon in 2021 to 3.04% with a 3% coupon in 2040; a 2045 term bond was priced to yield 3.18% with a 3.125% coupon and a 2050 term was priced to yield 3.21% with a 3.125% coupon.

The Series A bonds were priced for retail to yield from 0.89% with a 5% coupon in 2021 to 3.06% with a 3% coupon in 2040; the 2045 term was priced to yield 3.20% with a 3.125% coupon and the 2050 term was priced to yield 3.25% with a 3.125% coupon.

BofA Securities priced Utah’s (Aaa/AAA/AAA/NR) $448.455 million of general obligation bonds.

The deal was priced to yield from 0.43% with a 5% coupon in 2021 to 1.82% with a 3% coupon in 2034.

The Massachusetts Clean Water Trust (Aaa/AAA/AAA/NR) competitively sold $87.305 million of state revolving fund refunding bonds.

BofA won the deal with a true interest cost of 1.552%.

The deal was priced to yield from 0.84% with a 5% coupon in 2026 to 2.35% with a 3% coupon in 2042.

Secondary market
On Refinitiv Municipal Market Data’s AAA benchmark scale, yields fell seven basis points to 0.45% in 2021 and by six basis points to 0.52% in 2022.

Out longer on the MMD scale, the yield on the 10-year GO dropped four basis points to1.05% while the 30-year declined four basis points to 1.86%.

MMD’s 10-year muni-to-Treasury ratio was calculated at 168.5% while the 30-year muni-to-Treasury ratio stood at 143.0%.

The ICE AAA municipal yield curve showed short-term maturities falling five basis points, with the 2021 maturity dropping to a record low of 0.450% and the 2022 maturity at 0.505%.

Out longer on the ICE municipal yield curve, the 10-year yield was off four basis points to 1.057% while the 30-year decreased four basis points to 1.876%.

ICE’s 10-year muni-to-Treasury ratio was calculated at 181% while the 30-year muni-to-Treasury ratio stood at 141.0%.

IHS Markit’s municipal analytics AAA curve showed the 2021 maturity at 0.48% and the 2022 maturity at 0.53% while the 10-year muni was at 1.06% and the 30-year stood at 1.89%.

The BVAL curved showed the 2021 maturity two basis points lower to 0.42% and the 2022 at 0.48%. BVAL also showed the 10-year muni fall three basis points to 1.07% while the 30-year also fell three to 1.92%%.

Munis were also stronger on the MBIS benchmark scale, with yields falling in both the 10- and 30-year maturities.

Treasuries strengthened as equities rose.

Late in the day, the 10-year Treasury was yielding 0.626% and the 30-year was yielding 1.306%.

The Dow was up 0.97%, the S&P 500 gained 0.41% and the Nasdaq rose 0.07%.

Money market muni funds fall $741M

Tax-exempt municipal money market fund assets fell $740.6 million, bringing total net assets to $135.31 billion in the week ended May 11, according to the Money Fund Report, a publication of Informa Financial Intelligence.

The average seven-day simple yield for the 187 tax-free and municipal money-market funds dipped to 0.08% from 0.10% in the previous week.

Taxable money-fund assets increased $27.03 billion in the week ended May 12, bringing total net assets to $4.581 trillion.

The average, seven-day simple yield for the 796 taxable reporting funds declined to 0.13% from 0.16% in the prior week.

Overall, the combined total net assets of the 983 reporting money funds rose $26.28 billion to $4.716 trillion in the week ended May 12.

Lynne Funk contributed to this report.

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Coronavirus Primary bond market Secondary bond market Federal Reserve Illinois Utah New York State Dormitory Authority
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