Heavy fund inflows, reduced tax-exempt float should hold levels steady
The municipal market has been on a tear in terms of the fundamentals and technicals that are driving the market and there isn’t much in the near-term likely to stymie the tone.
Kim Olsan, senior vice president of municipal bond trading at FHN Financial, said that the combination of heavy fund inflows (both Lipper and ICI continue to report more than $1 billion weekly flows) and reduced tax-exempt float should at minimum hold levels steady into February.
“Although munis have lagged the U.S. Treasury rally that has only had the effect of moderating ultra-rich relative values,” she wrote in a report Monday. “After reaching an all-time yield low in the 10-year AAA, the market is pausing to assess where yields have settled.”
She noted that Intermediate- and long-dated bonds may find "piercing resistance levels an upward climb, if for no other reason than where both absolute yields and relative value ratios stand."
“A retracement of 20 basis points from current levels would put both the 10-year AAA closer to its six-month average of 1.41% and the 30-year spot back towards its 2.04% average over the same period,” Olsan said.
She also added that the interplay between equity and bond markets shows the advantage that has accrued to the risk-off theme.
“Current returns in munis are 1.77%, more than 100 basis points ahead of the S&P’s gains for the month. That contrasts with last year when the S&P 500 earned 7.8% but munis trailed well behind with just a 0.75% gain.”
IHS Ipreo estimates the week’s volume at $7.06 billion in a calendar composed of $5.80 billion of negotiated deals and $1.26 billion of competitive sales.
The primary market was quiet on Monday, as the issuance flow will pick up each day as the busiest day looks like Wednesday. No surprise, but taxables are leading the way again.
“One component to the market’s strength is the growing share of taxable volume — a condition that cannot be overstated for both its effect on overall float and the impact on tax-exempt yields,” Olsan said.
She added that over the last 6 months, taxable municipals have grown steadily as a percentage of total issuance.
"In August 2019, Bloomberg data show the sector accounted for 25% of all supply, grew to 30% in October and reached 39% in December. January’s volume will likely close out around 30%," she said.
One New York trader agreed, concluding that a lot of people were missing that important point.
"A lot of people say yeah, taxables are here to stay," the trader said. "But no one is talking about taxable issuance and how its overall percentage of issuance is gradually growing."
Barclays is expected to price Pennsylvania State University’s (Aa1/AA/ / ) $410.475 million of bonds on Tuesday.
JPMorgan is slated to price the Reedy Creek Improvement District, Fla.’s (Aa3/AA-AA-/NR) $337 million of Series 2020A taxable ad valorem tax refunding bonds on Tuesday. Disney World is the major property owner in the district.
Citi is scheduled to price Berks County Municipal Authority, Pennsylvania’s (NR/BBB+/BBB/NR) $267.06 million of revenue bonds for Tower Health Project on Tuesday.
Topping the week’s slate is the California State University’s (Aa1/AA-/NR/NR) $813 million of Series 2020B taxable systemwide revenue bonds. BofA Securities is set to price the revenue bond deal on Wednesday. Proceeds will be used to improve school facilities and to refund some debt for savings.
Raymond James & Associates is expected to price the New York City Municipal Water Finance Authority’s (Aa1/AA+/AA+/NR) $465 million of Fiscal 2020 Series DD water and sewer second general resolution revenue bonds on Wednesday. Proceeds will be used to fund capital projects and refund certain outstanding bonds for savings.
“Expected new issue supply is up 9% from the week before and includes more than a dozen loans of $100 million or more from a diverse group of issuers that is likely to attract strong interest,” said Patrick Luby, senior municipal strategist at CreditSights. “The calendar includes $2.6 billion in taxable bonds, an increase of 50% over last week's actual volume of $1.7 billion.”
NYU Langone bonds trade strongly
Last week, Goldman Sachs priced the Dormitory Authority of the State of New York’s (A1/A/NR/NR) $466.305 million of Series 2020A revenue bonds for the NYU Langone Hospitals Obligated Group and the NYU Langone Health’s (A3/A/NR/NR) $551.025 million of taxable Series 2020B revenue bonds.
According to a trader at the time of the DASNY pricing, investors got handsome yields in exchange for coupon and extension risk. “The yields were not bad; they came priced to sell and I think they priced it right,” he said, adding investors earned “100 basis points more for extending and accepting the 3% coupon.”
The DASNY bonds were rated A3 by Moody’s Investors Service and A by S&P Global Ratings.
“These ratings reflect the expectations that NYULH will continue to enjoy a solid market position in NYC with a broad reach throughout the tri-state region,” said Daniel Widawsky, executive vice president at NYU Langone Health. “Of note is our continued focus on the growth of our ambulatory practices around a select number of high quality hospitals and our steadfast commitment to providing patient centered, quality care. We believe that these factors are what differentiate us in the marketplace.”
The DASNY/Langone $75 million 3s of 2048 [64990GYA4], which were originally priced at 102.426 to yield 2.73%, were trading Monday at a high price of 103.897, a low yield of 2.57% in eight trades totaling $18.2 million. The 3s were trading on Friday at 103.897/2.57% in six trades totaling $19 million. The bonds had been freed to trade last Wednesday where they traded at 103.342/2.63% in 48 trades totaling $59.72 million.
“Syndicate business continues to favor alternate couponing along the entire curve,” Olsan said. “A pricing of A3/A New York Dormitory Authority NYU Langone Hospital bonds with three term bonds brought only 3s and 4s due 2048, 2050 and 2053. Of a deal size totaling $465 million, the 3s drew a yield of 2.73%, or +92/AAA BVAL and the 4s due 2050 yielded 2.43% for a spread of +60/AAA BVAL. Yield concession is paramount to rate risk on the long end of the curve, where the 30-year AAA spot traded to its low range in January.”
The $210 million 4s of 2050 [64990GYB2], which were originally priced at 114.336 to yield 2.43%, were trading Monday at a high price of 115.628, a low yield of 2.30% in four trades totaling $12 million. The 4s were trading on Friday at 115.628/2.30% in two trades totaling $10 million. The bonds had been freed to trade last Wednesday where they traded at 115.488/2.314% in 74 trades totaling $144.07 million.
The $181.305 million 4s of 2053 [64990GYC0], which were originally priced at 113.843 to yield 2.48%, were trading Monday at a high price of 116.189, a low yield of 2.244% in two trades totaling $1.7 million. The 4s were trading on Friday at 115.089/2.354% in three trades totaling $1.4 million. The bonds had been freed to trade last Wednesday where they traded at 114.99/2.364% in 60 trades totaling $115.57 million.
NYU said proceeds of DASNY Series 2020A bonds will finance parts of the following projects:
Cobble Hill ED: The Cobble Hill ED will consist of a five-story, 160,000 square foot building that will replace the existing Cobble Hill ED and house a free-standing emergency department, ambulatory surgery, a cancer center with infusion services, comprehensive women’s services, a diagnostic imaging center, a laboratory, clinical pharmacy and over 6,000 square feet of physician office space for members of the Faculty Group Practice. The new Cobble Hill site is located at the former location of Long Island College Hospital.
New Life Building: At the NYU Winthrop site, NYULH is constructing an addition on top of an existing facility and renovating portions of the adjacent Potter and North Pavilions to provide for an array of maternal fetal and other inpatient services, including post-partum rooms, medical/surgical rooms, a neonatal intensive care unit, ante-partum rooms, and exam/triage rooms. Comprising about 100,000 square feet of new and renovated space, the New Life expansion project will create new single-bedded rooms, improving the patient experience, and expanding neonatal intensive care services to accommodate demand.
Garden City Physician Offices: NYULH has signed a lease to fit out a 270,000 square foot building located at 1111 Franklin Avenue in Garden City, to provide multi-specialty clinical and office space for over 200 physicians and 400 supporting staff members. This facility will consolidate into a single, modern facility over 30 multi-specialty physician practices currently located in 17 locations, improving the patient experience. Specialties will include radiology, women’s imaging and reproductive services, internal medicine, cardiology, pediatrics and other medicine and surgical specialties. The consolidated location will also create efficiencies across Long Island practices by enabling partial or complete termination of multiple current leases.
The 2020B NYU taxables refunded outstanding balances on existing debt and amounts outstanding on lines of credit as well as for general corporate purposes.
Munis were mixed Monday on the MBIS benchmark scale, with yields falling by three basis points in the 10-year maturity and rising by less than a basis point in the 30-year maturity. High-grades were stronger, with yields on MBIS AAA scale falling two basis points in the 10-year and by four basis points in the 30-year maturity.
On Refinitiv Municipal Market Data’s AAA benchmark scale, the yield on the 10-year GO remained at record lows at 1.15% while the 30-year was unchanged at 1.80%.
The 10-year muni-to-Treasury ratio was calculated at 75.4% while the 30-year muni-to-Treasury ratio stood at 89.8%, according to MMD.
Stocks bounced back and were in the green after a brutal sell off on Friday, thanks to strong U.S. manufacturing data. Treasuries yields were higher. The Dow Jones Industrial Average was up about 0.60%, the S&P 500 Index gained around 0.81% and the Nasdaq was rose about 1.24%.
The Treasury three-month was yielding 1.564%, the two-year was yielding 1.355%, the five-year was yielding 1.346%, the 10-year was yielding 1.527% and the 30-year was yielding 2.000%.
“Munis are treading water to start off the month, after a tremendous January that pushed the market into uncharted territory (low yield-wise),” ICE Data Services said in a Monday market comment.
Last week’s actively traded issues
According to IHS Markit, revenue bonds made up 54.09% of total new issuance in the week ended Jan. 31, down from 55.49% in the prior week. General obligation bonds were 40.86%, up from 40.07%, while taxable bonds accounted for 5.05%, up from 4.44%.
Some of the most actively traded munis by type in the week ended Jan. 31 from New York, Florida and Ohio issuers, according to Markit.
In the GO bond sector, the New York City zeros of 2042 traded 29 times. In the revenue bond sector, the Escambia County Health facilities Authority, Fla., 3s of 2050 traded 68 times. In the taxable bond sector, the Ohio Turnpike Commission 3.216s of 2048 traded 56 times.
Previous session's activity
The MSRB reported 27,516 trades Friday on volume of $11.30 billion. The 30-day average trade summary showed on a par amount basis of $10.87 million that customers bought $5.48 million, customers sold $3.59 million and interdealer trades totaled $1.79 million.
California, New York and Texas were most traded, with the Golden State taking 16.614% of the market, the Empire State taking 13.307% and the Lone Star State taking 10.986%.
The most actively traded security was the California Community Housing Agency revenue, 5s of 2050, which traded 28 times on volume of $93.125 million.
The Treasury Department Tuesday auctioned $45 billion of 13-week bills at a 1.550% high yield, a price of 99.608194.
The coupon equivalent was 1.582%. The bid-to-cover ratio was 2.57.
Tenders at the high rate were allotted 1.550%. The median rate was 1.520%. The low rate was 1.490%.
The bills have an issue date of Feb. 6 and are due May 7.
Tenders totaled $114,273,828,000 and the Treasury accepted $43,660,300,500, including $300,000,000 non-competitive.
The Treasury Department Tuesday auctioned $39 billion of 26-week bills at a 1.520% high yield, a price of 99.231556.
The coupon equivalent was 1.557%. The bid-to-cover ratio was 2.77.
Tenders at the high rate were allotted 1.520%. The median rate was 1.495%. The low rate was 1.450%.
The bills have an issue date of Feb. 6 and are due Aug. 6.
Tenders totaled $106,564,362,800 and the Treasury accepted $37,660,564,800, including $500,000,000 non-competitive.
Data appearing in this article from Municipal Bond Information Services, including the MBIS municipal bond index, is available on The Bond Buyer Data Workstation