Municipals hold steady as investors await new issues, congressional action
Municipal yields held steady on Monday as the market awaited deals from Colorado and Seattle on Tuesday.
Market participants are watching economic data and potential future congressional actions. Some sources said municipal buyers, though, are being more cautious as ultra-low moving yields are giving some investors pause ahead of a seasonal slump ahead of August redemptions.
“Both U.S. Treasuries and munis had a strong [last] week as economic concerns took center stage and contributed to a building risk-off sentiment,” said Eric Kazatsky, senior municipal strategist at Bloomberg Intelligence. “This was most visible in long-end Treasuries, as the 30-year rate declined by almost nine basis points week-over-week.”
He said investor concerns last week were focused on the first weekly rise in jobless claims since March and by the upcoming expiration of an additional $600 a week in unemployment benefits just as Congress is working on a new stimulus bill.
“Should the additional unemployment benefit go away or be sharply reduced, the economic ramifications may serve as a further headwind to a speedier recovery,” Kazatsky said.
This complicated economic picture is forcing a less consistent risk-on trade and creating more focus on less risky asset classes, according to FHN Financial Senior Vice President Kim Olsan.
“Municipals are largely looking past current revenue crises knowing that most issuers will take measured responses to address shortfalls,” Olsan said.
“An asterisk is warranted despite fundamentals and technicals pointing in the same direction: If the Senate fails to convene a consensus on a meaningful relief package for states, stressed sectors could react in a larger way and reverse recent spread tightening,” she said. “Add to that the pre-election period that will ensue after Labor Day and create its own volatility for a cautionary approach.”
Volume for the week is estimated at almost $8 billion, with three issuers alone getting ready to offer $3 billion of bonds and notes.
“A fair amount of distraction from new-issue pricings is holding secondary flows to lower daily totals, but with positive price movements,” Olsan said.
“The reinvestment cycle has had a major effect on yield direction this month, with spot levels improving 10 to 18 basis points from the end of June,” she said. “Estimated redemptions in August total $32 billion (Bloomberg data) and should continue to influence yields, especially with taxable munis becoming a growing factor for tax-exempt float.”
On Tuesday, JPMorgan Securities is expected to price the East Baton Rouge Sewerage Commission, La.’s $827.65 million of revenue bonds.
The deals consist of the Louisiana Local Government Environmental Facilities and Community Development Authority’s $176.72 million of Series 2020B tax-exempt subordinate lien multi-modal revenue refunding bonds and $360.435 million of Series 2020A taxable subordinate lien revenue refunding bonds; and the commission’s $290.495 million of Series 2020A tax-exempt and Series 2020B taxable revenue refunding bonds.
In the competitive arena, Colorado is selling over $1 billion of tax and revenue anticipation notes in two offerings this week.
On Tuesday, the state will sell $410 million of Series 2020A education loan program TRANs. It will follow up on Thursday with a sale of $600 million of Series 2020 general fund TRANs.
Stifel is the financial advisor and Sherman & Howard is the bond counsel for the Series 2020TRANs while RBC Capital Markets is the financial advisor and Kutak Rock is the bond counsel for the Series 2020A TRANs.
Also Tuesday, Seattle, Wash., (Aa2/AA//) will competitively sell $202.875 million of municipal light and power improvement revenue bonds.
Piper Sandler is the financial advisor; Stradling Yocca is the bond counsel.
On Wednesday, Morgan Stanley is set to price the California Department of Water Resources’ (Aa1/AAA/NR/NR) $1.097 billion of tax-exempt and taxable water system revenue bonds.
On Thursday, Morgan Stanley is set to price the cities of Dallas and Fort Worth, Texas’ (A1/A/A+/AA) $1.139 billion of Series 2020C taxable joint revenue refunding bonds for Dallas Fort Worth International Airport on Thursday.
Picky investors snub low yields
Now that the early third quarter volume is picking up, the break-neck speed at which yields have recently declined recently is making investors less eager to buy at the higher prices, and more optimistic about holding out for future opportunities, according to Jason Lisec, co-head of fixed income capital markets at HilltopSecurities.
“It’s a lazy summer Monday and not a whole lot going on, even though the market is firm,” he said. “Buyers are facing a smaller calendar this week than the past couple of weeks."
With their June and July 1 cash spent on supply that arrived in early July, many investors are waiting on the sidelines pining away for the next influx of cash on Aug. 1, according to Lisec.
While municipals still present good fundamentals, he said this week’s activity is sort of in limbo.“With today’s flows and activity it’s hard to tell how investors will react this week,” Lisec said.
The lack of a significant new-issue calendar this week is encouraging some investors to purchase ahead of the first of the month, but many are putting purchases off until the arrival of Aug. 1 redemptions.
“There is plenty of secondary inventory” for those that want to spend cash, but the majority of investors are being wary, he said.
“Based on where rates are, we have come so far in such a short period of time that has put customers on the cautious side,” he said. “It’s not as easy now to part with investing dollars as it was in the beginning of July.”
He noted that yields have dipped so low over the course of the last two weeks that an investor has to move out to 15 years to earn a 1.03% yield on triple-A paper.
“At some point, they will be pushed off the sidelines and see opportunities where volume picks up and buyers buy bonds, but there will be fits and starts,” he said.
Many have a case of wishful thinking, that they believe will cure the upcoming typical seasonal slump at the end of August.
“There’s a thought in the back of some customers’ minds of an adjustment for yields to rise and they are hoping they will get a better buying opportunity,” Lisec said.
However, he doesn’t think there is a reason to believe rates will move materially in one way or another.
“You have a lower-rate environment, summer doldrums, and a market that’s advanced probably more than some people are comfortable with,” he said. “Until they get more comfortable, we will see this cautious attitude going forward.”
Some notable trades Monday:
New York City TFAs, 5s of 2021, traded at 0.18%-0.17%. San Antonio, Texas ISD, 5s of 2023 were at 0.21%.
Montgomergy County, Maryland GOs, 5s of 2027 traded at 0.53%-0.52%. Dallas ISD 5s of 2029 were at 0.76% after originally yielding 0.79% last week as Texas paper continues to trade up.
Maryalnd GOs, 5s of 2032 traded at 0.85%, originally yielding 0.91%.
Fort Worth, Texas ISD 3s of 2036 traded at 1.43%-1.42%, original yield at 1.57%.
Washington GO 5s of 37 traded at 1.26%, original 1.34%
New York City TFAs out longer, 4s of 2037, traded at 1.73%-1.70%. Humble, Texas ISD 2.5s of 2049 traded at 2.10%-2.00.
Last week, the most traded muni sector was education bonds, followed by industrial development and other uses.
Municipals were steady all along the curve on Monday, according to readings on Refinitiv MMD’s AAA benchmark scale.
MMD reported yields on the 2021 and 2023 GO munis were unchanged at 0.13% and 0.15%, respectively. The yield on the 10-year GO muni was flat at 0.72% while the 30-year yield was steady at 1.43%.
The 10-year muni-to-Treasury ratio was calculated at 116.4x% while the 30-year muni-to-Treasury ratio stood at 114.1%, according to MMD.
The ICE AAA municipal yield curve showed short yields flat at 0.120% in 2021 and 0.125% in 2022. The 10-year maturity was unchanged at 0.683% and the 30-year was steady at 1.450%.
ICE reported the 10-year muni-to-Treasury ratio stood at 120% while the 30-year ratio was at 114%.
The IHS Markit municipal analytics AAA curve showed the 2021 maturity yielding 0.13% and the 2022 maturity at 0.16% while the 10-year muni was at 0.70% and the 30-year stood at 1.43%.
The BVAL AAA curve showed the 2021 maturity yielding 0.10% and the 2022 maturity at 0.13% while the 10-year muni was at 0.68% and the 30-year stood at 1.44%.
Munis were little changed on the MBIS benchmark and AAA scales.
Treasuries were weaker as stock prices traded up.
The three-month Treasury note was yielding 0.109%, the 10-year Treasury was yielding 0.605% and the 30-year Treasury was yielding 1.251%.
The Dow rose 0.17%, the S&P 500 increased 0.55% and the Nasdaq gained 1.42%.