Retail buyers got first crack at New York State Urban Development Corp.’s multibillion-dollar deal on Tuesday as municipal bond prices finished weaker along with Treasuries as stocks rose.
Cash-flush investors are primed and eager to take advantage of a flurry of nearly $12 billion in new volume heading to market this week as municipal bonds were selling off — albeit slightly — in sympathy with Treasuries.
Despite municipals following Treasuries, which sold off due to the unexpected surge in retail sales, tax-exempts were outperforming their taxable counterparts, according to Robert Roffo, managing director at R&C Investment Advisors LLC.
After weeks of historically low supply, the latest rally in municipal bonds has brought with it an increase in new-issue financings, this week to the tune of about $11.6 billion in total volume, which consists of about $10.4 billion of negotiated deals and $1.2 billion of competitive sales, according to IHS Ipreo.
Roffo of R&C forecasts strong demand for the upcoming slate of new deals, especially the UDC deal, given the seasonal factors and recent strong inflows.
“I think there will be good demand for the New York Urban Development Corp. deal as the price talk is relatively attractive and there are approximately $40 billion in bonds maturing or being called this month, leaving investors with hoards of cash,” Roffo said.
Traders said the pricing of the deal shouldbe attractive given the need for extra yield given the overall low interest rate environment, compounded by the ongoing impacts of COVID-19 on large states, like New York.
Demand is still pretty strong despite calendar and weakness in Treasury
“The influx of cash from inflows to the June 15 cash that hit accounts yesterday, the seasonals going forward will continue to drive demand and be supportive of munis — regardless of which way rates are going,” a Florida trader said Tuesday afternoon.
He said the UDC deal will get heavy subscriptions.
“There’s a ton of demand for New York — and judging by the recent demand and pricing on TFA and NYC GOs — the demand for the UDC deal will “more than likely come wider” than historical spreads because of the pandemic lock down triggering financial concerns among investors.
“Despite issues revolving around New York, and the anticipated impact of big revenue and credit short falls, everyone is requiring extra yield to purchase New York,” the Florida trader said.
The price decline will impact the UDC deal as well, he noted.
Goldman Sachs priced the NYS UDC’s (Aa1/NR/AA+/NR) $1.3 billion of tax-exempt general purpose state personal income tax revenue bonds for retail investors ahead of Wednesday’s institutional pricing.
The bonds were priced for retail to yield 0.56% with a 5% coupon in 2025, 1.11% with a 5% coupon in 2029, 1.24% with a 5% coupon in 2030 and to yield from 1.66% with a 5% coupon in 2034 to 2.03% with a 5% coupon in 2042. A 2045 term bond was priced to yield 2.31% with a 4% coupon, a 2049 term was priced to yield 2.35% with a 4% coupon and a 2050 term was priced to yield 2.61% with a 3% coupon.
On Wednesday, Goldman will price the UDC’s $487 million of taxable bonds.
“It will require a little more spread to get the deal done, which is good for investors, and might be bad for the conduit, but with yields near all-time lows, they are still getting a good deal,” he said.
Since investors are willing to stretch for yield, a deal with attractive spreads will “be a welcome sight,” he said. “Municipals are going to have positive fundamentals in the next month or two with maturing bonds coming due — until that slows up there’s just not enough bonds around.”
The added influx of cash to investors will “help support other new issues as some of the fear of the COVID effect on investment-grade municipal credits has diminished,” Roffo said.
He expects the demand for new issues to continue to trend strong going forward in the face of lighter-than-usual secondary market activity.
Meanwhile, the Florida trader said there is continued demand for taxable municipals as the expansion of the government liquidity purchase plan continues to drive demand for credit in the corporate market.
“With the Fed broadening their purchasing in the secondary corporate market and buying more bonds that will take some supply out of the marketplace and create less paper and tighten trading spreads,” the Florida trader saied.
“The taxable muni debt fills that void and will trade comparable to what’s happening in the corporate taxable market,” he continued. “With the improvement in equities and the Fed buying ETFs and secondary positions that has brought spreads in tighter, and that will continue to support tighter corporate spreads and help muni taxable spreads tighten as well,” he added.
Primary market
Goldman also priced the North Carolina State University at Raleigh’s (Aa1/AA/NR/NR) taxable and tax-exempt general revenue bonds.
The $184.445 million of taxables were priced at par to yield from 0.602% in 2020 to 2.304% in 2035, 2.62% in 2039 and 3.02% in 2042.
Goldman priced the university’s $82.64 million of exempts with 5% coupons to yield from 0.36% in 2023 to 1.41% in 2034; a 2044 term was priced to yield 2.42% with a 2.375% coupon.
BofA Securities priced the Maryland Transportation Authority’s (Aa2/AA-/AA/NR) $399.005 million of tax-exempt transportation facilities projects revenue bonds.
The deal was priced to yield from 0.24% with a 5% coupon in 2022 to 1.76% with a 5% coupon in 2040. A 2045 term was priced to yield 2.13% with a 4% coupon and 2050 term was priced to yield 2.18% with a 4% coupon.
BofA also priced the Massachusetts State College Building Authority’s (Aa2/AA-/NR/NR) $395.75 million of taxable revenue refunding bonds.
The deal was priced at par to yield from 1.044% in 2024 to 2.251% in 2035, 2.972% in 2040 and 3.072% in 2049.
Additionally, BofA priced the Onondaga Civic Development Corp., N.Y.’s (Aa3/AA-NR/NR) $225.85 million of taxable revenue bonds and $118.8 million of tax-exempt revenue bonds for Syracuse University.
The taxables were priced at par to yield 2.768% in 2037 and 3.068% in 2055. The exempts were priced to yield from 0.55% with a 5% coupon in 2025 to 1.58% with a 5% coupon in 2035.
Barclays Capital priced the Miami University of Ohio’s (Aa3/NR/AA/NR) $128.24 million of general receipts revenue and refunding bonds.
The deal was priced to yield from 0.29% with a 5% coupon in 2021 to 2.12% with a 4% coupon in 2040; a 2045 term was priced to yield 2.26% with a 4% coupon.
In the competitive arena Tuesday, Henrico County, Va., (Aaa/AAA/AAA//) sold $121.525 million of general obligation bonds in two issues.
JPMorgan Securities won the $105.98 million of tax-exempt Series 2020A general obligation public improvement bonds with a true interest cost of 1.4942%.
The bonds were priced to yield from 0.25% with a 5% coupon in 2022 to 2.11% with a 2% coupon in 2040.
Raymond James won the $15.545 million of taxable Series 2020B GO refunding bonds with a TIC of 1.4034%.
PFM is the financial advisor and Hawkins Delafield is the bond counsel.
Since 2010, the county has sold about $1.2 billion of debt, with the most issuance occurring in 2018 when it offered $202 million.
On Wednesday, Fulton County, Ga., (Aa2/AA//) will competitively sell $284.66 million of water and sewerage revenue bonds.
First Tryon Advisors is the financial advisor; McGuireWoods is the bond counsel.
Proceeds will be use for the various capital improvements to the system.
Opportunity seen
Some in the market are seeing opportunities in munis when risks arise.
As a result of COVID-19 pandemic, financial markets saw one of the worst selloffs since the Great Depression, according to a
“As investors panicked and liquidated their investment holdings across all asset classes, numerous market dislocations developed as the proverbial ‘baby being thrown out with the bathwater’ scenario took hold,” Sage said. “During the month of March, solid AAA municipal credits were trading at distressed levels as mutual funds and other institutions were forced to liquidate to raise cash for withdrawals.”
The report noted that the municipal to Treasury yield ratio diverged from its long-term average and hit levels not seen since 2009. At its peak, AAA munis were trading at 2,100% or 21.0 times, the yield of comparable Treasuries.
“Prudent investors with cash and rational foresight were able to take advantage of once-in-a-decade, if not lifetime, opportunities to put money to work at deeply discounted levels,” Sage said.
“As an example, Sage was able to purchase short-dated — inside of 12 months — investment-grade municipal revenue notes around a 5.00% yield level, or approximately 450 basis points above comparable Treasuries,” the report said. “These Metropolitan Transportation Authority notes were rated MIG1/SP1 at the time of purchase, which is the highest credit rating for a money market municipal note.”
Secondary market
Some notable trades on Tuesday:
On the short end of the muni curve, Utah, 4s of 2021, traded at 0.25%-0.20%. Wake County, North Carolina GOs, 5s of 2022, were at 0.27%. Austin, Texas 5s of 22, at 0.33%.
Texas waters, 5s of 2022, traded at 0.30%.
Forsythe 5s of 2023 landed at 0.29%.
Out long Baltimore County, GOs, 4s of 2050, traded at 2.10%-2.00%.
On MMD’s AAA benchmark scale, yields rose along the curve. On the short end, the 2021 and 2023 maturities rose one basis point to 0.23% and 0.25%, respectively. The yield on the 10-year GO muni increased two basis points to 0.87% while the 30-year yield gained two basis points t0 1.63%.
The 10-year muni-to-Treasury ratio was calculated at 116.0% while the 30-year muni-to-Treasury ratio stood at 105.8%, according to MMD.
The ICE AAA municipal yield curve showed yields were up, with the 2021 and 2022 maturities both gaining two basis points to 0.210% and 0.232%, respectively. Out longer, the 10-year maturity rose two basis points to 0.837% while the 30-year rose three basis points to 1.641%.
ICE reported the 10-year muni-to-Treasury ratio stood at 113% while the 30-year ratio was at 106%.
The IHS Markit municipal analytics AAA curve showed the 2021 maturity yielding 0.20% and the 2022 maturity at 0.25% while the 10-year muni was at 0.85% and the 30-year stood at 1.62%.
The BVAL curve showed the 2021 maturity up two basis points to 0.16% while the 2022 was up two basis points to 0.22%. BVAL calculated the 10-year muni up two basis points to 0.82% and the 30-year up three basis points to 1.66%.
Munis were weaker on the MBIS benchmark and AAA scales.
Treasuries were weaker as stocks traded higher.
The three-month Treasury note was yielding 0.183%, the 10-year Treasury was yielding 0.752% and the 30-year Treasury was yielding 1.532%.
The Dow rose 1.56%, the S&P 500 increased 1.53% and the Nasdaq gained 1.24%.
