Munis mixed as elections, FOMC, jobs data loom large over trading week
A confluence of upcoming events kept municipal bond buyers on the sidelines Monday as an uncertain and cautious tone was felt throughout the market.
Investors are waiting for the results of Tuesday’s U.S. national elections as the Federal Reserve gets ready to hold its monetary policy meeting on Wednesday and Thursday and the Labor Department prepared to release the October employment report on Friday.
On Monday, munis finished steady to weaker across the curve, with yields higher on the shorter end of the AAA scales while remaining steady father out the curve.
Muni supply is estimated at only $759.6 million in a calendar composed of $529.1 million of negotiated deals and $230.5 million of competitive sales.
According to Kim Olsan, senior vice president at FHN Financial, this week is beginning to look a lot like Christmas, with only ultra-light volume expected.
“Based on so much supply being pre-issued ahead of the election, forward estimates have dropped 75% to just $5 billion,” she said.
October saw the second highest muni volume week in history with $65 billion of bonds being priced as issuers raced to get deals done ahead of the election. Only the $69.83 billion that came in December of 2017 before tax law changes went into effect was a bigger month.
Election eve in the municipal market displayed the usual quiet behaviors of a typical Monday, minus all the deal prep and investment strategies as the tax-exempt universe is taking a pause, glued to tomorrow’s much-anticipated presidential race and its impact on the municipal market.
“The new-issue market has come to a virtual stop sign with a sudden reversal of the past two months, where supply had accelerated to all-time highs,” Jim Colby, portfolio manager and strategist at Van Eck said Monday.
The market seems poised to accept the outlook scenarios of the election as still supportive for municipals, he said, pointing to a potentially stronger conviction for Joe Biden and his plan for higher taxes, which will benefit tax -exemption.
On the buy side, he said it appears demand generated from calls and coupons and maturities will dictate price in the coming two months, or until the results of the election become clear.
“Given the appearance of the forward calendar, this could be as quiet a finale to 2020 — juxtaposed to the frenetic activity of the past several weeks,” Colby said.
Meanwhile, Jeffrey Lipton, managing director and head of municipal credit and market strategy at Oppenheimer Inc., agreed the market has adapted a tell-tale tone prior to the election.
“Closing out today's session, we can characterize market activity as extremely quiet as the ‘big day’ is now upon us,” Lipton said Monday.
“As November gets underway, we can note a dramatically different primary supply picture as the calendar shows under $1 billion in sales for this week,” he added.
Throughout much of October, municipals traded within a tight range even as the new-issue calendar brought a record monthly issuance last month, he said. “Issuers lined up en masse to take advantage of historically low interest rates ahead of one of the most contentious presidential elections in recent memory and the market, with a largely institutional investment bias, stood ready with a hearty appetite,” he said.
This occurred as many issuers are struggling to address outsized budget gaps brought on by the pandemic-induced recession and are considering creative and unconventional remedies, he added.
“For most of October, demand continued unabated, and we expect this support to endure throughout the balance of the year,” Lipton said Monday.
Given Oppenheimer’s views of ample demand and abating new-issuance through the remainder of the year, compelling market technicals can be expected to keep municipal bond fund flows positive and to cast an overall bullish tone for the asset class, according to Lipton.
Against that backdrop, the market can expect to see municipals breaking free of their current trading range with the search for lower yields a likely outcome and strong positioning heading into 2021, Lipton said. “Market sentiment can also be lifted by expectations of higher individual and corporate tax rates under a Biden presidency,” Lipton said. “While the retail impact on demand may be somewhat limited, higher corporate taxes may very well incentivize certain institutional buyers that have otherwise shown more muted interest in the tax-exemption.”
Municipal market participants are also poised for a broader infrastructure initiative under a Biden win that may lead to more issuance activity at some point next year, Lipton noted. But, he continued, the Democratic agenda has a better shot of coming to fruition should a blue sweep take hold.
“In our view, however, the top agenda item for either a Trump or Biden presidency that will likely dominate the political landscape will have to be a direct and measured response to what appears to be a resurgence of confirmed COVID-19 cases in most states, with the coming winter months expected to give rise to elevated hospitalizations and deaths,” Lipton said.
Olsan noted that November issuance will be jammed into a few weeks, since the upcoming Veteran Day and Thanksgiving holidays, leave only four full weeks in 2020 in which to process supply.
“Net implied demand between bonds rolling off from calls and maturities (estimated at $45 billion through December) and projected supply could exceed $20 billion into year end,” she said. “The variable is what amount of volume can realistically be readied for pricing in a narrow window, but indications lean more constructively for issuers.”
In its weekly report, FHN said a surge in taxable muni volume created some unique buying conditions compared to the corporate equivalents.
“A pricing of $299 million A2/A South Carolina Public Service bonds drew a 10-year yield of +171/ UST as contrasted with A3/NR $500 million Berkshire Hathaway Energy bonds spread +90/UST,” FHN said. “Smaller issues of higher-rated taxable munis also offer attractive spreads to new-issue corporates. King County WA (Aaa/AAA) sold $73 million GOs at auction with the 2030s pricing +82/UST, while Aa3/AA- Proctor and Gamble priced its new 10-year +47/UST.”
As long as refunding needs remain high and taxable bonds are a viable conduit, opportunities should be buyer-favorable, FHN said.
Last Friday was just a typical end-of-the-week session, with no tricks or treats for municipal investors as the market remained quiet ahead of the election, said John Mousseau, president of Cumberland Advisors.
“It was a good time to buy issues in the past few weeks because we know issuers were coming to market to beat the election.” He said this was especially true due to “memories of volatility and the sell-off from four years ago.”
Mousseau noted there were good buying opportunities in recent weeks, however, visible supply has noticeable decreased to $5 billion from $20 billion.
“We will see some reversion to the mean, of course, but this should revert to a sellers market,” he said.
Analysts expect the Federal Open Market Committee to keep rates unchanged this week, but will keep an eye out for what Fed Chair Jeome Powell says at the press conference after the meeting.
“Regardless of who wins the presidency, we expect another sizable fiscal stimulus bill to pass soon after the election,” said Mark Haefele, chief investment officer at UBS Global Wealth Management. "Both monetary and fiscal policy should remain accommodative."
Economists surveyed by IFR Markets expect non-farm payrolls to have risen by 600,000 in October with the unemploiyment rate falling to 7.6% from 7.9% in September
“Though there are no holidays this week, the new-issue calendar certainly looks like a holiday week,” said Peter Franks, Refinitiv MMD senior market analyst. “The week's issuance is below $1 billion and the only major sales will be (Aa3/AA-) $130 million Maine Turnpike tomorrow in the negotiated market and $93 million Charleston County, S.C., Ed selling Thursday in the competitive market. Time will tell if Florida ROW taxable and tax-exempts come off the day-to-day calendar.”
Bofa Securities is expected to price the Maine Turnpike Authority’s (Aa3/AA-/AA-/) $130 million of Series 2020 turnpike revenue bonds on Tuesday.
There are currently three competitive sales from Florida on the day-to-day calendar.
The Florida Department of Transportation has $179.17 million of Series 2020A tax-exempt and $189 million of Series 2020B taxable right-of-way acquisition and bridge construction bonds awaiting sale. The Florida Board of Governors has a $71.8 million sale of Series 2020 tax-exempt dormitory revenue bonds for the Florida International University on the daily slate.
Some notable trades on Monday:
Northeastern Texas ISD 5s of 2023 traded at 0.35%-0.34%. Maryland GOs, 5s of 2024, at 0.31%. New York EFC subs, 5s of 2025, at 0.37%-0.36%. Chesapeake Virgina 5s of 2028 traded at 0.69%-0.68%.
Clark County Washington Evergreen SD #114, 4s. of 2033 traded at 1.51%-1.50% after originally pricing at 1.54%.
NYC TFA subs 5s of 2033 at 1.69%-1.68%.
NYC TFA subs, 5s of 2034 at 1.77%-1.76% after originally pricing at 1.79%.
Arlington Texas ISD 4s of 2045 at 2.05%-1.94%.
Last week, the most traded muni sector was industrial development followed by education and utilities, according to IHS Markit.
On Monday, high-grade municipals were mixed, according to final readings on Refinitiv MMD’s AAA benchmark scale. Short yields in 2021 and 2022 rose one basis point to 0.21% and 0.22%, respectively. The yield on the 10-year muni was up one basis point to 0.94% while the yield on the 30-year was flat at 1.71%
The 10-year muni-to-Treasury ratio was calculated at 110.7% while the 30-year muni-to-Treasury ratio stood at 105.3%, according to MMD
The ICE AAA municipal yield curve showed short maturities were steady in 2021 and 2022 at 0.21% and 0.23%, respectively. The 10-year maturity rose one basis point to 0.93% and the 30-year was unchanged at 1.73%.
The 10-year muni-to-Treasury ratio was calculated at 110% while the 30-year muni-to-Treasury ratio stood at 106%, according to ICE.
The IHS Markit municipal analytics AAA curve showed short yields flat at 0.17% and 0.18% in 2021 and 2022, respectively, with the 10-year unchanged to yield 0.95% and the 30-year steady at 1.72%.
The BVAL AAA curve showed the yield on the 2021 and 2022 maturities unchanged at 0.16% and 0.18%, repectively, while the 10-year was steady at 0.92% and the 30-year flat at 1.73%.
Treasuries were stronger as stock prices traded higher.
The three-month Treasury note was yielding 0.09%, the 10-year Treasury was yielding 0.84% and the 30-year Treasury was yielding 1.62%.
The Dow rose 1.45%, the S&P 500 increased 0.90% and the Nasdaq gained 0.18%.