Munis steady ahead of new supply as demand keeps market moving ahead
Municipals were flat on Monday, with yields on the AAA scales ending unchanged ahead of this week’s new issue supply.
Market participants said secondary activity was rather sluggish.
"Trade volumes today are extremely low, making this one of the quietest days of 2020," ICE Data Services said. "There is $8.1 billion slated to come to market this week, led by New York City."
Continued demand for municipal paper keeps driving the market forward, said FHN Financial Senior Vice President Kim Olsan.
“After what amounted to a modest pullback in rates during a week of more than $14 billion priced across all sectors speaks to the ongoing demand and fundamental pull,” Olsan said.
She noted generic yields moved eight to 10 basis points wider, but said the correction could have been bigger if reinvestment needs were not so strong.
“A projected $15 billion negative 30-day supply outlook — combined with incoming mutual fund cash exceeding $1 billion on a weekly basis — are the pulls against the tug of some yield rejection,” Olsan said.
Short-term sales from two big issuers last week pointed to defensive positioning, she said, adding, the New York’s MTA’s 1.92% note financing through the Federal Reserve’s Municipal Liquidity Facility beat out competitive bids from 20 dealers — while Texas sold more than $7 billion in one-year notes between 0.23% and 0.24%.
Further out on the curve it’s a yield-driven trade, she said, where the first 1% yield and decent curve slope are the draws.
“The 15-year/10-year curve is 34 basis points and an extension into 20 years offers another 20 basis points,” she said. “Absolute yields in this range are not only advantageous for tax-exempt buyers, but for crossover inquiry faced with anemic sovereign rates or corporate issuance that struggles to find comparable quality (J&J’s 20-year yielded 2.10% vs. Texas PSF-backed bonds about 20 basis points lower) the sector has intrigue.”
She said some of this week’s deals should continue a similar theme.
“Included in that group is AA-rated Michigan fuel sales tax bonds with a 25-year maximum maturity that will offer interesting spreads,” Olsan said.
This week’s volume is estimated at $8.2 billion, with $7.1 billion of negotiated deals and $1.1 billion of competitive sales.
On Tuesday, BofA Securities is set to price Fairfax County, Va.’s (Aaa/AAA/AAA/) $295 million of taxable public improvement refunding bonds.
On Wednesday, New York City (Aa1/AA/AA/NR) is coming to market with $1.38 billion of general obligation bonds.
Citigroup is set to price $1.08 billion of the city’s tax-exempt GOs on Wednesday after a one-day retail order period on Tuesday. The city will also competitively sell $304.15 million of taxables in two offerings on Wednesday.
The city’s central treasury balance, or those funds available for expenditure, stood at $9.135 billion as of Aug. 19, Comptroller Scott Stringer’s office said on Monday. At the same time last year, the city had a balance of $5.824 billion.
Private employment in the city continued to rebound from the impact of the pandemic. Private jobs rose to 3.4 million in July, an increase of over 100,000 from June, as some offices and businesses began to reopen.
However, in the week ended Aug. 15, initial unemployment claims by city residents rose to 33,591 from 28,447 in the previous week.
Goldman Sachs is expected to price the Trustees of California State University’s $1.35 billion of systemwide revenue bonds on Wednesday after a one-day retail order period on Tuesday.
The deal is composed of $528.77 million of Series 2020D taxables, $526.14 million of Series 2020E taxables and $294.265 million of Series 2020C tax-exempts.
JPMorgan Securities is set to price Michigan’s (Aa2/AA+/NR/NR) $800 million of state trunk line fund bonds being issued under the Rebuilding Michigan program on Wednesday.
JPMorgan is also set to price the University of Chicago’s (Aa2/AA-/AA+/NR) $300 million of taxable corporate CUSIP fixed-rate bonds on Wednesday.
Siebert Williams Shank is expected to price the Chicago Transit Authority’s (/A+//AA-) $345 million of second lien sales tax receipts revenue refunding bonds on Thursday.
Last week, the most traded muni sector was industrial development followed by education and utilities.
“Tax-exempt munis underperformed [last week], as the ongoing Congressional stalemate on a next stimulus bill weighed on muni fixed income markets, pushing MMD yields up seven to 10 basis points week over week,” Wells Fargo Securities said in a report Monday.
“Taxable munis outperformed all other asset classes, as modest risk-off sentiment led a Treasuries rally,” Wells Fargo said. “Taxable munis and Build America Bonds bested MBI by 100+ basis points week over week.”
Wells added that as MMD rates came under pressure, the muni to Treasury ratios cheapened again, moving past 100% in the 10- and 30-year maturities.
Municipals were steady on Monday, according to the final readings on Refinitiv MMD’s AAA benchmark scale.
Yields were unchanged at 0.13% in 2021 and 0.14% in 2022. The yield on the 10-year muni was flat at 0.73% while the 30-year yield was unchanged at 1.46%.
The 10-year muni-to-Treasury ratio was calculated at 112.7% while the 30-year muni-to-Treasury ratio stood at 108.1%, according to MMD.
The ICE AAA municipal yield curve showed the 2021 maturity unchanged at 0.120% and the 2022 maturity steady at 0.133%. The 10-year maturity was flat at 0.708% and the 30-year was steady at 1.468%.
ICE reported the 10-year muni-to-Treasury ratio stood at 116% while the 30-year ratio was at 106%.
The IHS Markit municipal analytics AAA curve showed the 2021 maturity yielding 0.14% and the 2022 maturity at 0.15% while the 10-year muni was at 0.75% and the 30-year stood at 1.47%.
Munis were little changed on the MBIS benchmark and AAA scales.
Treasuries were weaker as stock prices traded higher.
The three-month Treasury note was yielding 0.103%, the 10-year Treasury was yielding 0.649% and the 30-year Treasury was yielding 1.351%.
The Dow rose 0.79%, the S&P 500 increased 0.54% and the Nasdaq gained 0.07%.