Municipals were little changed in secondary activity but the primary was alive with new issues repricing to lower yields, New Jersey snagged 1.69% on a 2% coupon in 10-years and Refinitiv Lipper once again reported billion-dollar-plus inflows.
"New-issue proxies are reinforcing secondary bid sides in recent weeks that have favored a down-in-credit consumption along the ratings continuum as yields remain stubbornly low," said Kim Olsan, senior vice president at FHN Financial.
In other words, high-yield isn't so high in this environment and this certainly benefitted issuers like New Jersey and Connecticut, which along with their recent rosier credit pictures, allowed for lower nominal yields.
New Jersey sold general obligation bonds with 2% coupons on most of the curve, with its 10-year with a 2% coupon yielding 1.69% while its long bond, 5s of 2041, came in at 1.64%. The 10-year from its $3.67 billion deal in November came with a 4% coupon yielding 2.08%.
"It becomes obvious when looking at specific new-issue spreads how much conditions have improved over the last year," Olsan said. She noted that Clark County, Nevada, on Wednesday sold 10-year Aa3/AA- fuel sales tax bonds at +20/AAA, 12 basis points through the authority’s October 2020 sale.
For Connecticut's $1 billion deal, the current environment offered a 10-year yield of 1.21%, +30/AAA versus a May 2020 pricing that was spread +120/AAA (and a hefty 2.17% yield).
In the single-A range, transit, healthcare and utility names offer interesting spreads to high grades, Olsan noted.
"Indicative 5-year spreads are +20-25/AAA and in intermediate and long maturities spreads widen to +30 or greater," she said. "More than spread opportunity are the absolute yields that come in play — 20-year 'A' transportation credits have implied yields of 1.75%, or a [taxable equivalent yield] of 2.25% (21% corporate bracket) and over 3% for top-bracket individuals."
"The contrast between conditions in the depth of pandemic shutdowns as compared to the current scenario with increased travel is creating meaningful savings for issuers," Olsan said.
Triple-A benchmark scales were steady for the fifth day in a row, while municipal to UST ratios also held steady, closing at 60% in 10 years and 69% in 30 years on Thursday, according to Refinitiv. MMD, and ICE Data Services had the 10-year at 60% and the 30 at 70%.
Olsan noted the steady U.S. Treasury trading range in the last 10 days which has seen intermediate and long yields hold within a 10-basis-point range is a supportive factor for munis. The UST 10-year fell Thursday to 1.55% and the 30-year to 2.24%.
"Stability in taxable levels helps not only muni relative value but also gives hedging vehicles more reliability," Olsan added.
In the primary, Goldman Sachs & Co. LLC repriced $1.032 billion of special tax obligation transportation infrastructure bonds with bumps of two to six basis points for Connecticut (Aa3/A+/A+/AA+). The first series, $875 million of exempts, saw 3s of 2022 yield 0.09% (-2), 4s of 2023 at 0.13% (-4), 5s of 2026 at 0.29% (-6), 5s of 2031 at 1.21% (-6), 4s of 2036 at 1.63% (-6), 5s of 2041 at 1.69% (-5). The second, $12 million of refunding bonds, noncallable, 3s of 2022 at 0.09% (-2) and 4s of 2029 at 1.08%. The $145 million of forward delivery exempts saw 5s of 2023 at 0.32% (-3), 5s of 2026 at 0.68% (-3), 5s of 2031 at 1.40% (-4) and 5s of 2032 at 1.50% (-5).
Barclays Capital Inc. priced $493 million of Carle Foundation fixed period revenue bonds for the Illinois Finance Authority (/AA-/AA-/). Bonds were repriced five to eight basis points lower. Bonds in 2025 with a 5% coupon yield. 0.39% (-8), 5s of 2026 at 0.52% (-8), 5s of 2031 at 1.24% (-6), 5s of 2036 at 1.52% (-5), 4s of 2041 at 1.86% (-7), 3s of 2048 at 2.42% (-5) and 4s of 2048 at 2.02% (-7). The second series, $37 million of revenue bonds mature in 2053 with a 5% coupon to yield 1.33% (-7) with a mandatory hard put on 8/15/2031.
New Jersey (A3/BBB+/A-/) sold $400 million of tax-exempt various purpose general obligation bonds to J.P. Morgan Securities LLC. Bonds in 2022 with a 2% coupon yield 0.15%, 2s of 2023 at 0.20%, 2s of 2026 at 0.69%, 2s of 2031 at 1.69%, 2s of 2036 at 2.03% and 5s of 2041 at 1.64%.
J.P. Morgan repriced $183 million of tax-exempt and taxable revenue and revenue refunding bonds with bumps of two to four basis points for the Board of Regents of the University of Arizona (Aa2/AA-//). Bonds in 2024 with a 5% coupon yield 0.19%, 5s of 2026 at 0.45% (-2), 5s of 2031 at 1.14%, 5s of 2036 at 1.37% (-4), 5s of 2041 at 1.57% (-4), 5s of 2043 at 1.64% (-4). The second, $43 million, saw 5s of 2025 at 0.32% (-2), 5s of 2026 at 0.45% (-2), 5s of 2031 at 1.14%, 4s of 2036 at 1.56%, 4s of 2041 at 1.76% and 4s of 2048 at 1.92%.
The Los Angeles Unified School District (Aa3//AA+/AAA) sold $200.9 million of dedicated unlimited ad valorem property tax general obligation refunding bonds to Barclays Capital Inc. Bonds in 2021 with a 5% coupon yield 0.05%, 5s of 2022 at 0.05%, 5s of 2023 at 0.08%, 5s of 2026 at 0.37%, 5s of 2031 at 0.94% and 4s of 2032 at 1.04%.
Secondary trading shows how New York and California issuers are clearly benefiting from the higher taxes their residents will soon face.
Some short California and New York credits were trading at AAA levels. NYC waters 5s of 2022, traded at 0.05%. New York City 5s of 2022 at 0.05%. Los Angeles MTA 5s of 2022 at 0.05%. New York MTA 5s of 2022 at 0.18%. Compare that to a Washington, D.C. 5 of 2024 at 0.18%. Prince George's County, Maryland 5s of 2022 traded at 0.10%. Montgomery County, Maryland 5s of 2024 at 0.22%.
Out longer, NYC 5s of 2039 traded at 1.61%. NYC 5s of 2050 traded at 1.95%-1.94% versus 2.01% a week ago. Los Angeles DWP 5s of 2050 traded at 1.64%.
Triborough Bridge and Tunnel Authority MTA bridges and tunnels 5s of 2056 traded at 1.97%-1.95%.
Refinitiv Lipper reports $1.9B inflow
In the week ended April 21, weekly reporting tax-exempt mutual funds saw $1.889 billion of inflows. It followed an inflow of $2.255 billion in the previous week.
Exchange-traded muni funds reported inflows of $318.711 million, after inflows of $478.221 million in the previous week. Ex-ETFs, muni funds saw inflows of $1.570 billion after inflows of $1.777 billion in the prior week.
The four-week moving average remained positive at $1.607 billion, after being in the green at $1.282 billion in the previous week.
Long-term muni bond funds had inflows of $1.489 billion in the latest week after inflows of $2.137 billion in the previous week. Intermediate-term funds had inflows of $200.490 million after inflows of $162.601 million in the prior week.
National funds had inflows of $1.801 billion after inflows of $2.157 billion while high-yield muni funds reported inflows of $641.783 million in the latest week, after inflows of $1.279 billion the previous week.
Secondary market
On Refinitiv MMD’s AAA benchmark scale, the one-year sat at 0.05% in 2022 and 0.08% in 2023. The yield on the 10-year was at 0.93% and the 30-year at 1.56%.
The ICE AAA municipal yield curve showed yields at 0.06% in 2022 and 0.09% in 2023. The 10-year maturity at 0.94% while the 30-year fell to 1.55%.
The IHS Markit municipal analytics AAA curve showed yields rise a basis point to 0.06% in 2022 and 0.09% in 2023, the 10-year at 0.91% and the 30-year at 1.55%.
The Bloomberg BVAL AAA curve showed yields at 0.04% in 2022 and 0.06% in 2023, while the 10-year at 0.91%, and the 30-year yield at 1.56%.
The three-month Treasury note was yielding 0.02%, the 10-year Treasury was yielding 1.55% and the 30-year Treasury was yielding 2.24% near the close. Equities showed losses on the day with the Dow down 313 points, the S&P 500 fell 0.89% and the Nasdaq lost 0.88% near the close.
Economy
The economy is “beginning to fire on all cylinders,” Thursday’s indicators suggest, as four of the five surpassed expectations.
“Consumers are spending, factories are boosting production, and employers are looking for more workers, all systems are a go,” said Scott Ruesterholz, portfolio manager at Insight Investment. Insight believes this year should see “the fastest economic growth since 1984.”
But, he warned, some variables, including supply-chain issues and increasing COVID cases overseas, mean “considerable” uncertainty for the economic outlook.
“Strong consumer demand and supply chain bottlenecks are presenting pricing pressure,” Ruesterholz added, “but as supply chains normalize and base effects fade, elevated levels of inflation should prove transitory.”
Also, anticipation that the output gap will persist until late 2022 “should also help to mitigate” near-term pricing pressure.
Existing home sales declined 3.7% in March to a seasonally adjusted annual rate of 6.01 million from an upwardly revised 6.24 million a month earlier, first reported as 6.22 million, the National Association of Realtors said.
Sales year-over-year climbed 12.3% from 5.35 million in March 2020.
The drop “reflects supply constraints rather than weakening demand for housing,” said Ruesterholz.
The median price soared a record of 17.2% in March to an all-time high of $329,100, with double-digit gains in every region of the country.
“It is taking just 18 days to sell a home, a record low,” he said. “The undersupplied housing market is helping to drive a substantial increase in new construction activity, which should persist for some time.”
But rent, not home prices, are included in inflation calculations, noted Ralph McLaughlin, chief economic advisor at Kukun. “Rents are pretty flat right now, but if demand for services for home rises, that would be effectively captured in inflation readings.”
However, demand drives inflation tendencies, he said, so home prices are a sign of higher inflation is on the horizon.
Affordability was a big reason for the decline in sales, McLaughlin said.
“Prices have gone up because of inventory [shortages] and there are some signs that inventory is starting to rise,” as inventories grew 3.9% in March, although remaining 28.2% lower than a year ago. “I am cautiously optimistic that maybe we start to return to normal in the housing sector in the next few months,” he said.
But, these price gains are “not sustainable,” McLaughlin said. “If prices don't come down, sales will cool even more.”
Separately, initial jobless claims fell to a pandemic low of 547,000 on a seasonally adjusted annual basis in the week ended April 17 from an upwardly revised 586,000 a week earlier.
The April 10 read was first reported as 576,000. Economists polled by IFR Markets expected 625,000 claims in the week.
This was the lowest read since 256,000 the week of March 14, 2020.
The report suggests “a labor market with considerable slack with particular weakness in areas concentrated in service employment,” said Gary Pzegeo, head of fixed income at CIBC Private Wealth, U.S.
Continued claims decreased to 3.674 million in the week ended April 10 from a downwardly revised 3.708 million a week earlier, initially reported as 3.731 million.
This is the lowest read since 3.094 million the week of March 21, 2020.
“Initial and continuing claims hit new post-shutdown lows, another indicator in a string of data releases showing progress in re-opening,” Pzegeo said.
“Over the last two weeks, seasonally adjusted initial claims are down by over 200,000 with California, Texas and Ohio among the states with the largest reduction as a percent of their labor force,” he said. “The trend in continuing claims is also encouraging, but we are still seeing Nevada and New York with an unusually high number of filers relative to their labor force.”
Ruesterholz believes an acceleration in the labor market in imminent. “Firing activity is subsiding, and with a record number of small businesses having job openings, the groundwork is in place for job growth to exceed March’s 900,000 over the next few months,” he said.
Elsewhere, the Federal Reserve Bank of Chicago’s National Activity Index climbed to positive 1.71 in March from negative a revised 1.20 in February, originally reported as negative 1.09.
The CFNAI-MA3, the three-month moving average, jumped to positive 0.54 in February from a revised positive 0.07 a month earlier, originally reported as negative 0.02, while the diffusion index gained to positive 0.40 from a revised positive 0.22, originally reported as positive 0.17.
A zero reading suggests growth at its average rate. “A substantial likelihood of a period of sustained increasing inflation has historically been associated with values of the CFNAI-MA3 above +1.00 more than two years into an economic expansion,” according to the release.
“Consistent with other data, the better-than-expected reading points to a material pickup in economic growth beyond trend,” said Insight’s Ruesterholz. “Contribution to growth was fairly evenly balanced among consumption, industrial production, and employment.”
Also released Thursday, the Leading Economic Index grew 1.3% in March to 111.6 after a 0.1% dip a month earlier, while the coincident index climbed 0.6% to 104.0 after a 0.1% slip, and the lagging index fell 0.5% to 105.1 after a 1.6% gain a month earlier, the Conference Board reported Thursday.
Economists estimated the leading index would increase 0.9%.
“The increase in LEI was broad-based, as the services and manufacturing sectors saw record-breaking improvement over the month,” said Wells Fargo Securities’ senior economist Tim Quinlan and economic analyst Sara Cotsakis.
“While the consumer goods orders line item of the LEI was flat over the month, consumers are brimming with optimism, as seen in the consumer expectations component adding 0.11 percentage points, a rapid turnaround from the negative or flat contributions since the onset of the pandemic,” they wrote.
“We are still at the beginning stages of the revival of the service sector,” they said, noting this momentum should continue the next few months.
Also, the manufacturing sector “expanded further” in the Kansas City region with the composite reading hitting a record high, while expectations for future activity “increased considerably,” according to the Federal Reserve Bank of Kansas.
The composite index gained to 31 in April from 26 in March.
The number of employees index climbed to 29 from 17 and the average employee workweek index rose to 27 from 21.
Prices received for finished product index jumped to 41 from 31, while prices paid for raw materials increased to 73 from 66.
Volume of new orders index dipped to 29 from 37, while backlog of orders rose to 35 from 32.
“Order activity is very strong, and the biggest challenge the manufacturing sector faces is not a lack of demand but rather meeting that demand given supply chain bottlenecks,” said Ruesterholz. “Ultimately, this is a good problem to have as supply chains are gradually improving, and consumers’ excess savings should support elevated demand for some time.”
