Munis, Treasuries rally to safety amid stock market plunge
The municipal market rallied up to 7 basis points on Friday following Treasuries while equities continued to sell-off on COVID-19 fears as it spreads around the globe.
The muni 10-year landed at 1.09% and the 30 at 1.69%. U.S. Treasury yields plummeted as the 10-year hit the lowest since September at 1.47% and the 30-year hit an all-time low of 1.88% then moved up to 1.91% as of press time.
While COVID-19 has had an impact on all markets, including munis, Matt Fabian, partner and Municipal Market Analytics, said that he believes the virus impact is like the “fifth or sixth reason as to why muni yields are dropping like a rock.”
“There just continues to be more money than bonds and that is the fundamental reason for the sinking yields,” he said. “Another main reason is that the heavy taxable issuance has made tax-exempts even more responsive to the Treasury curve.”
He added that while munis have always taken price indications from Treasuries, there were internal vectors that were more important, either day-to-day or seasonal reasons. However, now things are different with taxables being such a large part of the market, he said.
While there seems to be a flight to quality into safe haven assets with virus fears running amok, one New York taxable trader noted that this time it is a little bit different, as the dollar and yen move is more about weakness in Japan as an assumed result of the virus.
“In other words, money is flowing out of Asia and heading this way,” he said. “Actually helping to hold credit spreads in on the taxable side, so it’s more of a technical move than it is a macroeconomic move.”
One New York trader added that it seems there were signals of weakness in commodities and equities before the virus headlines started in earnest.
“Seems now that mismanagement of the virus, detection, and messaging, real facts are all exponentially tipping the fallout,” he said. “Supply, thus demand economics, now starting to impact growth for the short term.”
He believes that we are still waiting to see the fallout and real market reaction.
“Virus-crisis in process and UST market most likely maintains a strong bidside, with munis following, but underperforming,” the trader added. “And watch the flows closely. If that slows, we will weaken.”
Peter Block, managing director at Ramirez and Co., said that this too shall pass and that what we are seeing is a natural reaction to a global threat.
“Despite all the noise, equities are still doing fine and still having one of the best Februarys ever,” Block said. “We are seeing dual bubbles — flight to safety but at the same time, people feel like we will get over this and the low Treasury yields are driving stocks in the red.”
He added that even though the concerns over COVID-19 seems to be mounting, there is optimism that it is a temporary global disruption.
“The bond market is saying the Fed is too tight, the market is telling us we need a cut but that could be a reaction to the short-term pressure of the virus. Clearly however you slice it, you can’t divorce the muni market from the virus as it is helping the muni market. Not that we needed any more fuel for the fire,” Block said.
Jim Colby, senior municipal strategist and portfolio manager at VanEck, said that we’ll continue to see risk-on risk-off behavior in the markets with each report that speaks to the spreading or capping of the contagion.
“So far, it has been good for munis and performance,” he said.
“Munis are on a tear today, benefitting from the confluence of a coronavirus flight-to-quality move, reduced new issuance and strong Friday volume,” ICE Data Services said in a Friday market comment. “The ICE muni yield curve has rallied three to six basis points today; the yield on the entire curve is at an all-time low. This move has flattened the curve as well; one-year to 30-year is now under 100 basis points.”
ICE added that high-yield credits are also doing well, with yields lower by three to five basis points depending on the sector. Taxables were five to six basis points better.
Munis were mixed on Friday on the MBIS benchmark scale, with yields rising three basis points in the 10-year maturity and falling by two basis points in the 30-year maturity. High-grades were also mixed with yields on MBIS AAA scale increasing by five basis points in the 10-year maturity and decreasing by one basis point in the 30-year maturity.
On Refinitiv Municipal Market Data’s AAA benchmark scale, the yield on the 10-year GO was five basis points lower to 1.09%, setting a record low. The previous record was 1.14% on Thursday.
“As to 10-year falling below 1.00%, it’s going to be 1.09% by the end of today so not much of a prediction that it breaks through,” said the New York taxable trader. “But I do think you need continuation of Treasury rally from these levels for it to happen.”
The 30-year GO fell seven basis points to a record of 1.69%, beating the previous low of 1.76% that was also set on Thursday.
The 10-year muni-to-Treasury ratio was calculated at 74.1% while the 30-year muni-to-Treasury ratio stood at 88.2%, according to MMD.
All three major indexes were in the red and Treasury yields were sharply lower. The spread of COVID-19 inside and outside of China has been unsettling the market lately, likely contributing to gains in havens like bonds and gold, with investors showing reluctance to hold on to equities heading into the weekend.
The Dow Jones Industrial Average was down about 0.95%, the S&P 500 index was lower by 1.12% and the Nasdaq fell roughly 2.05%.
The three-month Treasury was yielding 1.561%, the Treasury two-year was yielding 1.354%, the five-year was yielding 1.311%, the 10-year was yielding 1.470%, the lowest level since Sept. 4 and the 30-year was yielding 1.909%, hitting a record low.
“Two times Treasury 10-year went below 1.50%, were times of serious global stress,” Fabian said. “Maybe the coronavirus is that or maybe we don’t need as much global stress to get below 1.50%, and part of it is rewriting how Treasuries trade and munis respond.”
John Mousseau, president, chief executive officer and director of fixed income at Cumberland Advisors said that headline inflation is 2.5% the past 12 months and time periods where the 10-year is below the rate of inflation has been more commonplace in the past 10 years than previously but almost all the time periods in the past 60 years have been short compared to the much longer time periods where yields were greater than inflation (that is a positive real yield).
“Most of these periods have averaged about a year or a little less and we started last summer so I would assume as we get closer to election and a removal of corona as a threat, so I am assuming the end of the virus will be the trigger for the end,” he said. “We know there was extremely strong bond fund inflows last year but they have dribbled down quite a bit. What happens if those massive inflows become outflows?”
The secondary was active for a Friday as munis followed the Treasury rally.
Moving the market lower, especially on the long end, were a lot of large blocks of Texas, Washington and New York issues with sub-5% coupons, trading tightly to AAA benchmarks, even with the lower coupons.
Block trading across the curve saw yields falling on high-grade names, moving the benchmark curve lower by as much as 6 basis points.
Inside 10 years, Wake County, NC GOs, 5s of 2023, yielded 0.85%-0.84%.
North Carolina GOs, 5s of 2027, traded at 0.95%. On Feb. 13, they traded at 0.99%.
Meanwhile, around the 10-year Connecticut Health and Educational Facilities Yale University 5s of 2029 traded at 1.10%-1.09%. It yielded 1.22% when it was sold on Jan.20.
Greensboro, NC GOs, 4s of 2032 traded at 1.32%-1.30%.
Iowa Finance Authority green bonds, 5s of 2036 traded at 1.52%-1.51%. Thursday they traded at 1.55%-1.54% and originally yielded 1.64% on Jan. 20.
Texas waters, 3s of 2033 traded at 1.70%. On Thursday it traded at 1.79%-1.74% and at 1.81% on Feb. 14.
AAA (SPF) Cleveland, Texas ISD 4s of 2045 traded at 2.06%-2.05%. On Tuesday they traded at 2.18%-2.14% and on Feb. 14 they traded at 2.19%.
Kerrville Texas ISD 4s of 2044 traded at 2.05%-2.04%. Thursday they were at 2.10%. The original yield was 2.29% on Jan. 20.
Whatcom County, Washington School District #501 4s of 2030 traded at 1.31%-1.30% and on Tuesday they traded at 1.36%.
Washington State GOs, 4s of 2045 traded at 1.80%, seven basis points lower than on Thursday. The original level when it priced on Feb. 12 was 1.98%.
The muni market will see the largest issuance week of the year with roughly $13 billion of new deals expected. There are two deals expected to come in at over $1 billion and a total of 22 deals scheduled $100 million or larger, with five of them competitive. Eight of the $100 million or larger deals are taxables.
Block noted that the compression in ratios is what is driving the taxables.
“In terms of supply and lower yields I think it makes sense that it coincides in that lower rates bring the refundings," said the taxable trader. “The supply will not hurt demand. It’s real and persistent. Maybe spreads adjust some to accommodate but unlikely to reset the market and more yield will help.”
Jefferies is expected to price the Buckeye Tobacco Settlement Financing Authority’s $5.24 billion of asset-backed refunding senior and taxable bonds on Wednesday. The issue caries various ratings for different maturities. The taxable tranche is expected to come in around $427.005 million and the rest will be tax-exempt.
“As far as the deals go for next week, all will go well especially ones that offer spread like Ohio,” the New York trader said. “Markets can surely move to lower rates before retreating, which will be challenging for all.”
Mosseau added that in any case, the total return manager still has to find value and some of those are in cushion bonds with shorter calls that can be refunding candidates (with taxable issuance).
“Buckeye will get a big reception if for no other reason that managers will figure they must buy it as they figure their competitors will be,” Mosseau said.
Colby added that the muni market is strong and is transparent to all participants because the continued flow of cash absorbing all the new issues that are on the calendar each week.
“The refinancing of Buckeye will ultimately leave the high-yield market with a deficit of product to satisfy demand, because a portion will be done as taxable municipals, in a virtual game of musical chairs for the exempt bonds,” he said. “It will also continue to boost performance in the Tobacco sector and set out the likelihood of further refundings to hit the new-issue calendar this quarter.”
Barclays is scheduled to price the Regents of the University of California’s (Aa3/AA-/AA-/ ) $1.5 billion of medical center pooled revenue taxable bonds on Thursday.
Staying in California, Citi is slated to price the Department of Airports of the City of Los Angeles’ (Aa2/AA/AA/NR) $$738.575 million of senior refunding revenue private activity non-alternative minimum tax bonds for Los Angeles International Airport on Wednesday.
In the competitive arena, gilt-edged Baltimore County, Maryland is set to sell a total of $596 million in three separate sales in two days.
The county’s first sale will take place on Wednesday, with $246 million of consolidated public improvement bonds. Then on Thursday, it will sell $205 million of bond anticipation notes and $145 million of consolidated public improvement BAN’s.
“It’s tough to get bonds and tough to get paid for bonds that you get,” Fabian said. “Tax-exempts for new-money purposes continues to be better for issuers, while taxables for refundings is the best path for cost savings.”
He added that right now, reinvestment pressure is extreme, with more muni exempt buyers buying taxables because it has a better return.
Lipper reports 59th week of inflows
For the 59th straight week, investors keep pouring cash into the municipal market continuing the streak as the money flowing into cash-exempt mutual funds.
In the week ended Feb. 19, weekly reporting tax-exempt mutual funds added $1.767 billion of inflows, after inflows of $2.128 billion in the previous week, according to data released by Refinitiv Lipper late on Thursday.
Exchange-traded muni funds reported inflows of $180.347 million, after inflows of $226.376 million in the previous week. Ex-ETFs, muni funds saw inflows of $1.587 billion after inflows of $1.902 billion in the prior week.
The four-week moving average remained positive at $1.838 billion, after being in the green at $1.896 billion in the previous week.
Long-term muni bond funds had inflows of $1.124 billion in the latest week after inflows of $1.394 billion in the previous week. Intermediate-term funds had inflows of $497.491 million after inflows of $384.906 million in the prior week.
National funds had inflows of $1.562 billion after inflows of $1.880 billion while high-yield muni funds reported inflows of $481.181 million in the latest week, after inflows of $636.037 million the previous week.
Chip Barnett contributed to this report.