Municipal bonds firm while the long-end signals investor concern

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Municipals were steady Tuesday, with yields on the AAA muni scales a bit stronger on shorter maturities as traders and other market participants monitor the ongoing virus-related uncertainties.

Muni bonds were little changed on Tuesday with a small uptick in volume, ICE Data Services said, adding that “taxable yields are about two basis points lower despite the large supply this week.”

As The Bond Buyer has noted, taxable issuance has become another force in the market that hasn't existed prior to tax reform.

"[Taxables have] a ways to go in the marketplace as issuers become comfortable with dealing with new structures and investor bases, how to articulate correctly to those new domestic and international investors," said a New York strategist. "It is not an easy game to play for our market. It will take a lot of work."

Meanwhile on Tuesday, market attention was on the big primary market as well as the negotiations in Washington, D.C. over a new fiscal stimulus package, always on the minds of market participants as they navigate the space.

However, just looking at a few very large block trades, it is clear that participants are putting money to work in pockets that they see potential for a longer-term recovery.

Some notable trades on Tuesday:

Texas waters, 5s of 2023, traded at 0.18% in a plus-$5 million block from a 2018 issue. Forsyth County, North Carolina, 3s of 2028, traded at 0.62%-0.54%. The smaller handles have taken hold in certain credits and maturities.

Yale 5s of 2029 traded at 0.70%. Universities, especially Ivies, continue their strength in this market.

Gilt-edged Maryland GOs, 5s of 2031, were 18 basis points below 1%, a very dramatic look at how this market is dealing with this crisis. Credit quality is key, sources say.

Washington state GOs, 5s of 2045, were at 1.55%-1.50%.

Primary market
Demand is rampant as new deals come into the municipal market.

“Supply is a little more muted after last week’s big deals, but dealers don’t want unsold balances so deals will be priced to sell,” said John Mousseau, chief executive officer of Cumberland Advisors Inc.

Meanwhile, he said all eyes are on the federal government.

“We are all watching Congress to see what transpires,” Mousseau said.

What Congress was discussing has been garnering much market attention, according to Cooper Howard, director of fixed income strategy at Schwab.

“All eyes will be on Washington this week. We expect some form of direct aid for states and local governments, but the amount is in question,” Howard said. “The Heroes Act has $900 billion, a Republican proposal potentially has zero, so there may be a compromise somewhere in the middle.”

Cooper said no agreement on a deal could hamper recovery efforts.

“Without aid we expect additional cuts to employment. That could have an impact on the economic recovery going forward," he said.

Cooper was still bullish on credit quality for state and local governments.

"Even if aid doesn’t come, we don’t expect widespread defaults,” he said.

On Tuesday, King County, Wash., (Aa1/AA+/NR/NR) competitively sold $366 million of bonds.

Morgan Stanley won the $186.605 million of Series 2020B taxable sewer refunding revenue bonds with a true interest cost of 1.9272%.

The bonds were priced at par to yield from 0.27% in 2021 to 2.48% in 2040.

JPMorgan Securities won the $179.02 million of Series 2020A sewer improvement and refunding revenue bonds with a TIC of 2.6506%.

The bonds were priced to yield from 0.16% with a 5% coupon in 2022 to 1.87% with a 4% coupon in 2047; a 2052 maturity was priced to yield 1.92% with a 4% coupon.

Piper Sandler is the bond counsel; Pacifica Law Group is the bond counsel.

Proceeds from the taxables will be used to defease and advance refund certain sewer system bonds while proceeds from the exempts will fund improvements to the system and refund some bonds.

Since 2010, the county has sold over $6 billion of bonds, with the most issuance occurring in 2015 when it sold $1.2 billion. It sold the least in 2014 when it issued $268 million.

Jefferies priced the Port of Houston Authority, Harris County, Texas’ (Aaa/AAA/NR/NR) $233.65 million of unlimited tax refunding bonds.

The $6.55 million of Series 2020A-1 bonds not subject to the alternative minimum tax were priced to yield from 0.17% with a 5% coupon in 2021 to 0.55% with a 5% coupon in 2026.

The $227.1 million of Series 2020A-2 non-AMT bonds were priced to yield from 0.17% with a 5% coupon in 2021 to 1.81% with a 3% coupon in 2039.

Wells Fargo Securities priced San Antonio, Texas’ (Aa2/AA/AA/NR) $153.39 million of Series 2020C water system junior lien revenue bonds, no reserve fund.

The bonds were priced to yield from 0.44% with a 5% coupon in 2026 to 1.96% with a 3% coupon in 2042. A 2046 split maturity was priced to yield 1.66% with a 5% coupon and 1.86% with a 4% coupon and a 2050 maturity was priced to yield 1.90% with a 4% coupon.

Piper Sandler priced the Alvin Independent School District of Brazoria County, Texas’ (Aaa/NR/AAA/NR) $149.125 million of unlimited tax schoolhouse and refunding bonds.

The issue is backed by the Permanent School Fund guarantee program.

The bonds were priced to yield from 0.19% with a 5% coupon in 2021 to 1.75% with a 3% coupon in 2040; a 2045 term bond was priced to yield 1.92% with a 3% coupon and a 2048 term was priced to yield 1.75% with a 4% coupon.

Ramirez & Co. priced the New York State Housing Finance Agency’s (Aa2/NAF/NAF/NAF) $164.1 million of affordable housing revenue climate bond certified sustainability bonds.

The bonds were priced at par to yield from 0.30% in 2022 to 1.90% and 1.95% in a split 2032 maturity, 2% in 2035, 2.20% in 2040, 2.35% in 2045 and 2.55% in 2052.

Wells Fargo Securities priced the agency’s (Aaa/NR/NR/NR) $78.5 million of 15 Hudson Yards housing revenue green bonds with Fannie Mae Direct Pay credit enhancement.

The bonds were priced as a 2039 bullet maturity at par to yield 1.65%.

Siebert Williams Shank priced the agency’s (Aa2/NR/NR/NR) $22.5 million of Series 2020F affordable housing revenue bonds.

The bonds were priced as a 2036 bullet maturity at par to yield 1.10%.

On Wednesday, Maryland (Aaa/AAA/AAA/) is coming to market with four competitive sales totaling over $1 billion.

The state and local facilities loan of 2020 deals consist of: $345.76 million of taxable general obligation refunding bonds Second Series C; $290.08 million of tax-exempt Bidding Group 1 Second Series A GOs; $249.92 million of exempt Bidding Group 2 Second Series A GOs; and $117.34 million of exempt Second Series B refunding GOs.

Public Resources Advisory Group is the financial advisor. Ballard Spahr along with the State Attorney General are the bound counsel.

JPMorgan Securities will price Auburn University in Alabama’s $300 million of taxable general fee revenue bonds on Wednesday.

HilltopSecurities is expected on Wednesday to price the West Covina Public Financing Authority, Calif.’s $204.1 million of taxable lease revenue bonds.

Goldman Sachs is set to price the Andrew W. Mellon Foundation’s (Aaa/AAA//) $300 million of taxable social bonds while Morgan Stanley is set to price the Doris Duke Charitable Foundation Inc.’s (Aaa///) $100 million of taxable social bonds.

Secondary market

Municipals were steady, according to readings on Refinitiv MMD’s AAA benchmark scale.

MMD reported yields on the 2021 and 2023 GO munis were unchanged at 0.15% and 0.17%, respectively. The yield on the 10-year GO muni was flat at 0 0.73% while the 30-year yield remained at 1.45%.

The 10-year muni-to-Treasury ratio was calculated at 119.9% while the 30-year muni-to-Treasury ratio stood at 110.3%, according to MMD.

The ICE AAA municipal yield curve showed short yields dropping one basis point to 0.130% in 2021 and 0.147% in 2022. The 10-year maturity was unchanged at 0.708% and the 30-year was steady at 1.476%.

ICE reported the 10-year muni-to-Treasury ratio stood at 124% while the 30-year ratio was at 110%.

The IHS Markit municipal analytics AAA curve showed the 2021 maturity yielding 0.13% and the 2022 maturity at 0.16% while the 10-year muni was at 0.71% and the 30-year stood at 1.44%.

The BVAL AAA curve showed the 2021 maturity unchanged at 0.13% and the 2022 maturity lower by one basis point to 0.16% while the 10-year muni was at 0.72% a basis point lower and the 30-year fell two basis points to 1.48%.

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

Treasuries were stronger as stock prices traded mixed.

The three-month Treasury note was yielding 0.129%, the 10-year Treasury was yielding 0.597% and the 30-year Treasury was yielding 1.305%.

The Dow rose 0.67%, the S&P 500 increased 0.23% and the Nasdaq lost 0.71%.

Bond prices have been relatively stable over the past month despite increasing COVID-19 case counts, with investors increasingly anticipating improving medical outcomes, according to a market analysis from U.S. Bank Wealth Management.

“Investment-grade corporate and municipal bonds offer attractive yields relative to Treasuries,” said Bill Merz, a Minneapolis-based director of fixed income at U.S. Bank Wealth Management. “We see little edge to low-quality bonds, despite their relatively high yields, given weak current economic growth.”

He said that as long-term Treasury bond yields remain low munis will remain a good value.

Strong investor demand and low Fed policy rates have offset significant new Treasury issuance,” Merz said. “High-quality corporate and municipal bonds offer more attractive yields without a significant reduction in portfolio quality.”

He added that high-quality munis still offer higher-than-normal yields relative to Treasuries which, “paired with easy access to ongoing financing, should improve their return outlook.”

Lynne Funk contributed to this report.

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