Municipal market steadies as it enters new normal

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Yields in the municipal market declined slightly Monday as new-issue market showed some signs of activity.

Municipal credit is beginning to emerge as more of an investing consideration as the market deals with the coronavirus-led selloff and subsequent Fed-led rebound.

These moves are starting to make participants pick winners and losers from a credit perspective as they look at the underlying worthiness of municipalities after an extended period of significantly low rates and a supply/demand imbalance.

For now, the market is settling into a new normal, though caution still pervades.

“Coming up on the end of a remarkable month for the market, the tone has become more measured,” said Kim Olsan, senior vice president at FHN Financial.

Generic yields are currently at their levels from about two weeks ago from reads across the secondary.

Refinitiv Municipal Market Data’s AAA benchmark scale was 1.24% and 30-year at 1.84%. The ICE muni yield curve 10-year yield was down one basis point to 1.24%, while the 30-year was unchanged at 1.82%. BVAL 10-year was at 1.39% and no change in the 30-year at 1.95%.

Olsan noted that at the height of the selloff there was heavy volume generated from depositories and taxable fixed income buyers, as historical relative value ratios and taxable equivalent yields moved to exaggerated levels.

“A more normalized yield curve has returned the focus to traditional sector buyers, where fundamentals such as reinvestment flows and supply conditions are relevant,” she said.

“We will be beginning this week with much lower rates, close to those we saw in the middle of the week of March 9 and we expect that if investor demand continues to be strong, we could see more primary market issuance,” said Tom Kozlik, head of municipal strategy & credit at Hilltop Securities. “However, we are not yet to the point where we would say liquidity is repaired and a stable market has reappeared.”

He noted that the primary market this week is seeing a calendar of about $1.9 billion and see about $9 billion of issuance on the calendar listed as day-to-day status.

“We have started to see over the last several days issuers releasing disclosure statements related to COVID-19 on EMMA, and we have seen some marketing documents add disclosure language. This process could slow issuance potentially,” he said.

Bloomberg data indicate $19 billion of bonds are scheduled for call or maturity in the next 30 days, against $27 billion in expected supply.

“Some issuance will likely have to wait for better distribution channels and calmer conditions, i.e. nonrated and low-rated credits,” Olsan said.

However, in a “promising sign” of issuance reengaging, AAA-rated New York Environmentals were priced at the end of the week at stable spreads — the 5-year at -13/AAA and 10-year at -7/AAA, Olsan noted.

As the market watches how the stimulus package unfolds, some participants questioned whether it would be enough and some expect more will be done.

"The Coronavirus Aid, Relief, and Economic Stabilization (CARES) Act agreement is Washington’s third phase of COVID-19 stimulus and it is a very good step in the right direction," Kozlik said. "But, there are already questions considering if this is going to be the last phase. Those questions make sense at this point because of the uncertainty about what we may be in store for in coming weeks and months."

The CARES Act’s $2 trillion price tag is more than double the $831 billion Congress approved for the American Recovery and Reinvestment Act of 2009. The CARES Act is receiving some criticism for its lack of enormity, despite its record cost, according to Kozlik.

“We think the municipal market-specific provisions should help correct the market dislocation,” he said. “But, the targeted relief for state and local government and other municipal entities’ budget-related provisions really falls short of what is likely to be required under the current circumstances.”

Meanwhile, as the short-end of the market recovers from the disruption over the past month, the Municipal Securities Rulemaking Board Monday updated its daily analysis of trade activity to include trades of all types of variable rate securities, including variable rate demand obligations and auction rate securities.

As credit increasingly becomes more of a concern, Lumesis said it has launched a free service that makes available a consolidated list of all continuing disclosure filings made to the MSRB that relate to the COVID-19 pandemic, along with a link to each filing. It is available on the Lumesis website and will be updated three times each business day.

Gregg Bienstock, CEO of Lumesis, said that the firm is offering this service "to assist all market participants to efficiently identify and access COVID-19 related filings made to EMMA.”

The firm noted that identifying these types of filings “can be time-consuming" but by "leveraging our obligor-based database, technological know-how and outstanding team, we are able to provide the market a service that efficiently aggregates and presents important information shared by issuers for use in client communication, research or other needs," Lumesis President Tim Stevens said.

Secondary market

Munis were stronger Monday on the MBIS benchmark scale, with yields falling by one basis point in both the 10-year and 30-year maturity.

High-grades were also weaker, with yields on MBIS' AAA scale increasing by two basis points in the 10-year maturity.

Muni yields fell on Refinitiv Municipal Market Data’s AAA benchmark scale, as the yield on the 10-year was two basis points lower to 1.24% and 30-year muni GO was unchanged at 1.84%.

BVAL saw the one-year yield fall by two basis points as of publication, the 10-year was one basis point lower to 1.39% and no change in the 30-year to 1.95%.

On the ICE muni yield curve late in the day, the 10-year yield was down one basis point to 1.24%, while the 30-year was unchanged at 1.82%.

“With the recent volatility across markets because of concerns for the spread of COVID-19, we’ve seen unprecedented pressures on the fixed income markets,” Lynn Martin, president of ICE Data Services, said. “The actions announced by the Federal Reserve last week have already had an important impact on municipal bonds, with yields strengthening early in the week, and [last week] being one of the biggest rallies for munis on record.”

Martin said the market was up and functioning as designed.

“While our markets and data operations are seeing record levels of volatility and activity, they continue to operate and function as they were designed,” Martin said. “We have also tightened surveillance of the markets that have been most negatively impacted by COVID-19, such as toll roads, airports and stadiums, among others, and we’re working with customers to ensure they have the data, insights, analytics and trading tools that they need to manage risk and access our global markets.”

The 10-year muni-to-Treasury ratio was calculated at 127.9% while the 30-year muni-to-Treasury ratio stood at 110.3%, according to MMD.

“M/T Ratios were at highs that even dwarfed those seen during the 2008 Financial Crisis, at the end of last year, the 10 year M/T Ratio back down to a still very attractive 165% from Monday’s 370%,” said Kozlik. “We have seen a similar trend on the short- and long-term parts of the yield curve as well. The 2 year M/T Ratio fell to 413% (Thursday) from 857% (Monday), and the 30 year M/T Ratio fell to 139% (Thursday) from 251% (Monday).”

Stocks were positive on Monday and Treasury yields were mixed.

The Dow Jones Industrial Average was up about 2.63%, the S&P 500 index was higher by 2.95% and the Nasdaq gained roughly 3.15% late in the session on Monday.

The three-month Treasury was yielding 0.069%, the Treasury two-year was yielding 0.238%, the five-year was yielding 0.385%, the 10-year was yielding 0.662% and the 30-year was yielding 1.296%.

Primary market

Upcoming volume includes a few major competitive sales and a handful of negotiated deals scheduled this week with many others still on a day-to-day status. Oregon’s Portland School District No. 1J has $441 million planned for Thursday while Milwaukee, Wisconsin has two competitive deals on the calendar for Thursday worth $280 million

Citi priced Forsyth County School District, Georgia’s (Aaa/AAA/NR/NR) $147.5 million of general obligation bonds on Monday.

“Against a backdrop of outflows from fixed income mutual funds, the performance of the markets in the face of so much supply is a testament to the improvement in sentiment among investors who now seem willing to put to work any dry-powder they have kept in reserve,” said Jason Shoup, head of global credit strategy at Legal & General Investment Management America. “The Fed’s actions to improve dollar funding conditions are also beginning to translate into more foreign buying of U.S. investment grade with large overnight buying throughout the week. In contrast, the news on the spread of the virus continues to be mixed.”

He added that economically, they think there’s a high likelihood that second quarter GDP annualized declines by 25% to 40% in the U.S. and the unemployment rate spikes to 8% and 12%.

Chip Barnett contributed to this report.

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