Municipals rally to start the month ahead of large taxable slate in primary

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The municipal market rallied Friday with high-grades leading the trading early on and AAA benchmark yields falling 10 to 11 basis points across the curve.

Municipal to U.S. Treasury ratios dropped dramatically on the 10-year.

The MMD muni to taxable ratio was 210.0% on the 10-year and 168.5% on the 30-year. Thursday, the MMD muni to taxable ratio was 235.5% on the 10-year and 179.5% on the 30-year.

The ICE muni to taxable ratio on the 10-year was 229% and the 30-year was 165%. Yesterday the 10-year was 2.68% and the 30-year was 1.78%.

Traders noted that buyers seem to be returning, banking on the Fed’s Municipal Liquidity Facility making its way through the market. High-grade trading, especially on the short and intermediate parts of the market, fared better Friday.

However, high-yield is still getting “pummeled” and that any new-issues coming to market will need to have enough credit clout to price at favorable levels for the issuers themselves or for investors to purchase.

After a few days in which it seemed the market was settling into steady, some traders were caught off guard by the large Friday rally.

“We did hear that May coupon payments hitting offered some buyers some bidding power and that relative value is playing a part—especially on the short end where AAA/pres can be bought at multiples to USTs,” a Pennsylvania trader said, adding there was some corporate crossover inquiry in the space doing just that.

"Some adjustment today with the MMD curve getting bumped and supply has been manageable and starts to pick up a bit next week," a New York trader said. "Led by $1 billion Penn State deal, I doubt it would be enough to weaken market but enough to pause it at the tighter levels."

Secondary trading pointed to Maryland GOs in 2023 with 5% coupon yielding 0.94%-0.92%. Texas GOs, 5s of 2024, 1.00%-0.98%. San Antonio Texas GOs, 5s of 2025 at 1.22%-1.21%. Columbus Ohio GOs, 5s of 2026 at 1.28%-1.21%.

Fairfax County, VA GOs 4.5s of 2027 yielded 1.31%-1.30%. Yesterday they yielded 1.37%.

Harvards, 5s of 2028, yielded 1.31%-1.29%.

King County, Washington School District #414 5s of 2028 traded at 2.73%.

In the primary for the week of May 4, the largest negotiated deal scheduled is a more than $1 billion of Pennsylvania State University (Aa1/AA//) taxable bonds with serials from 2021-2035 and terms in 2043 and 2050. It also has $61 million of exempts scheduled for Tuesday. Lead book-runner on the deals is Barclays Capital.

The Great Lakes Water Authority is back on the day-to-day calendar with $715 million of sewage disposal system revenue refunding bonds in two series, both taxable, the first $548 million of seniors rated A1/AA-/A+ and the second liens rated A2/A+/A. Citi is set to price the deal.

The New York Metropolitan Transportation Authority also has plans to issue $672 million-plus climate bonds initiative deal that was postponed this week is back on the calendar. It also has $250 million of manatory tender bonds on the calendar. Jefferies is set to laed the deals. Many analysts said it will be telling what rates the MTA can get given the massive revenue shortfalls it faces because of the lack of ridership due to coronavirus.

In the competitive space, Illinois plans to test investor appetite with $1.2 billion of one-year cash flow certificates on Wednesday to help cover delayed income tax payments just after an audit released Thursday shows deep tax revenue losses in 2019 and even more expected in 2020 and 2021.

Meanwhile, looking back at the month of April and performance, taxable munis hold the distinction as being the largest positive sector year-to-date, up 2.81%, said Kim Olsan, senior vice president at FHN Financial. Supply has made up 23% of all volume, and while spreads widened out in March, a rebound in April occurred as value buyers took advantage of outsized spreads. The indicative 10-year AA taxable spread is now +150/10-year UST vs. +185 at the end of March.

"Taxable munis are cheap versus corporate investment-grade, so they’ve had a firm bid lately," said one New York taxable trader. "A long way back from the liquidation levels we were seeing back a month ago at the worst."

He added that on the other hand, taxables are starting to look tight/expensive to tax-exempts.

Meanwhile, the biggest loser was high-yield which was pummeled in April, losing 3.37% on reactions of heightened concern around project revenue outlooks and potential defaults, Olsan said.

The sector is down 10% on the year and will likely see ongoing pressure.

Although April’s yield moves were less volatile than March’s, there was still a wide trading range of 70 basis points in intermediate and long durations, Olsan said.

“It would have been difficult to beat the 200 basis-point swings of the prior month, but there were a few constructive developments that did occur,” she said. “After becoming severely dislocated into the end of March, generic yields became overbought mid-month and spent the last 10 sessions or so re-correcting.”

That adjustment brought more buyers back into fray, where a 2% yield-to-worst offers a 21% bracket buyer a tax-exempt yield over 2.50% and an individual 35% federal/5% state tax buyer a tax-exempt yield near 3.50%.

Still, Olsan noted the broader market lost 1.26%, the largest decline in April since 2004. On a year-to-date basis, the 1.88% loss represents the weakest start to the year since 2008.

Durations favored short bonds, the only major sector to post a gain in April (up 0.23%). Yields have responded in a big way to the Municipal Liquidity Facility—1-year AAAs are down 32 basis points from the end of March and the 7-day SIFMA rate has fallen from 1.83% to 0.22% in that timeframe, Olsan said.

Further out the curve the results aren’t so positive—intermediate bonds lost 1.02% and the end of the curve gave up 2.64%, she said.

“The result is a significant curve shift, steeper by 55 basis points in the last month,” Olsan said. The 15-year/10-year slope is 40 basis points (out from 25 basis points) and the 30-year/10-year slope is 82 basis points (up from 66 basis points).

Secondary market data
Munis were stronger on the MBIS benchmark scale Friday, with yields falling by seven basis points in the 10-year maturity and by one basis point in the 30-year maturities. On the MBIS AAA scale, munis were mixed with yields decreasing by six basis points in the 10-year maturity and increasing by three basis points in the 30-year maturity.

On Refinitiv Municipal Market Data’s AAA benchmark scale, the yield on the 10-year muni 11 basis points lower to 1.35% and the 30-year decreased 12 basis points to 2.16%.

On the ICE muni yield curve late in the day, the 10-year yield fell 11 basis points to 1.35% while the 30-year was lower by 11 basis points to 2.17%.

BVAL saw the 10-year decreased eight basis points to 1.36% and the 30-year fell nine basis points to 2.27%.

The IHS muni curve saw the 10-year fell to 1.36% and the 30-year decreased to 2.19%.

Stocks were in the red as Treasuries were mixed.

The Dow Jones Industrial Average fell 2.47%, the S&P 500 index decreased 2.81% and the Nasdaq was down 3.06%.

The three-month Treasury was yielding 0.109%, the Treasury two-year was yielding 0.196%, the five-year was yielding 0.348%, the 10-year was yielding 0.628% and the 30-year was yielding 1.268%.

Lipper reports billion-dollar outflows
Investors pulled cash out of the municipal market after two consecutive weeks of modest inflows.

In the week ended April 29, weekly reporting tax-exempt mutual funds saw $1.255 billion of outflows, after inflows of $73.844 million in the previous week, according to data released by Refinitiv Lipper late on Thursday.

Exchange-traded muni funds reported outflows of $259.315 million, after inflows of $32.169 million in the previous week. Ex-ETFs, muni funds saw outflows of $996.447 million after inflows of $106.014 million in the prior week.

The four-week moving average was negative still at $663.721 million, after being in the red at $537.077 3.975 billion in the previous week.

Long-term muni bond funds had outflows of $1.323 billion in the latest week after outflows of $123.137 million in the previous week. Intermediate-term funds had outflows of $36.397 million after outflows of $43.059 million in the prior week.

National funds had outflows of $982.938 million after inflows of $167.068 million while high-yield muni funds reported outflows of $790.359 million in the latest week, after outflows of $318.769 million the previous week.

Bond Buyer indexes jump
The weekly average yield to maturity of the Bond Buyer Municipal Bond Index, which is based on 40 long-term bond prices, gained 12 basis points to 3.89% from 3.77% the week before.

The Bond Buyer's 20-bond GO Index of 20-year general obligation yields rose 20 basis points up to 2.56% from 2.36% the week before.

The 11-bond GO Index of higher-grade 11-year GOs increased 20 basis points to 2.09% from 1.89% the prior week.

The Bond Buyer's Revenue Bond Index jumped 12 basis points to 2.98% from 2.86% from the previous week.

The yield on the U.S. Treasury's 10-year note increased to 0.64% from 0.60% the week before, while the yield on the 30-year Treasury was higher to 1.28% from 1.19%

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