Post-election pop: Munis rally 10 bps with UST, first time since Spring

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With the final result of the U.S. presidential election in doubt, municipal bonds traded significantly stronger on Wednesday following a U.S. Treasury rally of as much as 14 basis points.

In secondary trading, yields on AAA munis dropped all across the curve, with some falling by as much as 10 basis points.

While the White House race was still undecided, it appears the Senate will not switch and will stay Republican and the House will remain in Democratic control.

"Trading in munis remains quite firm, but the pace has slowed somewhat as participants digest the day's events and set up for the next trade," said Peter Franks, Refinitiv MMD senior market analyst. He said Treasury yields had fallen by as much as 18 basis points on the long end overnight in reaction to election news, adding that muni yields headed demonstrably lower Wednesday after weeks of adopting a wait-and-see approach.

It was another story for high-yield, which was somewhat quiet. Illinois was seeing the effects of the election and the rejection by voters of a progressive income tax increase.

"High grades rallied up to 10 basis points to follow UST but it seems that high-yield is staying on the sidelines to a degree," said Jon Barasch, director of municipal evaluations at ICE Data Services. "Of course Illinois is seeing a lot of weakness in the secondary since voters didn't approve the graduated tax measure," he said. Barasch noted he was seeing 20 to 30 basis point moves for the state's paper. "Illinois is just a whole other animal now."

The day after the election the market was no less uncertain or volatile as the still-undecided nail-biting presidential race lingered in the backdrop of falling yields, according to underwriters.

“The morning was a little bit crazy,” a New York underwriter said as yields fell on the AAA scales. “They are bumping the heck out of the scale. The long end is very aggressive.”

With the delay in the election results, the market continued to experience some jitters Wednesday, market players said.

“You’re going to have a deadlock in Washington — even if [Joe] Biden gets in, you’re going to have a contested election,” the underwriter said. The undecided vote also caused volatility in the stock market, he noted.

“The equity market is going crazy with the Washington deadlock, even though Biden not being able to put all his tax plans in place helps with capital gains,” as well as keeping inflation at bay, the New York underwriter said.

Dealers and investors were busy locking in long purchases Wednesday as yield-starved investors were concerned with interest-rate volatility and not happy with the ultra-low yields on the short end, the underwriter said.
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A “blue wave” Democratic sweep of the White House, Senate and House of Representatives didn’t happen, which is both a positive and a negative for the municipal bond market, John Mousseau, president of Cumberland Advisors, said.

“Municipal bonds aren’t hurt as much as they are not helped. A second stimulus bill that would include additional aid for state and local governments will be harder to come by with the House and Senate in control of different parties,” Mousseau wrote in a post-election report Wednesday.

Munis should be fine however, he said, adding that while they will probably not get a tax-increase boost right away from a demand/supply standpoint they are in very good shape.

“Muni credit will continue to be important and is anything but static. Without a second stimulus bill, we may see some additional actions from the Federal Reserve to shore up markets if needed,” he wrote.

“On the positive front we have noted how much muni supply is down,” he said. “Issuers rushed to market to beat the election, remembering the bond market volatility of four years ago. So, for now, there is very little issuance and a large reinvestment period of December and January looming.”

He said higher rates may be coming up in the future.

“Interest rates, both intermediate and longer, will be slower to rise; but as the economy improves and we get to a vaccine, we should see higher rates no matter who is finally elected president. Thus caution is needed on durations and maturities,” he said.

However, investors should remain wary of some possible post-election risks, according to UBS Global Wealth Management’s Mark Haefele, Solita Marcelli and Tom McLoughlin.

“Investors should remain mindful of the potential risk that the election result remains unknown for days or even weeks; both [presidential] candidates have indicated plans to mount legal challenges over ballots and counting procedures,” they said in a special report Wednesday. “Furthermore, a potentially divided Congress next year could constrain the size of any new fiscal stimulus.”

Workers count election ballots at the Philadelphia Convention Center on Tuesday.

They said investors should diversify their portfolios and buy into trends accelerated by the COVID-19 pandemic.

“We still expect an interim stimulus bill to be signed into law regardless of who is ultimately elected, a vaccine to be rolled out by the second half of 2021, and the Fed to step in and reiterate its commitment to a supportive monetary policy,” they said.

“The pandemic has given us a glimpse of what the new economy is likely to look like — irrespective of who sits in the White House. It’s one that is more digital, favoring investments in stocks that are likely to disrupt their sectors with the use of technology such as 5G,” they wrote. “The world is also more likely to be more local, benefiting automation and robotics as companies seek to diversify their supply chains and bring them closer to home.”

Primary market
There are currently no major deals slated to be priced for the rest of the week. There are three competitive sales from Florida on the day-to-day calendar.

The Florida Department of Transportation has a sale of $179.17 million of Series 2020A tax-exempts and an offering of $189 million of Series 2020B taxable right-of-way acquisition and bridge construction bonds awaiting sale.

The Florida Board of Governors has a $71.8 million sale of Series 2020 tax-exempt dormitory revenue bonds for the Florida International University on the daily slate.

ICI: Muni bond funds see $1.2B inflow
Long-term municipal bond funds and exchange-traded funds saw combined inflows of $1.220 billion in the week ended Nov. 28, the Investment Company Institute reported Wednesday.

It marked the 26th straight week that the funds saw inflows. In the previous week, muni funds saw an inflow of $2.200 billion, ICI said.

Long-term muni funds alone had an inflow of $1.048 billion in the latest reporting week after an inflow of $2.116 billion in the prior week.

ETF muni funds alone saw an inflow of $172 million after an inflow of $84 million in the prior week.

Taxable bond funds saw combined inflows of $7.314 billion in the latest reporting week after an inflow of $13.387 billion in the prior week.

ICI said the total combined estimated outflows from all long-term mutual funds and ETFs were $21.305 billion after an inflow of $2.959 billion in the previous week.

Secondary market
Some notable trades on Wednesday:

Delaware GOs 5s of 2023 traded at 0.23%. NY EFC green bonds 5s of 2025 at 0.32%. Harvards, 5s of 2027, traded at 0.49%. NYC TFA subs 5s of 2029 at 1.18%-1.15%. Original: 1.31%.

Strength showed on high-grades with Baltimore County, Maryland GOs 5s of 2031 at 0.98%. Maryland GOs, 5s of 2031, at 0.99%. Delaware GOs, 4s of 2032 at 1.06%. Fairfax County, Virginia 5s of 2032 at 1.04%. Clark County Washington Evergreen SD #114, 5s of 2032, at 1.17%.

NYC TFA subs 4s of 2039 at 2.15%-2.11%. Texas waters, 3s of 2039, at 1.75%. Texas waters, 4s of 2045 at 1.97%-1.85%.

On Wednesday, high-grade municipals were stronger, according to final readings on Refinitiv MMD’s AAA benchmark scale. Short yields in 2021 and 2022 fell three basis points to 0.18% and 0.19%, respectively. The yield on the 10-year muni dropped 10 basis points to 0.84% while the yield on the 30-year declined 10 basis points to 1.61%

The 10-year muni-to-Treasury ratio was calculated at 109.1% while the 30-year muni-to-Treasury ratio stood at 103.6%, according to MMD

The ICE AAA municipal yield curve showed short maturities fell three basis points in 2021 and 2022 to 0.18% and 0.20%, respectively. The 10-year maturity fell eight basis points to 0.85% and the 30-year yield declined 10 basis points to 1.63%.

The 10-year muni-to-Treasury ratio was calculated at 110% while the 30-year muni-to-Treasury ratio stood at 105%, according to ICE.

The IHS Markit municipal analytics AAA curve showed short yields falling to 0.16% and 0.17% in 2021 and 2022, respectively, with the 10-year dropping to 0.89% and the 30-year yield down to 1.66%.

The BVAL AAA curve showed the yield on the 2021 and 2022 maturities falling by three basis points to 0.14% and 0.16%, respectively, while the 10-year deopped eight basis points to 0.85% and the 30-year declined nine basis points to 1.73%.

Treasuries were stronger as stock prices traded higher.

The three-month Treasury note was yielding 0.11%, the 10-year Treasury was yielding 0.77% and the 30-year Treasury was yielding 1.55%.

The Dow rose 2.10%, the S&P 500 increased 2.80% and the Nasdaq gained 4.10%.

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