Munis little changed as new supply, FOMC meeting loom over market
Municipals were little changed Monday ahead of the week’s nearly $10 billion new-issue slate. Muni yields remained steady along most of the AAA GO scales.
“Munis got off to a slow start with nominal activity as participants await this week's slate of new deals and the latest from the FOMC on Wednesday,” said Peter Franks, Refinitiv MMD’s senior market analyst.
With no interest rate changes expected in the foreseeable future, the market will keep an eye on the FOMC's Summary of Economic Projections, or dot plot. The last dot plot released in June showed no FOMC participants expected rates to rise before 2022 and only two see them rising then.
"If there is one takeaway from this market it is that yields are just still so remarkably low," a New York City trader said. "How can we look at New York City TFAs at 5s in 2041 trading at 1.96%-1.95% while pricing in May at 2.37%? Washington Suburban Sanitation District 2s of 2041 trading at 2.01%, originally pricing at 2.10% last week.
Through the second week of the month, tax-free municipal bonds are still trying to find their footing and a definitive direction for performance, according to Eric Kazatsky, senior municipal strategist at Bloomberg Intelligence.
“Munis' September track record may work against them, as the month has historically been a more challenging period for performance,” Kazatsky said. “While U.S. Treasuries rallied last week, munis didn't partake in the bounce. The belly and longer end of the curve, once again, showed slight weakness.”
He said muni trading has been somewhat range-bound for the first part of September, with AAA rates mostly unchanged.
“However, when you look down a rating rung to AA revenue bonds, the movement in munis is much more pronounced, with five-year rates declining by 14 basis points,” he said. “Conversely, a move in AA general obligation bonds has been largely nonexistent.”
He noted that by traditional measures, the U.S. is in a recession.
“Knowing that, we may be able to look back at past recessionary periods to draw some inferences about the potential direction for municipal bonds in the second half,” he said. “The last time period we can point to is 2007-09. In 2008, the Bloomberg Barclays Municipal Bond Index returned minus 2.475% for the year, after returns were positive 1.57% through August. Comparatively, munis have returned 3.29% through the same time period this year.”
Volume this week is estimated at $9.8 billion, composed of $5.9 billion of negotiated deals and $3.9 billion of competitive sales.
Jefferies priced for retail the New York City Transitional Finance Authority’s (Aa1/AAA/AAA/NR) $900 million of tax-exempt future tax secured subordinate Fiscal 2021 Series C Subseries C-1 bonds.
The bonds were priced for retail to yield from 0.28% with a 3% coupon in 2022 to 2.18% with a 4% coupon in 2040; a 2048 maturity was priced for retail as 3s to yield 2.56%.
The TFA will also competitively sell $173 million of taxables on Tuesday.
Public Resources Advisory Group and Frasca & Associates are the financial advisors. Norton Rose and Bryant Rabbino are the bond counsel.
Proceeds from the sales will be used to fund capital projects and convert certain floating rate debt to fixed rate debt.
On Tuesday, the Metropolitan Transportation Authority (A3//A+/AA+) is competitively selling $900 million of Series 2020D transportation revenue climate bond certified green bonds in three offerings of $300 million each.
PRAG and Rockfleet Financial Services are the financial advisors. Nixon Peabody and D Seaton & Associates are the bond counsel.
According to NYC Comptroller Scott Stringer’s office, subway ridership passed the 1.5 million mark on Sept. 3, its highest level since mid-March. Weekday ridership also continued to rise after the Labor Day holiday, averaging 1.57 million on Sept. 8 and 9.
However, as of last Wednesday, ridership was 71% lower than it was in 2019.
Looking at bus ridership, after the end of free fares on local buses at the end of last month, weekday ridership fell 23% in the week ending Sept. 4, dropping from an average of 1.30 million riders to 1.01 million. Local buses had been free from March 23 to Aug. 31 to enable rear-door boarding and social distancing between drivers and riders.
Citigroup is expected to price the Mount Sinai Obligated Group’s (A3/A-/NR/NR) $400 million of corporate CUSIP taxable bonds on Tuesday.
On Wednesday, BofA Securities will price Brown University's (Aa1/AA+//) $370 million of taxables.
In the competitive arena on Wednesday, Pennsylvania (Aa3/A+/AA-//) is selling $470 million of general obligation bonds.
PFM Financial Advisors and Sustainable Capital Advisors are the financial advisors. Stradley Ronon and the Tucker Law Group along with the State Attorney General are the bond counsel.
Some notable trades Monday:
Irving Texas ISD 5s of 2024 traded at 0.22%. Hamilton County, Texas, 5s of 2024 traded at 0.24%. Ohio waters, 5s of 2031, at 1.01%-0.99%. Charlotte, North Carolina waters 5s of 2032 at 1.05%, originally priced the same. Maryland GOs, 5s of 2033, at 1.11%-1.10%. Forsyth School District, Georgia, 5 of 2037 at 1.26%-1.20%. Fairfax County, Virginia, GOs, 5s of 2037 traded at 1.31%-1.21%. New York City TFA, 4s of 2039 traded at 2.01%-1.93% while pricing last December at 2.40%.
“Tax-exempt munis were mostly flat last week outperforming most other taxable fixed income asset classes as rates were under pressure,” Wells Fargo Securities said in a Monday market report.
Week over week, taxable munis underperformed, Wells Fargo said, adding however the year-to-date total return performance has been strong — at 9.3% for the taxable index and 10.7% for the Build America Bond index.
“With rates under pressure, duration and lower-rated investment-grade underperformed; the long-end underperformed the front-end by 12 basis points and BBBs underperformed AAAs by nine basis points,” Wells Fargo said.
Last week, the most traded muni sector was industrial development followed by education and utilities, IHS Markit said.
High-grade municipals were unchanged on Monday, according to final readings on Refinitiv MMD’s AAA benchmark scale.
Yields were flat in 2021 and 2022, at 0.12% and 0.13%, respectively. The yield on the 10-year muni was steady at 0.84% while the 30-year yield remained at 1.58%.
The 10-year muni-to-Treasury ratio was calculated at 125.6% while the 30-year muni-to-Treasury ratio stood at 112.1%, according to MMD.
"Municipal bonds are getting off to a slow start this week," ICE Data Services said. "After a strong Friday, trade volumes have fallen significantly."
The ICE AAA municipal yield curve showed the 2021 maturity unchanged at 0.13% and the 2022 maturity flat at 0.13%. The 10-year maturity was steady at 0.80% and the 30-year was flat at 1.59%.
The 10-year muni-to-Treasury ratio was calculated at 125% while the 30-year muni-to-Treasury ratio stood at 111%, according to ICE.
The IHS Markit municipal analytics AAA curve was showed the 2021 maturity yielding 0.14%, the 2022 maturity at 0.15%, the 10-year muni at 0.85% and the 30-year at 1.59%.
The BVAL AAA curve showed the yield on the 2021 maturity unchanged at 0.11%, the 2022 maturity steady at 0.14%, the 10-year flat at 0.81% and the 30-year unchanged at 1.58%.
Treasuries were stronger as stock prices traded higher.
The three-month Treasury note was yielding 0.112%, the 10-year Treasury was yielding 0.666 and the 30-year Treasury was yielding 1.410%.
The Dow rose 1.20%, the S&P 500 increased 1.30% and the Nasdaq gained 1.75%.