Munis steady but high-yield outperforms, investors await supply

Municipals were firmer in spots but triple-A yield curves held at Friday's levels even as U.S. Treasuries gained on the tail of equity losses.

The start of the new week brought with it an increasing demand for paper amid ongoing scarcity and high-yield is the paper du jour.

On a week-over-week basis, the performance of municipals compared to UST was a bit of a mixed bag, with the best outperformance for tax-exempts coming in the 30-year tenor, according to Eric Kazatsky, senior strategist at Bloomberg Intelligence. Returns of all the investment grade options "pale in comparison to those for municipal high-yield."

The Bloomberg Barclays Municipal High Yield Index has returns of 1.53% in 2021. That marks the second-best start to a year since 2020, which saw 1.76% returns over the first three weeks in January, he noted.

This week’s $1.3 billion Texas gas deal is the biggest on the calendar and with A3/BBB+ ratings, it should provide some yield. Chicago school bonds with BB-/BBB ratings will also contribute to the yield hunt and issuers should be greeted with high demand.

Though municipals continue to outperform Treasuries, the "percentages are grinding lower, and the Street is thin,” a New York trader said. “I don’t think we are ready for inflation to impact rates, but in general we can make a case for being here for a while.”

Municipals as a percentage of Treasuries ticked up Monday to 74% in 10 years and 80% in 30 years, according to Refinitiv MMD. Ratios were at 72% in 10 years and 82% in 30, according to ICE Data Services.

If last week was any indication for this week's performance, new issues continue to be highly sought after and oversubscribed.

“They are getting great numbers and bumped and they trade up in the secondary,” the trader said.

Going forward, he said, the activity in the remainder of the quarter depends on rates and uncertainty in Washington regarding the outcome of state and local stimulus plans.

“It depends on the stimulus for the state and local government bailout,” he said. “Depending on that maybe they won’t have to come to market, but it’s hard to say.”

The New York City Transitional Finance Authority said it will price about $1.3 billion future tax-secured subordinate bonds Feb. 3. The deal will be led by Wells Fargo Securities with $1 billion of tax-exempt fixed-rate bonds and $300 million of taxable fixed-rate bonds. The deal will have a two-day retail order period beginning Monday.

The TFA will also sell $300 million of taxable bonds in the competitive market on Feb. 3.

Primary market to come this week
BofA Securities is set to price $1.09 billion of gas supply revenue refunding bonds for the Texas Municipal Gas Acquisition and Supply Corp. (A3/BBB+//).

Barclays Capital Inc. is set to price $664.3 million of Los Angeles International Airport revenue refunding bonds for the Department of Airports of the City of Los Angeles (Aa3/A+/AA-/). Series A, $420 million, is serials from 2025-2041, terms 2046 and 2051. Series B, $244 million is serials 2025-2041, terms 2046 and 2048. Barclays will also price $95 million of subordinate taxable revenue refunding bonds for the issuer on Wednesday. Serials 2025-2036.

J.P. Morgan Securities LLC is set to price $560 million of unlimited tax general obligation and refunding GOs for the Board of Education of the City of Chicago (NR/BB-/BB/BBB-/).

Goldman Sachs & Co. LLC is set to price $398.7 million of taxable senior- and junior-lien toll road refunding revenue bonds for the Foothill/Eastern Transportation Corridor Agency, (Baa2//BBB/). The senior-lien Series 2021B, $244.9 million, is rated Baa2/A-/BBB/. Series 2021D junior-lien $153.8 million is rated Baa2/BBB+/BBB-/. The deal is set for Tuesday.

UBS Financial Services Inc. is set to price $319 million of taxable general obligation refunding bonds for the Metropolitan Government of Nashville and Davidson County, Tennessee, (Aa2/AA//) on Tuesday. Serials 2021-2027, 2031-2032.

UBS is also set to price $131.9 million of tax-exempt general obligation refunding bonds for the issuer on Tuesday. Serials 2021-2026.

J.P. Morgan Securities LLC is set to price $275 million of Yale University revenue bonds for the Connecticut Health and Educational Facilities Authority (Aaa/AAA/NR/NR) on Thursday.

Fairfax County, Virginia, (Aaa/AAA/AAA/) is set to sell $263 million of unlimited tax general obligation bonds at 10:45 a.m. Tuesday. Serials 2021-2040.

Jefferies LLC is set to price $175 million of taxable limited tax refunding bonds for Williamson County, Texas (NR/AAA/AAA/NR). Serials 2022-2033.

Raymond James & Associates, Inc. is set to price $151.9 million of electric system revenue bonds for Nashville and Davidson County (/AA/AA+/) on Tuesday. Serials 2022-2041, term 2046.

Citigroup Global Markets Inc. is set to price $140.9 million of turnpike revenue bonds for the Ohio Turnpike and Infrastructure Commission (Aa2/AA-/AA/) on Tuesday. Terms in 2046, 2051.

J.P. Morgan Securities LLC is set to price $135 million of taxable corporate CUSIP bonds for The Nature Conservancy, D.C. (Aa2///) on Wednesday.

Stifel, Nicolaus & Company, Inc. is set to price $111 million of Galveston and Brazoria Counties, Texas unlimited tax school building bonds for the Friendswood Independent School District (Aaa/AAA//) (PSF insured) on Thursday. Serials 2022-2051.

Jefferies LLC is set to price $105 million of Stoneridge Apartments essential housing revenue bonds for the California Community Housing Agency on Tuesday. Terms in 2056.

Knoxville, Tennessee, (/AA+//) will competitively sell $104 million of unlimited tax GOs at 10 a.m. Tuesday. Serials 2022-2041.

Secondary market
Secondary trading showed several high-grades steady or a basis point or two better.

Wake County, North Carolina, GOs, 5s of 2022 traded at 0.10%. Loudoun County, Virginia, 5s of 2022 at 0.11%-0.10%. Georgia GOs in 2024 at 0.18%-0.17%. Montgomery County, Maryland GOs, 5s of 2024 traded at 0.17%. Oregon GOs, 5s of 2025, traded at 0.26%. Baltimore County, Maryland, 5s of 2025 at 0.23%. Last Tuesday, they traded at 0.26%, in line with the three basis point improvement last week.

New York Dormitory Authority personal income tax 5s of 2026 traded at 0.37%-0.36%, 5s of 2027 at 0.51%-0.50%.

Yale 5s of 2029 traded at 0.64% and 0.66% Thursday. Columbus, Ohio, GOs, 5s of 2031 traded at 0.87%-0.84% versus 0.88%-0.86% Wednesday and 0.92% original yield. Maryland GOs in 2033 traded at 0.96% versus 1.01% Tuesday. Channelview Texas ISD 2s of 2040 traded at 1.68%-1.62%. On Thursday they traded at 1.79%-1.73% after yielding 1.79% original.

High-grade municipals were steady, according to final readings on Refinitiv MMD’s AAA benchmark scale. Short yields were at 0.11% in 2022 and 0.12% in 2023. The 10-year sat at to 0.75% and the 30-year sat at 1.44%.

The ICE AAA municipal yield curve showed short maturities at 0.11% in 2022 and 0.13% in 2023. The 10-year remained at 0.75% while the 30-year yield stayed at 1.46%.

The IHS Markit municipal analytics AAA curve showed yields at 0.13% in 2022 and 0.14% in 2023 while the 10-year remained at 0.74% and the 30-year yield at 1.43%, also unchanged.

The Bloomberg BVAL AAA curve showed yields at 0.11% in 2022 and 0.12% in 2023, down one basis point, while the 10-year fell one basis point to 0.72% and the 30-year yield at 1.46% was one basis point lower.

The three-month Treasury note was yielding 0.09%, the 10-year Treasury was yielding 1.04% and the 30-year Treasury was yielding 1.80%, both five basis points lower. The Dow fell 75 points, but pared back earlier triple-digit losses, the S&P 500 rose 0.25% and the Nasdaq rose 0.54%.

FOMC meeting to calm markets
The Federal Open Market Committee meeting should soothe the markets, as economists expect the panel to clarify its thoughts on tapering its asset purchases — they won’t be a cut anytime soon — and perhaps better explain its plans on inflation averaging and what it means for the fed fund target rate.

The panel should be more optimistic about economic conditions expected later this year, as the Biden administration should off more stimulus, according to Diane Swonk, chief economist at Grant Thornton, and “will openly welcome and underscore the close relationship he has with his former boss, colleague and friend, the new Treasury Secretary Janet Yellen. The Fed and Treasury will need to work closely to limit damage to the economy going forward; I can’t imagine a closer and more collegial alliance than that between Powell and Yellen.”

Federal Reserve Chair Jerome Powell at his post-meeting press conference, “will face tough questions about where the FOMC actually stands with regard to its self-imposed average inflation target and balance sheet operations,” Swonk said. And while he will attempt to assuage market participants that monetary policy will not change soon, “that may not be enough given the mixed messages the Fed has been sending on its decision rules and the anxiety building in financial markets about the Fed’s willingness to expand its balance sheet.”

Ian Seaver, head of fixed income and multi-asset reseacrh at Hartford Funds, suggests the FOMC will “emphasize a comfort level with current accommodation and convey that any reduction in asset purchases is not a near term consideration.”

While “inflation could start taking hold as the current monetary policy stance is augmented with additional fiscal stimulus,” he said, “based on previous guidance, we would not expect a change in policy response until there is clear evidence that inflation is being maintained at a healthy level and the economy is on solid footing.”

Tapering asset purchases this year seems “unlikely,” Seaver said, “unless there is substantial and sustained improvement in economic data to support the Fed’s inflation and employment goals.”

Market participants hope the Fed sticks close to prior statements and “continue to err on the side of caution to sustain the recovery,” he said.

“All of this talk of tapering and rate hikes is a nonsense,” said Craig Erlam, senior market analyst at OANDA Europe, “especially given the tweaks to its targeting that ensures we won't be facing tightening any time soon, until long after the pandemic.”

The unknown rattles investors, he added, and the Fed knows that. “Policy makers have been on the PR offensive in recent weeks to avoid a needless taper tantrum repeat and reassure investors they have nothing to worry about.”

“For now, we expect the Fed to stick to the prevailing policy stance and not to initiate tapering discussions — even though there is some divergence among FOMC members on this issue,” said Christian Scherrmann, U.S. economist at DWS Group.

The annual rotation of voters, which gives Federal Reserve Bank of Atlanta President Raphael Bostic, and others, representation this year, comes shortly after he said he was “… hopeful that in fairly short order we can start to recalibrate.” The comments rattled the markets until Powell spoke and said this wasn’t the time to talk about tapering.

“The recently passed round of fiscal support and the prospect of still larger stimulus may raise the Fed’s optimism on economic prospects,” Scherrmann said, “but the Fed will not share this optimism without warning that the path from now to a happy summer of vaccines, fiscal largesse, and better weather, reducing infections and boosting growth, could be rough.”

Economic data, including jobless claims and retail sales, recently posting weaker than expected, “give grounds for caution,” he said. Indications that inflation could be rising “suggest an economy that might eventually be able to reflate, which fits well with the inflation tolerance the Fed has incorporated into its new framework.”

Despite Bostic’s concern that less accommodation may be needed later this year, Morgan Stanley researchers said, “We do not expect the annual rotation of voters to upset the message that the Fed is comfortable with the current amount of policy accommodation, and we think the chair will continue to stress that any talk of tapering its asset purchases is premature.”

Tapering will begin next year, Morgan Stanley believes.

In data released Monday, factory activity in Texas expanded much slower, according to the Federal Reserve Bank of Dallas’ Texas Manufacturing Outlook Survey.

The production index dropped to 4.6 in January from 26.8 in December, while the new orders index fell to 6.3 from 19.6, the general business conditions index declined to 7.0 from 10.5, while at the company level conditions slid to 10.3 from 18.2. The outlook uncertainty index rose to 19.3 from 13.4.

The future production index slipped to 43.7 in January from 47.3 in December, while the new orders index climbed to 40.1 from 38.1, the general business conditions index gained to 29.6 from 17.8, while at the company level conditions rose to 27.7 from 24.7.

Separately, the Federal Reserve Bank of Chicago’s National Activity Index for December gained to 0.52 from 0.31 in November, with 53 of the 85 components making positive contributions, suggesting stronger economic growth.

The three month average, CFNAI-MA3, crept to 0.61 from 0.59, while the Diffusion Index slid to 0.54 from 0.55.

Christine Albano contributed to this report.

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Secondary bond market Primary bond market New York City Transitional Finance Authority Texas Board of Education of the City of Chicago Economic indicators FOMC
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