National emergency declared as munis get respite from extreme volatility

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After a week in which all markets faced a historical whirlwind from the COVID-19 spread, Friday marked a somewhat calm tenor for the municipal market.

Uncertainty still abounds for the public finance space, as just before the market close, President Trump declared a national emergency. Meanwhile, states and cities across the country are closing schools, courts, national sporting events, and cutting back public transit. But Friday, at least, provided some reprieve from the five previous volatile days.

Triple-A benchmarks were steady, with some even seeing a few bumps, while participants await a new week in which issuers will see whether they can access the market.

“I would think that most people are still trying to digest the week we went through and doing their best to try and get back to normal,” a New York trader said. “The key word there being ‘trying,’ as that may be easier for some and not so easy for others.”

Meanwhile, the new-issue calendar looks to be about $5 billion with the last-minute addition of the New York State Urban Development Corporation putting a $1.58 billion state sales tax revenue refunding bond deal on the calendar.

"One of the beauties and challenges is how many issuers, CUSIPS, coupons, call dates and other structural features that we have in the municipal market," said John Heppolette, head of municipal markets and finance at Citigroup. "When you have a large move, and a lot of idiosyncratic moves, it's very hard for a pricing service to value more than a million CUSIPS all of the same."

"Muni yields are still attractive for issuers on a historical basis and as a market we will get through this," Heppolette said. "Primary volume will be much more market-dependent than usual, but municipalities have the liquidity to wait and will still have low debt costs."

What's transpired?
It took exactly a year—between January 2019 and January 2020—for the 10-year AAA spot to rally 100 basis points and just four trading days to sell off 85 basis points,” said Kim Olsan, senior vice president of municipal bond trading at FHN financial. “Dramatic moves in response to liquidity needs have taken implied spots back to levels from June 2019.”

She added that for many months, the market fought and struggled to justify 0%-2% handles, but relative value was more or less well aligned and levels adjusted accordingly.

“When COVID-19 emerged and a flight to quality took hold, relative value was the first sign of becoming distorted well to the high side of history,” Olsan said. “But the recent distress forced yields back to a more natural equilibrium—mid-1% inside 10 years, 2% now in high-grade 10-year bonds and long-dated 3% handles.”

She also said that sellers were met by bid levels dramatically wider from their lows of just a few days ago.

“Once momentum developed with customer orders and post-bid follow-through business, there was a sense of some workable trading range developing,” she said. “In some cases, levels were adjusted 100 basis points or more from a week ago.”

Tom Kozlik, head of municipal strategy and credit at Hilltop Securities said that we are now at the point where several economists are calling for a 100 basis point cut and potentially additional quantitative easing measures by the Federal Reserve at their March 18 meeting.

“After the Federal Reserve enacted their surprise 50 basis point cut on March 3, much has happened in municipals,” he said, noting that after a record 60 straight weeks of flows into municipal mutual funds, Lipper reported on March 5 that $249 million flowed out of municipal funds. “This was an important signal of shifting investor demand and a key dropping off point because previously it could have been argued that municipals were being viewed as one of the sheltered asset classes.”

After that, munis were no longer sheltered.

“Demand for U.S. Treasuries accelerated and caused municipal-to-Treasury ratios to rise, however this M/T environment was generally not seen as a buying opportunity,” Kozlik said. “A total of about $11 billion of primary market municipal issuance was expected to price during the week of March 9, but municipal bond market demand has been unsteady at best. The issues that were being priced came at spreads wider than expected.”

Then the storm.

Kozlik said there is still too much uncertainty among the investor community at this point.

“If [this kind of activity] continues, it only serves to complicate the municipal investor landscape,” he said. “Now the ability for the market to be accessed remains questionable. Price discovery remains a key challenge now as investors have backed off most likely because of the uncertainty they face.”

He also said that there certainly could be some moments where we see a limited amount of investor interest, but exactly when and at what level is a mystery.

“How long this environment lasts and how much worse it becomes is currently unknown,” Kozlik said. “Still likely in the very early stages of what can be described as the financial impact from the COVID-19 effect.”

Secondary market
“Municipal bonds are experiencing a day of relative calm after the debacle of the past few trading sessions,” ICE Data Services said in a Friday market comment. “Pricings are inching back up again; yields on the ICE muni curve are down two basis points in the front end and four basis points in the longer end at midday.”

ICE said the curve was flatter on Friday by two basis points, but noted that it steepened 23 basis points week-over-week.

“Trade volume remains strong, especially in light of it being Friday,” ICE said. “High-yield bonds are also showing gains, in the five basis points range. Taxable yields are generally higher, in line with Treasuries.”

Munis were weaker on Friday on the MBIS benchmark scale, with yields rising nine basis points in the 10-year and by nine basis points in the 30-year maturity. High-grades were also weaker, with yields on MBIS' AAA scale increasing by seven basis points in the 10-year maturity and by seven basis points in the 30-year maturity.

Munis were steady on Refinitiv Municipal Market Data’s AAA benchmark scale, as the yield on both the 10-year muni and 30-year muni GO were unchanged from 1.61% and 2.32%, respectively.

BVAL was little changed, while ICE bumped their curve by three to four basis points.

The 10-year muni-to-Treasury ratio was calculated at 168.8% while the 30-year muni-to-Treasury ratio stood at 147.6%, according to MMD.

“The last time M/T Ratios were close to this level was December 2011 when it hit 123% and December 2008 when it peaked at 186%,” Kozlik said. “And while M/T ratios continued to rise, the movement was still generally not considered a buying opportunity.”

Stocks took a positive turn on Friday, with all three major indexes in the green by at least 5%.

The Dow Jones Industrial Average was up about 6.07%, the S&P 500 index was higher by 6.07% and the Nasdaq gained roughly 5.69% late in the session on Friday.

The three-month Treasury was yielding 0.267%, the Treasury two-year was yielding 0.498%, the five-year was yielding 0.714%, the 10-year was yielding 0.979% and the 30-year was yielding 1.559%.

Puerto Rico bonds were trading up on Friday, according to ICE.

“Commonwealth GO 8% due 2035 are up 2 ¼ points to $67, COFINA 5% due 2058 (74529JPX) are up 2 ¾ points to $101 and GDB Debt Recovery bonds (36829QAA) are up 3 ½ points to $67 ¾,” ICE said.

Primary market
In a last-minute addition, the New York State Urban Development Corporation (Aa1/AA+/AA+/NR) added a $1.58 billion state sales tax revenue refunding bond deal that is set to be priced by Goldman.

This addition brings the volume up.

Municipal bond volume is estimated at $4.88 billion next week, with at least $4.13 billion of negotiated deals and $753 million of competitive offerings.

The calendar has 22 deals $100 million or larger with six of them being taxable or partially taxable.

There is a growing list of deals that are either scheduled to come the week of March 16 or on the day-to-day calendar: New Hope Cultural Educational Facilities Financing Corp.’s $668.95 million of taxable bonds; Kentucky Public Energy Authority’s $536.04 million; Stanford Health Care’s $524.417 million of taxable corporate cusip bonds; Ohio Water Development Authority’s $450 million; California County Tobacco Securitization Agency’s $337.207 million; City of Ontario, California’s $340.305 million of taxable bonds; State of Wisconsin’s $280.590 million of taxable bonds; Florida Development Finance Corp.’s $233.805 million of federally taxable bonds; Port of Morrow, Oregon’s $190 million of federally taxable bonds; San Bernardino Community College District’s $143.250 million; Aledo Independent School District, Texas’ $128.85 million; And Rhode Island Housing and Mortgage Finance Corp.’s $119.045 million.

Citi is scheduled to price the Great Lakes Water Authority’s $1.2 billion deal that includes a water tranche and sewer tranche in the upcoming week.

Citi intents to take indications of interest on the $706.675 million of taxable sewage disposal system revenue refunding bonds on Wednesday as well as the taxable piece in $454.51 million of water supply system tax-exempt new money revenue and taxable refunding tranche.

The final pricing on both the water and sewer pieces is scheduled for Thursday.

"It's on the calendar and that's the plan as of today, but like all deals right
now it could change depending on the market," said one a municipal source working on the deal.

Wells Fargo is expected to price New York State Housing Finance Agency’s $319.945 million of affordable housing revenue, refunding and sustainability bonds on Wednesday.

Citi is also scheduled to price Lower Colorado River Authority’s ( /A/A+/ ) $304.305 million of transmission contract refunding revenue bonds on Tuesday.

"We saw more buyers at adjusted levels in secondary trading this morning, which made us more comfortable and encouraged going into next week," said Jay Wheatley, head of municipal syndicate at Citi.

“This past week, we saw credit spreads widen and 40 transactions got moved to day-to-day status. We are telling issuers to remain ready, so that they able to pounce and price when necessary at the right time," said Paul Creedon, co-head Citi public finance department.

The Federal Open Market Committee is scheduled to meet on Tuesday and Wednesday, with what will most likely conclude with another cut in interest rates.

By "Given the risk market meltdown, consensus has moved to a 100 bps cut by the Fed at or before next week’s meeting, with which I concur,” said John Vail, chief global strategist at Nikko Asset Management. “Since the ECB did not cut rates, the BOJ will not likely either next week. Among many other supportive BOJ measures, I still expect it to increase its ETF target, which has now become consensus, but the market reaction will depend on how high it will be and any restrictions put on its implementation. A doubling of the target to 12TT Yen would very positively impress the market, but 9TT would be a major positive too."

Lipper reports outflows again
For the second week in a row, investors pulled cash from the municipal market.

In the week ended March 11, weekly reporting tax-exempt mutual funds suffered $1.760 billion of outflows, after outflows of $249.657million in the previous week, according to data released by Refinitiv Lipper late on Thursday.

Exchange-traded muni funds reported outflows of $11.302 million, after outflows of $156.744 million in the previous week. Ex-ETFs, muni funds saw outflows of $1.749 billion after outflows of $92.913 million in the prior week.

The four-week moving average remained positive at $505.886 million, after being in the green at $1.478 billion in the previous week.

Long-term muni bond funds had outflows of $1.657 billion in the latest week after outflows of $377.862 billion in the previous week. Intermediate-term funds had outflows of $155.616 million after outflows of $6.813 million in the prior week.

National funds had outflows of $1.623 billion after outflows of $204.484 million while high-yield muni funds reported outflows of $1.729 billion in the latest week, after outflows of $128.523 million the previous week.

Bond Buyer indexes jump up
The weekly average yield to maturity of the Bond Buyer Municipal Bond Index, which is based on 40 long-term bond prices, rose seven basis points to 3.46% from 3.39 % the week before.

The Bond Buyer's 20-bond GO Index of 20-year general obligation yields was vaulted 26 basis points up to 2.57% from 2.31% the week before.

The 11-bond GO Index of higher-grade 11-year GOs increased 26 basis points to 2.10% from 1.84% the prior week.

The Bond Buyer's Revenue Bond Index was up 26 basis points to 3.07% from 2.81% from the previous week.

The yield on the U.S. Treasury's 10-year note fell to 1.47% from 1.56% the week before, while the yield on the 30-year Treasury was lower to 1.47% from 1.56%

Meanwhile, “the impact of the U.S. Federal Reserve’s new repo related QE commitment of $1.5 trillion is resonating positively, and government policymakers around the world also became focused, recommitting to doing what it takes to support their respective economies,” said Steve Skancke, chief economic advisor at Keel Point. “The U.S. Congress and White House appear closer to an agreement, which is markedly different than how the day started Thursday.”

Chip Barnett and Lynne Funk contributed to this report.

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