Munis brush off headline volatility, await new-issue calendar

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After the first full week of 2021, munis mostly brushed off the volatile news cycle and risk-on/risk-off movements in equities and U.S. Treasuries as technicals remained squarely in the muni market's favor.

Municipals were little changed Monday as participants await the larger new-issue calendar while equities and U.S. Treasuries react to tumultuous news out of Washington and COVID-19 continues to ravage the globe.

"Between the events at the U.S. Capitol, inflation break-evens hitting new highs and the prospects for trillions of dollars in new stimulus, the U.S. has had its hands full to start 2021," said Eric Kazatsky, senior strategist at Bloomberg Intelligence. "Somewhat positively, municipals have massively outperformed their taxable counterparts by doing next to nothing. This has had the unintended consequence of pushing muni-to-Treasury ratios to some of the highest levels in history, a fact that makes investing new cash somewhat of a slippery slope."

While many market participants want higher rates and would welcome larger yield curve adjustments, technical pressures from continued strong inflows and slight new-issue forward calendar will serve to keep prices elevated over the near term, Kazatsky and other analysts said.

Eric Kazatsky
"Somewhat positively, municipals have massively outperformed their taxable counterparts by doing next to nothing," said Eric Kazatsky, Bloomberg Intelligence.

Municipal yields were steady between 2022 and 2051 on Monday afternoon on triple-A benchmarks and ratios continue to hover below 70% in 10-years.

On Monday, the municipal to Treasury ratios fell slightly at 69% in 10-years and 78% in 30-years, according to Refinitiv MMD. Ratios were 67% in 10-years and 79% in 30-years, according to ICE Data Services.

“We have a 10-year Treasury creeping up to 1.13%, but munis are flat today,” a New York trader said. “There is not enough volatility to create weakness and dealers are light, so there is no supply pressure.”

There were few large deals priced in the primary market. J.P. Morgan won $106 million of general obligation school building and facility improvement bonds from the Madison Metropolitan School District, Wisconsin (/AA+//). Yields ranged from 0.15% with a 2% coupon in 2022, 0.48% with a 1% coupon in 2026, 1.35% with a 1.375% coupon in 2031 and 1.92% with a 2% coupon on bonds in 2040.

With potential volume of $6.9 billion expected to come later in the week, large corporate CUSIP and taxable higher education and hospital deals make up a good portion of the calendar.

“January historically, and continues to be, a big redemption date,” a New York trader said, noting that investors have yet to put coupon and maturity proceeds to work as volume is down after the flood of supply that came into the market earlier in the fourth quarter to take advantage of low interest rates.

“With interest rates rising, they are becoming smart buyers and not just jumping in,” the trader said. “There is a lot of cash in the system,” he added, but said with the rising Treasury market a potential indicator of where municipals could be headed, many investors remain on the sidelines.

“They are waiting for new-issue product, but I don’t see it coming in January in any significance” until the end of the month, or possibly even February, he said.

Overall, the post-election economic and political climate appears advantageous for municipals, according to the trader.

“The perception is the Dems taking control is probably a positive for munis,” as Democratic leadership in many cities and states means more recovery money flowing into municipalities in the ongoing COVID-19 crisis, he said.

In addition, higher interest rates are likely a good thing for municipals, especially at a time when global volatility in the United Kingdom, such as the potential for the Bank of England to move interest rates to negative as early as February, could attract cross-over buyers, he added.

Rosy outlook, despite credit concerns
Continuing outperformance by municipals, due largely to supply volatility in the fourth quarter, and compelling market technicals make municipals well-positioned for 2021, Jeff Lipton, managing director of municipal credit at Oppenheimer & Co.

“Despite rather frothy price levels, muni demand, amplified by reinvestment needs, has held in quite impressively,” he said. “The market has witnessed unabated demand — no matter the size of weekly calendars — and the amount of available cash and the need for institutions to get invested would suggest a continuation of this trend as part of the 2021 narrative.”

Municipal technicals coupled with a more favorable credit outlook than initially anticipated will likely bring continued active buyer interest from individuals and mutual funds through, at least, the early months of 2021, according to Lipton.

“Our base case does not see recession in 2021, yet an uneven recovery with rising impairments within the more risky corners of muni credit can be expected,” said Jeff Lipton of Oppenheimer & Co.

“Our base case does not see recession in 2021, yet an uneven recovery with rising impairments within the more risky corners of muni credit can be expected,” he added.

Similar to 2020, Lipton said the “unique technical environment with demand as an unwavering constant” should be a key driver of performance in 2021.

“Munis can be expected to outperform U.S. Treasuries with net negative supply potentially extending the out- performance,” he said.

Municipal credit spreads may widen out in 2021 given historical tightness against a backdrop of mounting credit pressure, according to Lipton.

“Unfunded pension liabilities and advancing OPEB obligations will continue to be a financial drag for municipal budgets along with uneven revenue performance for certain credits and sectors,” he said.

An unforeseen significant credit event in 2021 could have the tendency to more aggressively widen out municipal spreads and ratios given the historical compression in 2020, he said.

“As we think about muni supply for 2021, we must acknowledge that many issuers are struggling to address outsized budget gaps brought on by the pandemic-induced recession and are considering creative and unconventional remedies that may translate into a renewed trend of fiscal austerity,” Lipton said.

However, a major credit event could yield a more systemic impact upon the broader municipal market, even as the public health backdrop materially improves, according to Lipton.

Despite credit concerns, the municipal market, overall, should continue to remain stable and strong through the year, Lipton said.

“Sustained favorable technicals throughout 2021 should be accretive to performance and keep returns in a range similar to what was earned last year,” he said.

Secondary market
High-grade municipals were unchanged, according to final readings on Refinitiv MMD’s AAA benchmark scale. Short yields were steady at 0.13% in 2022 and 0.14% in 2023. The 10-year at 0.77% and the 30-year at 1.46%.

The ICE AAA municipal yield curve showed short maturities flat at 0.13% in 2022 and at 0.15% in 2023. The 10-year was unchanged 0.75% while the 30-year yield was at 1.48%.

The IHS Markit municipal analytics AAA curve showed yields at 0.14% in 2022 and 0.15% in 2023 while the 10-year as at 0.74% and the 30-year yield at 1.44%.

The three-month Treasury note was yielding 0.09%, the 10-year Treasury was yielding 1.14% and the 30-year Treasury was yielding 1.88%. The Dow fell 91 points, the S&P 500 fell 0.65% and the Nasdaq fell 1.19%.

Economic indicators
Not much data was released on Monday. The Conference Board’s employment trends index slipped to 99.01 in December from 99.05 in November. Before that it increased seven months in a row.

“The latest employment trends index numbers signal that the labor market recovery has paused, and in the coming months employment will likely remain stagnant or even dip,” according to Gad Levanon, head of The Conference Board Labor Markets Institute. “We expect in-person services such as restaurants, hotels, entertainment, passenger transportation, and personal and childcare services to take the biggest employment hit. The number of jobs in most other industries should continue to grow.”

Three of the index’s eight components fell in the month, led by initial jobless claims.

Also released Monday, the Federal Reserve Bank of New York’s December survey of consumer expectations showed 3% inflation is expected at both the one- and three-year intervals. The one-year was unchanged from November’s expectation, but the three-year rose from 2.8%. However the median inflation uncertainty also increased.

Primary market still to come
J.P. Morgan Securities LLC is set to price $1.3 billion of Corporate CUSIP taxable refunding bonds for Baylor Scott & White Holdings (Aa3/AA-/NR/NR) Thursday.

Loop Capital Markets is set to price $442 million of turnpike subordinate revenue bonds for the Pennsylvania Turnpike Commission (A3/A/A-/A+).

The Virginia College Building Authority is set to sell $356.9 million of taxable educational facilities revenue refunding bonds on Wednesday.

Barclays Capital Inc. is set to price $340 million of general obligation refunding bonds for Cook County, Illinois (A2/A+/A+/) on Thursday.

Goldman Sachs & Co. LLC is set to price $300 million of taxable bond for the Trinity Health Credit Group (Aa3/AA-/AA-/) on Tuesday.

Barclays Capital is set to price $250 million of electric system general revenue notes for the Long Island Power Authority (A2/A/A/) on Wednesday.

Jefferies LLC is set to price $250 million of Texas Veterans Land Board (Aaa///) variable rate demand bonds with terms in 2051 on Tuesday.

Multnomah County, Oregon will competitively sell $229.4 million of taxable general obligation bonds on Tuesday. The County will also sell $157 million of exempt GOs on Tuesday.

RBC Capital Markets is set to price $175 million of taxable revenue refunding bonds for the California Statewide Communities Development Authority (A1/A+/A_/) (California Independent System Operator Corporation Project green bonds) with serials 2022-20235 and terms in 2039.

Morgan Stanley & Co. LLC is set to price $173.6 million of sales tax revenue bonds for Cook County, Illinois (NR/AA-/NR/AAA).

Stifel, Nicolaus & Company, Inc. is set to price $171.6 million of taxable and tax-exempt refunding bonds for the City of Yuma, Arizona (/AA-/AA-/).

BofA Securities is set to price $147 million of taxable pension obligation bonds for the City of El Cajon, California (/AA//) on Wednesday.

BofA Securities is set to price $127.6 million of St. Luke’s University Health Network Hosiptal revenue bonds for the Bucks County Industrial Development Authority, Pennsylvania (A3/A-//).

Fremont, California USD is set to sell $126.5 million of general obligation bonds on Wednesday.

Raymond James & Associates, Inc. is set to price $124.9 million of Stevenson University revenue refunding bonds for the Maryland Health and Higher Educational Facilities Authority (NR/BBB-/NR/), serials, 2029-2041, terms 2046, 2051 and 2055.

Ziegler is set to price $120 million of Springpoint Senior Living Project revenue refunding bonds for the National Finance Authority (NR/NR/BBB+/) Wednesday.

Barclays Capital is set to price $100 million of taxable general obligation refunding bonds for the Fremont, California, Unified School District on Thursday.

J.P. Morgan Securities LLC is set to price $100 million of corporate CUSIP taxable bonds for American University (A1/A+/NR/NR)Thursday.

Gary Siegel contributed to this report.

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Secondary bond market Primary bond market Taxable bonds Economic indicators Volatility Coronavirus
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