Primary market sees strong demand at expense of secondary
After an impressive rally in May, municipal participants have hit a pause button, particularly as U.S. Treasury yields rise, pushing municipal to UST relative value ratios lower.
“Instead, it appears the focus has shifted to primary offerings, which are being well received and seeing strong demand at the expense of secondary market flows,” said Greg Saulnier, managing analyst, U.S. Municipal Bonds Refinitiv (TM3/MMD). “Underlying factors look to be favorable, including manageable supply, summer redemptions/coupon payments, and back-to-back weeks of inflows.”
In the week ended June 3, weekly reporting tax-exempt mutual funds saw $1.206 billion of inflows, after inflows of $1.092 billion in the previous week, according to data released by Refinitiv Lipper Thursday.
The 10-year muni-to-Treasury ratio was calculated at 103.7% while the 30-year muni-to-Treasury ratio stood at 102.5%, according to MMD.
ICE reported the 10-year muni-to-Treasury ratio stood at 106% while the 30-year ratio was at 100%.
Despite this, more than one trader has expressed nervousness over the fallout for municipalities in the wake of the pandemic and protests.
“Time will tell, but right now it’s a bit of a staring contest between the bulls and bears,” Saulnier said.
Thin trading continues but high-grades are keeping the secondary market afloat. There might be a shortage of interesting yields, but there is no lack of demand for high-grade credit.
While current yields represent a sharp decline from early May and credit spreads tighten, the relationship between tax-exempt and taxable munis at the major spot levels has been something of interest as well, noted Kim Olsan, senior vice president at FHN Financial. Taxable volume this year is $36 billion vs. $13 billion from 2019, while tax-exempt supply so far this year is $112 billion against $115 billion through last May. The taxable sector is up 3.16% through May while the broad-market gain is 1.24%, she said.
Secondary activity on Thursday saw gilt-edged Maryland GOs, 5s of 2021, trade at 0.15%-0.10%. Cambridge, Massachusetts GO 5s of 2022 traded at 0.20%. Austin, Texas ISD 5s of 2022, at 0.26%-0.25%. Washington GOs, 5s of 2024, traded at 0.28% via an inter-dealer trade and then 0.23% to a customer.
The further out the curve one goes in the secondary shows lower-coupon bonds trading more than 5s, providing for distortion of AAA 5% curve benchmark yields.
King County, Washington school district #414, 4s of 2027, traded at 0.78%.
Forsyth, North Carolina, GO, 3s of 2029, traded at 0.94%. Purdue University 5s of 2034 traded at 1.31%.
Texas waters, 3s of 2040, traded at 1.93%.
Out longer, Suffolk County, New York waters, 3s of 2044, traded at 2.10%.
Metropolitan Southern California waters, 5s of 2045, traded at 1.61%-1.60%.
Wells Fargo Securities priced and repriced the Los Angeles Department of Water and Power’s (Aa2/NRAA/NR) $204.255 million of water system revenue bonds to lower yields.
The deal was repriced with 5% coupons to yield from 0.14% in 2021 to 1.42% in 2037; term bonds yielded 1.58% in 2040, 1.62% in 2041, 1.77% in 2047 and 1.80% in 2050.
The deal had been tentatively priced with 5% coupons to yield from 0.18% in 2021 to 1.66% in 2041; a 2047 term bond yielded 1.82% and a 2050 term yielded 1.85%.
Goldman Sachs priced and repriced Maine’s (Aa2/AA/NR/NR) $103.525 million of general obligation bonds to lower yields.
The deal was repriced with 5% coupons to yield from 0.28% in 2023 to 1.00% in 2030.
The deal was tentatively priced with 5% coupons to yield from 0.29% in 2023 to 1.02% in 2030.
Citigroup received the written award on the Ventura County Public Financing Authority, Calif.’s (Aa1/AA+/NR/NR) $287.105 million of taxable lease revenue refunding bonds.
The bonds were priced at par to yield from 0.598% in 2020 to 2.912% in 2038; a 2043 term yielded 3.244%
RBC Capital Markets priced the Michigan State Housing Development Authority’s (Aa2/AA+/NR/NR) $227.045 million of single-family mortgage revenue bonds consisting of $127.045 million of Series 2020A non-AMT bonds and $100 million of Series 2020B taxable bonds.
The exempts were priced to yield from 0.30% at par in December 2020 to 2.10% and 2.15% at par in a split 2031 maturity. Terms were priced at par to yield 2.30% in 2035, as 2/5s to yield 2.55% in 2040, at par to yield 2.80 in 2045 and at par to yield 2.85% and as 3.5s as a PAC to yield 1.54% in a split 2050 maturity.
The taxables were priced at par to yield from 0.896% in December 2020 to 2.559% and 2.609% in a split 2030 maturity, 2.959% in 2035, 3.489% in 2040 and 3.739% in 2050.
BofA Securities received the official award on the University of Notre Dame Du Lac’s (Aaa/NR/NR/NR) $155 million of taxable corporate CUSIP fixed-rate bonds.
In the competitive arena, Miami-Dade County, Fla. (Aa2/AA/NR/NR) sold $168.775 million of taxable GO refunding bonds and $33.955 million of tax-exempt GO refunding bonds for the Building Better Communities program.
Wells Fargo won the taxable bonds with a TIC of 2.2757%. The deal was priced to yield from 0.55% at par in 2021 to 2.55% at par in 2039; a 2041 term was priced at par to yield 2.75%.
UBS Financial won the exempts with a TIC of 1.9639%.
PFM was the financial advisor; Hogan Lovells and Steve Bullock were the bond counsel.
Credit risk is not going away
Municipal investors and advisors are grappling with changing credit and pricing risk that could continue to impact the municipal market in the coming months, according to Paul Daley, managing director and head of the information lab at market data and analytics provider BondWave.
News of government intervention has helped normalize some of the market volatility and uncertainty that had created unusual spikes in typical market behavior at the start of the pandemic, but some of the changes could linger, Daley said this week.
The cost of trading has increased, and bid-offered spreads remain disconnected, he said.
While they are still elevated, they are down from the escalated levels the market witnessed at the peak in late March.
“March 20 was the peak of the real craziness in bid offered spreads — between corporates and municipals — when that relationship reversed and we saw very elevated levels that were five to 10 times more than normal levels,” he said.
“Beginning in early March when fixed income markets became unusually volatile in response to the shutdown of the economy due to the spread of COVID-19, we see a pronounced dislocation between evaluated prices and trade prices, in the municipal market in particular,” Daley wrote in a May report.
“Beginning in early March and continuing to the present, sales to customers, offer side trades, have occurred at a discount to the evaluated prices,” he said in the report.
“At the same time, purchases from customers, bid side trades, which normally trade at a slight premium, began to trade at a large premium,” Daley said.
That trend implies that mark-ups, relative to evaluated prices, became negative for the offer and very large for the bid.
“The only way for this to happen is if the evaluated prices are above both the bid and the offer prices,” he added.
Meanwhile, credit continues to be impacted by the pandemic, according to Daley, who said there is a noticeable repricing of relative risk between single and double bonds versus triple-A credit from their typical norms.
For instance, he said the spread between double and triple-A bonds has widened to 50 basis points in recent weeks from its typical tight spread of 10 basis points before COVID-19.
With double-A credits the most actively issued and traded bonds in the municipal market that creates a more significant risk premium than ever before, according to Daley.
“People are very much reconsidering the risk of what felt like riskless credit in the past,” he explained. “Part of it is there’s been a re-categorization of what constitutes risky and less risky bonds.”
What used to be a clear delineation between sectors was recently altered during the pandemic when sectors, such as transportation, moved away from lower risk and into a higher risk category along with hospitals, health care, and housing.
“Transportation joined the 3H’s,” Daley said. “As pricing has come back in general the pricing of risk in transportation bonds has not come back.”
The depressed prices are driving them into a higher yield category and to trade like health care, hospitals, and housing paper.
He said due to this and other volatility, investors and advisors need to be cognizant of the “granular trends” since many of them have rating components to comply with.
In addition, the market should be monitoring which credits have been downgraded with a negative watch or are likely to be downgraded and positioning ahead for those events.
The federal stimulus programs are helping to mitigate some of the market fear over credit, pricing, and overall volatility, according to Daley.
“The presence of the backstop is enough to get the market to somewhat stabilize,” Daley said. “That’s a statement of how important confidence is to investors. If the market lacks confidence there’s panic selling, and the bid offered blows out, but if we can get people back to where they are confident then the marketplace can trade normally.”
Muni activity remained in neutral on Thursday, as prices remained little changed.
On MMD’s AAA benchmark scale, the yields on the 2021-2023 maturities were flat at 0.16%, 0.19% and 0.23%, respectively. The yield on the 10-year GO was steady at 0.84% while the 30-year was flat at 1.65%.
The ICE AAA municipal yield curve also showed yields remaining mostly flat, with the 2021-2023 maturities yielding 0.150%, 0.178% and 0.229%.
Out longer it was the same story with yields on the 10- and 30-year maturities steady at 0.825% and 1.649%, respectively.
The IHS Markit municipal analytics AAA curve showed the 2021 maturity at 0.16%, the 2022 maturity at 0.21% and the 2023 maturity at 0.24% while the 10-year muni was at 0.84% and the 30-year stood at 1.63%.
The BVAL curve showed the 2021 maturity unchanged at 0.09% and the 2022 at 0.15%. BVAL also showed the 10-year muni unchanged at 0.81% and the 30-year also unchanged at 1.69%.
Munis were little changed on the MBIS benchmark scale.
Treasuries were weaker as equities traded lower.
The three-month Treasury was yielding 0.160%, 10-year Treasury was yielding 0.811% and the 30-year was yielding 1.620%.
The Dow dropped 0.30%, the S&P 500 decreased 0.65% and the Nasdaq declined 0.93%.
Money market muni funds fall $134M
Tax-exempt municipal money market fund assets fell $341.8 million, bringing total net assets to $134.48 billion in the week ended June 1, according to the Money Fund Report, a publication of Informa Financial Intelligence.
The average seven-day simple yield for the 187 tax-free and municipal money-market funds dipped to 0.05% from 0.06% in the previous week.
Taxable money-fund assets decreased $28.02 billion in the week ended June 2, bringing total net assets to $4.558 trillion.
The average, seven-day simple yield for the 793 taxable reporting funds declined to 0.08% from 0.09% in the prior week.
Overall, the combined total net assets of the 980 reporting money funds dropped $28.36 million to $4.693 trillion in the week ended June 2.