Municipals enter 'equilibrium' to start July reinvestment

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Although the municipal market was mostly in holiday mode on Wednesday, the arrival of significant July 1 coupons and redemption payments brought with it an increased need for municipal paper and continued focus on the primary market with taxables leading the way.

Yields were steady on AAA benchmarks and few deals priced, including a $1.1 billion Port Authority of New York and New Jersey taxable consolidated notes.

Citigroup priced the Aa3/A+/AA-/NR-rated $1.1 billion of taxable Series AAA consolidated notes, due July 1, 2023, which were priced at par to yield 1.086%, about 90 basis points over the comparable Treasury security.

New deals have all had a strong demand component. “There’s definitely not enough tax-exempt supply to support the demand,” a New York trader said.

First half data revealed that taxables have returned 7% year to date, while high-yield has gained 3.96% and pulled back some earlier losses, ending 1H20 down just 2.64%.

Of the $45 billion in volume for June, $16 billion, or 35%, represented taxable supply, the trader noted.

“Taxables definitely performed better just because there’s been more focus on the primary,” he noted. “Munis are a good place to be.”

More inflows were reported with ICI seeing nearly $2 billion coming into municipal bond mutual funds.

Meanwhile, New York State and City are planning $5 billion of issuance in the third quarter with

“The tone continues to be very firm and we are in a great place after a record issuance month in June,” a New York trader said.

“I think people are trying to figure out what supply will be like in July there is plenty of money around looking to be put to work,” he added.

Meanwhile, clearly several valuation components of the capital markets, including stocks and the municipal bond credit curve, have experienced an impressive rally that under normal circumstances might suggest the potential for a substantial economic rebound in coming months and quarters, said George Friedlander, veteran municipal strategist.

“In munis specifically, a part of the reason for the well-supported market is a relative shortage of tax-exempt supply during June, which is part of the heavy bond call/maturity period that runs from June 1 to August 1. Tax-exempt issuance in June was down 9.3%, while taxable issuance was up a whopping 697%.”

Friedlander said that while total issuance was up 23% in June, it “is an illusion, given the drop in tax-exempts.” Friedlander is more bearish on the market going into the third quarter.

“In light of severely expanding risks related to the Covod-19 pandemic, continuing strength in the muni market remains unlikely,” Friedlander said. “I remain extremely concerned about state and local government credit strength and bond marketability specifically, as pressures on state and local governments and related enterprises remain severe, and well-justified fiscal support from the federal government remains questionable in light of ongoing Senate-side reticence.”

The New York trader had a different take. The virtually unchanged levels on yields tracked by benchmarks over the last month should now reflect the market’s improvements.

“The market has reached a point of equilibrium,” he said. “I don’t know what would push rates lower, unless we don’t get any supply through July and August.”

The trader said the performance for the last three months was “rocky” with all the volatility surrounding COVID-19, but said the taxable and high-yield performance “definitely supports fixed income.”

Overall, he said the municipal market is performing well, despite a liquidity crunch this week.

“We have employment coming out tomorrow and it’s an early close so liquidity is starting to dry up,” the trader said of Thursday’s expected climate.

“We are in a holiday mode right now — we’re seeing deals ticketed and the secondary has slowed down dramatically,” he said. “Things will get quieter here [Wednesday] afternoon and going into tomorrow. It’s a short day and not much going on with the early close.”

Secondary market
Some notable trades:

Washington GOs, 5s of 2021 traded at 0.22%-0.18%. Baltimore Country, Maryland GOs, 5s of 2026, 0.58%-0.57%. Utah GOs, 5s of 27, at 0.67%-0.66%. Connecticut Health and Educational Facilities Yale revs, 5s of 2029 at 0.82%.

The 10-year showed Prince Georges County, Maryland GOs 5s yielding 0.96%-0.95%. Harvard 5s of 2030 traded at 0.89%-0.88%.

Greensboro North Carolina GO 4s of 2033 traded at 1.28%. Lewisville Texas ISD 4s of 2035 traded at 1.47%. San Francisco BART green bonds, 3s of 2036, at 1.79%-1.8%.

Dallas waters 5s fo 2038 at 1.51%-1.50%. Arlington Texas Great heart 4s of 2045 at 2.08%.

Out long, Lamar Texas ISD 4s of 2047 traded at 1.83%-1.82% while Fort Lauderdale, Florida police and public safety revs, 3s of 2049, yielded 2.26%-2.21%.

Readings on MMD’s AAA benchmark scale were unchanged. Yields on the 2021 and 2023 maturities were steady at 0.25% and 0.27%, respectively.

The yield on the 10-year GO muni was flat at 0.90% while the 30-year yield was steady at 1.63%.

The 10-year muni-to-Treasury ratio was calculated at 131.6% while the 30-year muni-to-Treasury ratio stood at 113.7%, according to MMD.

The ICE AAA municipal yield curve showed short yields steady at 0.220% and 0.232% in 2021 and 2022, respectively. Out longer, the 10-year maturity was at 0.852% while the 30-year was at 1.649%.

ICE reported the 10-year muni-to-Treasury ratio stood at 133% while the 30-year ratio was at 113%.

The IHS Markit municipal analytics AAA curve showed the 2021 maturity yielding 0.27% and the 2022 maturity at 0.30% while the 10-year muni was at 0.91% and the 30-year stood at 1.66%.

The BVAL curve showed the 2021 maturity flat at 0.19% and the 2022 unchanged at 0.24%. BVAL calculated the 10-year muni unchanged at 0.84% while the 30-year was also unchanged at 1.65%.

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

Treasuries were weaker as stocks traded mixed.

The three-month Treasury note was yielding 0.150%, the 10-year Treasury was yielding 0.687% and the 30-year Treasury was yielding 1.432%.

The Dow slipped 0.05%, the S&P 500 increased 0.58% and the Nasdaq gained 0.92%.

NYS projects $5.1B bond sales in Q3
New York State, New York City and their authorities are expected to sell $5.06 billion of bonds in the third quarter, state Comptroller Thomas DiNapoli said Wednesday.

The planned sales include $3.48 billion of new money and $1.58 billion of refundings.

The Dormitory Authority of the State of New York, Empire State Development, the New York State Housing Finance Agency, the Metropolitan Transportation Authority and the Port Authority of New York & New Jersey are all expected to issue bonds in the third quarter.

For July, $4.71 billion is scheduled, of which $3.48 billion is for new money and $1.32 billion for refunding purposes; $350 million is scheduled for August, all of which is for refunding purposes; and there are no planned sales for September.

ICI: Muni bond funds see $2.9B inflow
Long-term municipal bond funds and exchange-traded funds saw combined inflows of $2.923 billion in the week ended June 17, the Investment Company Institute reported Wednesday.

It marked the eighth week in a row the funds saw inflows. In the previous week, muni funds saw inflows of $2.942 billion, ICI said.

Long-term muni funds alone had an inflow of $2.610 billion in the latest reporting week after an inflow of $2.426 billion in the prior week.

ETF muni funds alone saw an inflow of $313 million after an inflow of $516 million in the prior week.

Taxable bond funds saw combined inflows of $22.183 billion in the latest reporting week after inflows of $16.026 billion in the prior week.

ICI said the total combined estimated inflows from all long-term mutual funds and ETFs were $7.626 billion after inflows of $8.014 billion in the previous week.

Lynne Funk contributed to this report.

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Coronavirus Primary bond market Secondary bond market Port Authority of New York & New Jersey Investment Company Institute