With a single basis point bump in yields across the municipal curve on Friday, the market readied for the new-issue calendar with the expected arrival of a $1 billion Texas Municipal Gas deal, several taxable and transportation deals, and a $260 million competitive deal from gilt-edged Fairfax County, Virginia.
A "perpetual calm" continued to fall over the municipal market on Friday as “relentless" inflows into municipal funds, combined with the shortage of traditional tax-exempt supply appears to be directing most aspects of daily market activity, according to Jon Law, vice president and portfolio manager at Advisors Asset Management.
The tone was similar to that of the trend of late, he said.
"The market has been absolutely resilient over the last two months, practically unfazed by this current reflation trade that’s been affecting most other financial markets and also responsible for the sizable backup in Treasury yields,” he said.
The fact that municipal benchmark yields are practically unchanged from their 2020 year-end levels — offset by rising Treasuries yields not seen in quite some time — is a testament to the strong grip the demand-supply imbalance has on the market, Law said.
"It’s also been undoubtedly responsible for these astonishingly low muni-to-Treasury ratios,” he said.
Municipals as a percentage of Treasuries were at 70% in 10 years and 77% in 30 years on Monday, according to Refinitiv MMD. Ratios were at 69% in 10 years and 79% in 30, according to ICE Data Services.
At the same time, that isn’t deterring investors’ interest, according to Law.
“We’re now at 11 consecutive weeks of inflows so lower ratios don’t seem to be having much of an impact discouraging traditional tax-exempt investors from adding more money, much less pulling their money out of the asset class,” he said.
As long as taxable issuance continues to eat into traditional tax-exempt supply like it has been so far this month and most of 2020, Law said, the current low-volatility market and steady conditions are likely to persist.
"Municipalities still do not have the ability to advance refund existing debt via tax-exempt financing and many continue to see the appeal of taxable deals being subject to less legal restrictions than the traditional tax-exempt route,” he said.
As of January 20, tax-exempt municipals have returned 0.10%. They have been outperforming both Treasuries (returning negative 0.96%) and corporates (returning negative 0.90%) by 100 basis points or more on a month-to-date basis, according to Law.
"Perhaps this outperformance was because munis lagged both of those taxable asset classes for most of 2020,” he said. "I don’t think it’s a complete stretch to suggest that the current market is a fairly valued market, at least more so than at any time post-COVID.”
Given that scenario, Law said, there are still areas of opportunity for investors to find value in the current market.
Besides venturing further along a gradually steepening municipal curve, he suggested, credit selection still provides sufficient opportunities for investors to pick up yields at levels significantly higher than benchmarks.
"Although the gap has significantly narrowed and credit spreads have dramatically tightened in recent months, bifurcation across various states and sectors of the market remains,” he said.
Given the constraints on supply currently — and expectations of future scarcity — Law believes the market has behaved as advertised so far in the first quarter.
"Unless something comes out of left field, I would expect tax-exempt yields to continue to trade within a tight range and the market to remain insulated from Treasury market volatility for the remainder of the quarter,” he said.
"Looking out a little further, the fact that Democrats have control — albeit slim — of all three branches of government is probably one of the better long-term scenarios for municipals,” he said. "Not only do states and local governments have a better shot of receiving additional fiscal aid to help fight this pandemic, the demand for municipals would be even greater than what it is now if higher taxes come into the picture.”
Primary market to come
BofA Securities is set to price $1.09 billion of gas supply revenue refunding bonds for the Texas Municipal Gas Acquisition and Supply Corp. (A3/BBB+//).
Barclays Capital Inc. is set to price $664.3 million of Los Angeles International Airport revenue refunding bonds for the Department of Airports of the City of Los Angeles (Aa3/A+/AA-/). Series A, $420 million, is serials from 2025-2041, terms 2046 and 2051. Series B, $244 million is serials 2025-2041, terms 2046 and 2048. Barclays will also price $95 million of subordinate taxable revenue refunding bonds for the issuer on Wednesday. Serials 2025-2036.
J.P. Morgan Securities LLC is set to price $560 million of unlimited tax general obligation and refunding GOs for the Board of Education of the City of Chicago (NR/BB-/BB/BBB-/).
Goldman Sachs & Co. LLC is set to price $398.7 million of taxable senior- and junior-lien toll road refunding revenue bonds for the Foothill/Eastern Transportation Corridor Agency, (Baa2//BBB/). The senior-lien Series 2021B, $244.9 million, is rated Baa2/A-/BBB/). Series 2021D junior-lien $153.8 million is rated Baa2/BBB+/BBB-/). The deal is set for Tuesday.
UBS Financial Services Inc. is set to price $319 million of taxable general obligation refunding bonds for the Metropolitan Government of Nashville and Davidson County, Tennessee, (Aa2/AA//) on Tuesday. Serials 2021-2027, 2031-2032.
UBS is also set to price $131.9 million of tax-exempt general obligation refunding bonds for the issuer on Tuesday. Serials 2021-2026.
J.P. Morgan Securities LLC is set to price $275 million of Yale University revenue bonds for the Connecticut Health and Educational Facilities Authority (Aaa/AAA/NR/NR) on Thursday.
Fairfax County, Virginia, (Aaa/AAA/AAA/) is set to sell $263 million of unlimited tax general obligation bonds at 10:45 a.m. Tuesday. Serials 2021-2040.
Jefferies LLC is set to price $175 million of taxable limited tax refunding bonds for Williamson County, Texas (NR/AAA/AAA/NR). Serials 2022-2033.
Raymond James & Associates, Inc. is set to price $151.9 million of electric system revenue bonds for the Metropolitan Government of Nashville and Davidson County, Tennessee, (/AA/AA+/) on Tuesday. Serials 2022-2041, term 2046.
Citigroup Global Markets Inc. is set to price $140.9 million of turnpike revenue bonds for the Ohio Turnpike and Infrastructure Commission (Aa2/AA-/AA/) on Tuesday. Terms in 2046, 2051.
J.P. Morgan Securities LLC is set to price $135 million of taxable corporate CUSIP bonds for The Nature Conservancy, D.C. (Aa2///) on Wednesday.
Stifel, Nicolaus & Company, Inc. is set to price $111 million of Galveston and Brazoria Counties, Texas unlimited tax school building bonds for the Friendswood Independent School District (Aaa/AAA//) (PSF insured) on Thursday. Serials 2022-2051.
Jefferies LLC is set to price $105 million of Stoneridge Apartments essential housing revenue bonds for the California Community Housing Agency on Tuesday. Terms in 2056.
Knoxville, Tennessee, (/AA+//) will competitively sell $104 million of unlimited tax GOs at 10 a.m. Tuesday. Serials 2022-2041.
Secondary market
High-grade municipals fell one basis point across the curve, according to final readings on Refinitiv MMD’s AAA benchmark scale. Short yields were at 0.11% in 2022 and 0.12% in 2023. The 10-year fell to 0.75% and the 30-year sat at 1.44%.
The ICE AAA municipal yield curve showed short maturities at 0.12% in 2022 and 0.14% in 2023. The 10-year fell a basis point to 0.75% while the 30-year yield stayed at 1.47%.
The IHS Markit municipal analytics AAA curve showed yields fall a basis point at 0.13% in 2022 and 0.14% in 2023 while the 10-year fell one basis point to 0.74% and the 30-year yield at 1.43%, also one lower.
The Bloomberg BVAL AAA curve showed yields at 0.12% in 2022 and 0.13% in 2023, down one basis point, while the 10-year stayed at 0.74% and the 30-year yield at 1.47%, was one basis point lower.
The three-month Treasury note was yielding 0.09%, the 10-year Treasury was yielding 1.09% and the 30-year Treasury was yielding 1.85%, two basis points lower. The Dow fell 114 points, the S&P 500 fell 0.10% and the Nasdaq rose 0.20%.
Economic indicators
In the only economic data released on Friday, existing home sales grew 0.7% in December to a seasonally adjusted annual rate of 6.76 million from 6.71 million in November.
Economists polled by IFR Markets expected 6.54 million sales.
Sales were 22.2% better than the 5.53 million recorded in December 2019, the National Association of Realtors said.
“Home sales rose in December, and for 2020 as a whole, we saw sales perform at their highest levels since 2006, despite the pandemic,” said Lawrence Yun, NAR’s chief economist. “What’s even better is that this momentum is likely to carry into the new year, with more buyers expected to enter the market.”
While low mortgage rates helped fuel sales, the number of homes for sale fell to 1.07 million, just a 1.9 month supply, NAR said, “both historic lows.”
“Although mortgage finance costs will rise gradually this year and next as the economy kicks into greater gear,” Brent Campbell, economist at Moody’s Analytics said, “homebuyers will still benefit from locking in mortgage rates well below the historical average.”
Lynne Funk and Gary Siegel contributed to this report.
