Despite secondary selling pressure, new deals price but many remain on hold
The secondary market saw yields rise again by at least five or six basis points. New deals were priced but issuers faced yield concessions.
The market isn't facing 50-basis-point swings, but its footing is still off as participants grapple with the long-term effects of the pandemic.
Additionally, the market will potentially see bonds maturing in 2060 by a major issuer that is not a university issuing 100-year bonds. The New York Power Authority put out a preliminary pricing wire on its more than $1 billion deal, but it is still on the day-to-day calendar. The Goldman Sachs-run deal has the power authority selling bonds that mature in 2060. The levels are 3% coupons in 2045 yielding 3.18%. The next tranche, $73 million of 4s, shows preliminary yields of 2.93%. One-hundred million of 3s in 2050 were to yield 3.23%. 4s of 2050 were expected to yield 2.98%. 4s of 2055 were expected to yield 3.13%. 3.25% coupons in 2060 were to be priced at 3.48% and the 4s of 2060 were expected to yield 3.28%.
“As the municipal market continues to heal, issuers see the historically low rates as a borrowing opportunity,” Nuveen analysts said in a report. “We expect new issuance to continue increasing, and municipal investors are adjusting accordingly."
Meanwhile, the New York Metropolitan Transportation Authority pulled its $672 million transportation revenue green bonds from the calendar at least until May 4.
“We seem to be entering the third wave of supply-driven cuts since most of us started working remote,” said one southern trader. “With increased supply, whether it is fund selling or a larger primary issuance, the market seems to lose its footing quickly.”
He noted that with Tuesday’s cuts, the muni market will have cheapened by around 30 basis points since last Monday.
“However, this slower pace of these cuts is certainly healthier for the market than the intraday 50 cuts we have recently experienced,” he said. “For price discovery this week, there have been several AAA names that have sold competitively," most notably Tuesday’s Harford, Maryland GO deal.
The deals sold to different underwriters, but both were purchased at a healthy spread to the current AAA, according to the trader.
“The market has also seen negotiated PSF deals with strong underlying ratings price at much wider spreads,” he said. “In addition to credit concerns for the pandemic, participants are also weighing how the collapse of oil prices will effect various credits in oil-dependent states. As usual, the market tends to react to these concerns by moving to higher yields.”
Citi priced Sacramento Municipal Utility District’s (NR/AA/AA/ ) $400 million of electric revenue bonds.
It was priced as 5s to yield 1.62% in 2030 and as 5s to yield 2.53% in 2050.
Goldman Sachs priced the Curators of the University of Missouri’s (Aa1/AA+/ / ) $400 million of taxable bonds.
The deal was priced at par to yield 1.466% in 2023, 1.714% in 2025, 2.012% in 2027 and 2.748% in 2050.
Goldman also priced the Curators of the University of Missouri’s (Aa1/AA+/ / ) $190.20 million of system facility revenue bonds.
The deal was priced as 5s to yield 1.86% in a 2030 bullet maturity.
Davis Joint Unified School District, California (A1/AA-/ / ) sold $100.6 million of general obligation, election of 2018 bonds on Tuesday.
The bonds were won by Citi with a true interest cost of 2.8678%.
Hartford County, Maryland (Aaa/AAA/AAA) sold a total of $133.89 million of bonds.
Baird won $40 million of consolidated public improvement bonds with a TIC of 2.0069% and Citi won $93.89 million of refunding bonds with a TIC of 1.3611%.
Secondary market data
Munis were weaker on the MBIS benchmark scale Tuesday, with yields rising by three basis points in the 10-year maturity and by six basis points in the 30-year maturities. On the MBIS AAA scale, munis were weaker with yields increasing by one basis point in the 10-year maturity and by four basis points in the 30-year maturity.
On Refinitiv Municipal Market Data’s AAA benchmark scale, the yield on both the 10-year muni and 30-year were 10 basis points higher to 1.38% and 2.23%, respectively.
The MMD muni to taxable ratio was 226.2% on the 10-year and 184.3% on the 30-year.
On the ICE muni yield curve late in the day, the 10-year yield was up five basis points to 1.38% while the 30-year was higher by six basis points to 2.19%.
The ICE muni to taxable ratio on the 10-year was 246% and the 30-year was 176%.
BVAL saw the 10-year increased eight basis points to 1.39% and the 30-year rose nine basis points to 2.29%.
The IHS muni curve saw the 10-year rise to 1.37% and the 30-year increased to 2.20%.
Stocks were mixed as Tresuries were lower.
The Dow Jones Industrial Average rose 0.26%, the S&P 500 index increased 0.10% and the Nasdaq was down 0.70%.
The three-month Treasury was yielding 0.109%, the Treasury two-year was yielding 0.211%, the five-year was yielding 0.369%, the 10-year was yielding 0.612% and the 30-year was yielding 1.206%.
Selectivity and swelling volume
Municipal yields have room to rise moderately on the heels of last week’s rising yields on longer paper, the arrival of $7 billion in new issuance, and the second consecutive week of positive fund flows, according to Nuveen’s Bill Martin, head of global fixed income, and John Miller, head of municipals, in an April 27 weekly commentary.
“As the municipal market continues to heal, issuers see the historically low rates as a borrowing opportunity,” the analysts said. “We expect new issuance to continue increasing, and municipal investors are adjusting accordingly.”
They pointed to this week’s calendar, which is again bustling with more than $7 billion in primary issuance, including $2.2 billion in taxable paper.
“A few weeks ago, tax-exempt, high-grade municipals generated tremendous interest, with higher yields than Treasuries,” they said.
While they said that is still true, the anticipation of heightened supply allows investors to be more selective -- which could prove to be an advantage or disadvantage.
As of April 27, the municipal to Treasury ratio was 195.1% in 10 years and 170.4% in 30 years, according to Thomson Reuters.
“As a result, issuers will likely be forced to price deals more cheaply,” they said.
However, some investors may decide to remain on the sidelines in anticipation of more attractive prices ahead.
Despite being priced relatively cheaply, Anne Arundel, Maryland’s $222 million general obligation issue — rated Aa1 by Moody’s Investors Service and triple-A by Standard & Poor’s — met with a “tepid” reception, according to the analysts.
The $74 million deal which priced April 22 included a 2049 final maturity priced to yield 2.18% -- 16 basis points cheaper at the time of pricing than the comparable triple-A GO benchmark scale tracked by Refinitive/Municipal Market Data.
“This difficulty was not a credit issue, but rather it reflects investors anticipating the growing new-issue calendar, which will come cheaper,” Martin and Miller said.
Meanwhile, in the high-yield sector, the analysts said they feel investors are being compensated for credit deterioration before an eventual recovery, even though outflows have returned.
For instance, they said that high-yield municipal bond outflows totaled $318 million last week, largely reversing the $292 million in inflows that arrived in the previous week.
“Uncertain investors are weighing the historic attractiveness of current market levels versus potential long-term credit risk,” they explained.
“Credit spreads currently average plus 360 basis points and we are seeing dislocated municipal-to-Treasury ratios,” they added.
They noted that Illinois bonds, for example, are trading at levels commensurate with bonds rated low double-B to high single B, which indicates the market is already pricing in major downgrades to one of the highest-profile issuers.
“We believe defaults should be limited to projects that were already experiencing stresses or underwritten with lapses in security features,” they added.
Christine Albano contributed to this report.