Munis settle into steady after whirlwind weeks
The municipal market was mostly quiet Friday as participants came off a week of a strong rally, an awakened new-issue market and the first fund inflows since February as they cautiously await another week with more deals on tap and continued questions of support out of Washington.
Triple A benchmarks showed slight weakness with most off a basis point or two.
While many new-issues are still on the day-to-day calendar for next week, more are being slated to price on specific days, signaling that dealers and issuers are ready to again test the primary.
”The market feels heavy and a bit ahead of itself, although the short end is cheap,” said Rick Marrone, senior portfolio manager at Washington Crossing Advisors. “Muni mutual funds saw inflows for the first time in five weeks, which is good to see, although I'm not sure that is representative of overall demand, which is less than robust.”
He said new-issue supply, limited as it has been, has been accepted by the market, but that could be tested whenever we get back to normal.
Friday’s trading was somewhat busy on the heels of the largest deal to price in the supply-starved municipal market since the start of the COVID-19 pandemic.
A day after the upsized, $1.4 billion California general obligation bond issue was repriced and oversubscribed four times, the overall secondary market activity did see an uptick for a Friday.
Larger blocks of bonds were being exceptionally well bid in general trading while smaller odd lots traded at much wider spread than usual, Michael Pietronico, chief executive of Miller Tabak & Asset Management, said on Friday afternoon.
In other trends, Pietronico said he is paying keen attention to sector value and forecasting for future value.
“Credit bifurcation is alive and well in the municipal market as some sectors, such as hospital debt, continue to see spread widening over weakening revenue trends,” he said.
“Our sense is that once the economy moves forward again some excellent opportunities are available for sophisticated investors,” he said.
Sales tax-backed bonds are one sector he is watching closely for value.
The bonds widened “fairly dramatically once the economy shut down,” and Pietronico says “a bounceback in the economy should bode well for these bonds later in the year.”
Secondary prints showed high-grades remaining in trading range bound. North Carolina GOs, 5s of 2023, traded at 0.92%-0.90%, same as Monday's 0.90%. Harvard 5s of 2025 traded at 0.82%-0.81%. Wednesday they traded at0.85%-0.83% and orignal levels were 0.89%. Harvards 5s of 2030 traded at 1.07%-1.06% from orignal 1.13% levels. Out long, New York City TFAs, 5s of 2047, traded at 3.01%, a basis point higher than Thursday. Fort Lauderdale, FL 5s of 2049 traded at 2.62%-2.60%, lower than Thursday's 2.66%-2.64%
Although the California deal saw spreads wider by 30 to 50 basis points to the Refinitive/MMD benchmark scale compared to a month ago, the bonds still represented value, according to Karel Citroen, head of municipal research at investment advisor Conning.
“They are still attractive levels,” he said.
The $618.110 million of various purpose GO bonds was priced as 5s to yield 1.42% in the 2030 maturity and as 3s to yield 2.85% and 4s to yield 2.60% in a split 2050 maturity.
It was then re-priced as 5s to yield 1.40% in 2030 and as 3s to yield 2.85% and as 4s to yield 2.54% in a split 2050 maturity.
The bonds are especially attractive for retail investors in high-tax states like California, following the Tax Cut and Jobs Act and the $10,000 State and Local Tax (SALT) deduction cap, according to Citroen.
“Fundamentally, California has used its strong economic recovery to build up reserves, which it will now need to offset an expected decline in income and sales tax collections,” he said. “The success of the sale of this deal will also be indicative of the usefulness of the Municipal Liquidity Fund (MLF) the federal government has created.”
“We expect high-credit quality names, like California, to still be able to access the capital markets efficiently and, as such, to have no real use for the MLF,” Citroen added.
Meanwhile, other participants joined in on the general theme being expressed that the MLF isn't going to be enough for the municipal market.
“There was certainly some market disappointment from the announcement of the Fed’s Municipal Liquidity Facility, meaning the market was expecting the Fed to announce that it was going to be buying medium and long term municipals in the primary and secondary market,” said Tom Kozlik, head of municipal strategy and credit at Hilltop Securities. “That did not seem to carry over too strongly into this week, however as the market continued to find its footing this week and is still in the process of normalizing.”
He added that this week’s positive muni flow number was an indicator that municipal demand could be coming back but that it is too early to tell how sustained the demand could be.
“The total calendar looks like it is only about $4 billion, so not as close to the $9 billion to $11 billion we were seeing before the COVID-19 pandemic but, market sentiment seems to be normalizing and demand for this week’s California issue was a constructive sign,” he said. “Now we are only seeing about $4 billion as day-to-day, some fell off the day-to-day calendar and the easier deals are more likely to price.”
The calendar for next week features 12 deals $100 million or larger, many on the day-to-day calendar.
Raymond James is scheduled to price the County of Riverside, Calif.’s (A2/AA/ / ) $720.945 million of pension obligation refunding bonds on Tuesday.
The Pennsylvania Economic Development Corporation (A2/A/A) is expected to price $100 million of exempt and $180 million of taxable UPMC revenue bonds Wednesday. Barclays is expected to run the books.
Barclays is also anticipating pricing the Maryland Health and Higher Educational Facilities Authority’s (A2/A/A/ ) $210 million of exempt UPMC revenue bonds on Wednesday.
In the competitive space, the Dublin Unified School District, California is expected to sell $123 million of revenue bonds at 12:30 p.m. on Wednesday.
Katy, Texas ISD has $177 million on tap for Tuesday.
NY Power Authority announces potential $1.1B sale
The Power Authority of the State of New York (Aa1/AA/AA/ ) is considering a potential issuance of approximately $1 billion of fixed rate tax-exempt revenue bonds and $110 million of fixed rate federally taxable revenue bonds. Goldman Sachs will run the books on the transaction will is expected to price as early as the week of April 27, although the size, timing, and structure of the potential transaction is subject to market conditions.
Secondary market data
Munis were mixed and little changed on the MBIS benchmark scale Friday, with yields rising by less than a basis point in the 10-year maturity and unchanged in the 30-year maturities. On the MBIS AAA scale, munis were weaker with yields increasing by three basis points in the 10-year maturity and by five 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 unchanged at 1.07% and 1.90%, respectively.
The MMD muni to taxable ratio was 175.1% on the 10-year and 156.6% on the 30-year.
On the ICE muni yield curve late in the day, the 10-year yield was up less than one basis point to 1.11% while the 30-year was unchanged at 1.90%.
The ICE muni to taxable ratio on the 10-year was 181% and the 30-year was 147%.
BVAL saw the 10-year was unchanged at 1.14% and the 30-year was also steady at 1.99%.
The IHS muni curve saw the 10-year stayed at 1.14% and the 30-year stayed put at 1.89%.
Stocks were positive as Treasury yields were mixed.
The Dow Jones Industrial Average rose 1.83%, the S&P 500 index increased 1.65% and the Nasdaq was up 0.46%.
The three-month Treasury was yielding 0.130%, the Treasury two-year was yielding 0.202%, the five-year was yielding 0.352%, the 10-year was yielding 0.650% and the 30-year was yielding 1.260%.
Lipper reports first inflow in six weeks
For the sixth week in a row, investors put cash into the municipal market for the first time since the week of Feb. 26.
In the week ended April 15, weekly reporting tax-exempt mutual funds saw $833.388 million of inflows, after outflows of $2.306 billion in the previous week, according to data released by Refinitiv Lipper late on Thursday.
Exchange-traded muni funds reported inflows of $99.768 million, after outflows of $462.099 million in the previous week. Ex-ETFs, muni funds saw inflows of $733.620 million after outflows of $1.844 billion in the prior week.
The four-week moving average was negative yet again at $3.975 billion, after being in the red at $7.237 billion in the previous week.
Long-term muni bond funds had inflows of $574.947 million in the latest week after outflows of $1.618 billion in the previous week. Intermediate-term funds had inflows of $66.903 million after outflows of $328.773 million in the prior week.
National funds had inflows of $836.207 million after outflows of $1.948 billion while high-yield muni funds reported inflows of $292.953 million in the latest week, after outflows of $960.168 million the previous week.