N.Y. housing set for social bond sale; munis flat ahead of large new deals
Municipals were steady Monday, with yields across the curve finishing out the day unchanged after the recent market correction. Yields barely budged off last week's higher levels.
In the primary, a New York State issuer is coming to market with an affordable housing deal that it has designated as "social" bonds as environmental, social and green bond investments are taking a firmer root in the municipal space.
Almost $9 billion of new deals are set to hit the market this week. And as the summer dwindles down, buyers will be lining up to grab the new issues as demand continues to be strong after last week’s new deals priced wider, municipal players said.
“After benchmark triple-A yields were trading around record lows about two weeks ago, the market tone turned negative on the back of rates re-setting higher, a pick-up in high grade supply, elevated bid wanted lists, and the strong seasonal redemption cash dwindling,” said Justin Horowitz, vice president and municipal trader at AllianceBernstein.
“We have felt the market tone was at least a few basis points worse than the MMD cuts implied almost every day this week,” Horowitz said Friday. “As we head into September and redemptions slow, but new issue remains strong, we would expect the large high-grade deals will continue to have to come at a concession in order to get sold.”
After large deals like Los Angeles Airport had balances in the previous week, underwriters re-priced deals wider last week, according to Horowitz. He said the New York City deal highlighted the widening coming plus 70 basis points in 10 years versus trading around plus 40 earlier this month.
“While some buyside firms were either too full on their NYC exposure or nervous about the credit, the deal proved that at a wide enough spread, the demand will be there,” Horowitz said. “In fact, it actually came behind a Baa1/A-minus rated Central Texas Regional Mobility deal that priced plus 68 basis points, which just highlights how wide New York City was,” he added.
Horowitz said he expects this week’s largest deal — the $2.4 billion California general obligation exempt sale to need to come at 15 to 20 basis points concession to get placed.
On the other hand, he said, the market continues to seek higher-yielding credits with most lower-rated deals multiple times oversubscribed.
For instance, he said Raymond James’ $360 million, non-rated student housing deal was as much a six times oversubscribed on the term bonds. Additionally, $368 million Chicago Transit Authority deal that was 16 times oversubscribed and was trading up another 15 basis points on Friday.
Horowitz said he expects high-yield participants to be focused on Citi's $1.3 billion Delta LaGuardia deal as well as Piper's non-rated PureCycle Project deal.
On Tuesday, the State of New York Mortgage Agency (Aa1/NR/NR/NR) will come to market for institutional buyers with its first social bond issuance.
“[The] social bonds designation reflects intended use of proceeds in a manner that is consistent with the ICMA ‘social bond principles,’ which include project categories such as ‘affordable housing,’ ” the agency said in an investor roadshow.
Citigroup is set to price SONYMA’s $177.495 million of homeowner mortgage revenue social bonds, which are structured in four series.
The deal consists of $103.25 million of Series 227 bonds not subject to the alternative minimum tax, $19.245 Series 228 AMT bonds and $25 million of Series 229 taxable and $30 million of Series 230 taxables.
For retail, the $103 million tax-exempt series saw 2.15% coupons priced at par in 2035, 2.35% coupons at par in 2040, 2.50% coupons at par in 2047 and 3.25% priced to yield 1.02% in 2050.
"What this says is that while New York and New York City paper is trading wider generally, a revenue-based credit, such as this housing deal, will fare somewhat better. Especially given its 'social' motives," a New York trader said. "'Social' is becoming more 'normal' and this issuer has been at the forefront of making sure investors know they are serious about putting the word out there that investors should take note of its efforts. Other issuers might consider following suit. I'm of the mind that this isn't just a gimmick."
The deal is one of a growing number of social bond sales in the municipal bond market this year.
Prior issuance incudes bonds for the Ford Foundation, the John D. and Catherine T. MacArthur Foundation, the Doris Duke Charitable Foundation, the W.K. Kellogg Foundation and the Andrew W. Mellon Foundation.
On Monday, Morgan Stanley issued price guidance on California’s (Aa2/AA-/AA/NR) $2.436 billion sale of general obligation bonds.
The $980.055 million of various purpose GOs were seen pricing as 5s to yield from 0.20% in 2021 (+5 basis points to the AAA scale) to 0.74% in 2027 (+24), 1.01% in 2029 (+28), 1.20% in 2031 (+30), 1.28% in 2032 (+30), and to yield 1.60% in 2034 (+50)and 1.65% in 2035 (+50)with 4% coupons, to yield 2.19% with a 3% coupon in 2041 (+80), to yield 1.66% with a 4% coupon in 2045 (+15)and to yield 2.41% with a 3% coupon in 2050(+85). The $1.456 billion of various purpose refunding GOs were seen pricing to yield from 0.20% in 2021 (+5) with a 5% coupon to 1.86% with a 4% coupon in 2040 +50).
On Wednesday, BofA Securities is set to price Florida’s (Aa3/AA/AA/NR) $2.25 billion of the state Board of Administrative Finance Corp.’s taxable revenue bonds for the Florida Hurricane Catastrophe Fund.
Also Wednesday, Citigroup will price the New York Transportation Development Corp.’s (Baa3/NR/BB+/NR) $1.3 billion of special facilities revenue bonds for the Delta Airlines LaGuardia Airport Terminals C and D development project.
“Tax-exempt munis outperformed [week over week], as the Treasury curve bear steepened,” Wells Fargo Securities said in a Monday research note. “Taxable munis also underperformed all other asset classes week over week.”
Wells Fargo said that for August tax-exempt munis remain negative on a total return basis and that monthly returns for the BAB and taxable muni Index also remained negative.
“With rates under pressure, the short end of the curve outperformed week over week, with the five-year part of the curve providing +24 basis points of excess return,” Wells Fargo said.
Last week, the most traded muni sector was industrial development followed by education and utilities, IHS Markit said.
“Municipal-bond prices were cut for the third straight week in the period ended Aug. 28,” Eric Kazatsky, senior municipal strategist at Bloomberg Intelligence, said in a report. “Some of the overhang on tax-exempt rates came courtesy of Federal Reserve Chairman Jerome Powell, who detailed his intent to cease preemptive interest-rate hikes based on short-term inflation targets. The policy shift will essentially allow inflation to run hotter than the Fed's 2% target.”
He said that concerns about higher future inflation helped push up rates 10-years and out on the U.S. Treasury curve, dragging exempts along for the ride.
Kazatsky said that general-obligation tax-backed issuers are experiencing credit weakening and spread widening as well.
“One example is Aa1 rated City of New York, which is staring down a $9 billion budget hole and recently tapped the muni market for over $1 billion of new debt. What's notable is that the city's bond spreads are back at levels seen in May,” he said. “In context, plus-70 spreads are almost three standard deviations higher than longer-term averages. For comparison, you can get NYC GO or an A rated higher-ed institution for essentially the same spread.
“An example on the state level is Aa1 New York, which now has higher spreads than Aa3 Pennsylvania and is approaching levels for A1 rated Connecticut,” he said.
Some notable trades Monday:
Montgomery County, Maryland GOs, 4s of 2023, trading at 0.21%. New York City paper continues to show weakness with NYC TFAs, 5s of 2023, at 0.37% and New York State EFC, 5s of 2026, at 0.42%. Washington GOs, 5s of 2033, at 1.23%-1.16%. New York paper again, with TFAs, 4s of 2035 at 1.85%. Friday, they traded at 1.86% and originally priced on August 17 at 1.72%. Georgia GOs, 3s of 2036, traded in blocks at 1.39%-1.45%. Down to the Lone Star state, Austin ISD, 4s of 2037, traded at 1.45%-1.35%, originally priced at 1.50% on August 24. Houston Port 4s of 2038 traded at 1.64% after trading on Friday at 1.63%-1.53%. Out long, more Texas paper with Goose Creek ISD 4s of 2050 trading at 1.81% while they traded at 1.76%-1.70% Friday after originally pricing at 1.81%.
On Monday, municipals were flat, according to the final readings on Refinitiv MMD’s AAA benchmark scale.
Yields were unchanged in 2021 and 2022 at 0.15% and 0.16%, respectively. The yield on the 10-year muni was flat at 0.81% while the 30-year yield was steady at 1.56%.
The 10-year muni-to-Treasury ratio was calculated at 114.7% while the 30-year muni-to-Treasury ratio stood at 106.1%, according to MMD.
“Municipal bonds are ending the month on a quiet note,” ICE Data Services said Monday. “Yields on the ICE muni curve are unchanged. Yields in August crept higher after three months of steady declines.”
The ICE AAA municipal yield curve showed the 2021 maturity unchanged at 0.140% and the 2022 maturity steady at 0.152%. The 10-year maturity was flat at 0.786% and the 30-year was steady at 1.571%.
ICE reported the 10-year muni-to-Treasury ratio stood at 114% while the 30-year ratio was at 105%.
The IHS Markit municipal analytics AAA curve showed the 2021 maturity yielding 0.15% and the 2022 maturity at 0.16% while the 10-year muni was at 0.81% and the 30-year stood at 1.55%.
Munis were little changed on the MBIS benchmark and AAA scales.
Treasuries were stronger as stock prices traded mixed.
The three-month Treasury note was yielding 0.102%, the 10-year Treasury was yielding 0.712% and the 30-year Treasury was yielding 1.477%.
The Dow fell 0.79%, the S&P 500 decreased 0.15% and the Nasdaq gained 0.83%.