Primary gets taxable POBs out of Cal, green bonds from Wisconsin, while secondary feels pressure

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The municipal market saw a plethora of deals come in as the secondary market weakened on the majority of industry benchmark scales with yields rising nearly 8 basis points on the long end, but cuts across the curve were seen elsewhere. There was some sentiment that the rally more than a week ago was somewhat overdone.

ICI though reported $1.3 billion of inflows into municipal bond mutual funds, another signal that the market is finding some footing.

New-issues still came to market and saw demand with Barclays pricing an $80 million environmental improvement fund revenue green bonds for the state of Wisconsin. David Erdman, capital finance director, said he was “very excited and pleased with the results” considering he received 15 bids on the deal. By comparison, Milwaukee over two weeks ago when it first tested the competitive market saw two bids.

“The 15 bids show not only interest in this transaction but also the current interest in the municipal market,” said Erdman.

“It was appropriate timing for the state’s first series of green bonds as we celebrate today the 50th anniversary of Earth Day, which was founded in Wisconsin in 1970 by then U.S. Sen. Gaylord Nelson.”

It was priced as 5s to yield 1.28% in 2030 and as 5s to yield 1.90% in the long-bond (2039 maturity).

Highly rated Anne Arundel County, Maryland as priced as did $720 million Riverside California taxable pension obligation bonds.

However, secondary markets showed weakness and some participants said it was actually cheaper than where AAA benchmarks landed.

“The market is cheaper than where anyone thinks it is,” said one New York trader. “There are no quick fixes out there — and equities clearly sniffed that out last week.”

“Real money buyers are being patient, see it coming their way and there is no need for them to press,” he said. “Deals struggling at new levels and there is limited liquidity all amidst partisan bickering [in Washington], a deteriorating credit backdrop and further spread widening.”

A Texas trader said that the market has seen quality spreads widen out, especially in the negotiated market.

"With that said we have seen evidence that AAAs are not clearing the market at the implied MMD AAA benchmark scale,” he said. “Dealer-to-dealer liquidity has been impaired since last week including overall flow and the primary has all the customer focus and appears to be right sized versus demand.”

He added that sentiment in the market has been very directional with the bears and you see it reflected in the rate lock market where entry is costing you north of 20 basis points since last week.

“Not sure the sell-off is due to an overshoot or a further building in of a credit event that is extending the longer this lock down lasts,” he said. “Now we are seeing stories about pension issues, support for bankruptcies, downgrades, etc. and it is not helping buyer confidence.”

Primary market
On Wednesday, Raymond James priced Riverside County, California's (A2/AA/ / ) $720.945 million of taxable pension obligation bonds.

JP Morgan priced Ohio Water Development Authority’s (Aaa/AAA/NR/NR) $450 million of water pollution control loan fund revenue bonds.

The deal was priced as 5s to yield 1.41% and 5s to yield 1.43% in a split 2030 maturity and as 5s to yield 2.29% in 2050.

Wells Fargo priced Washington State’s (Aaa/AA+/AA+/ ) $410.74 million of various purpose general obligation refunding bonds.

It was priced to mature serially from 2021 through 2027. It was priced as 5s to yield 0.84% and as 5s to yield 0.88% in a split 2021 maturity and as 5s to yield 1.15% in the 2027 maturity.

The second tranche was also priced to mature serially from 2020 through 2027, as 4s to yield 0.80% in 2020 and as 5s to yield 1.15% in 2027.

RBC Capital Markets received the written award on the Pennsylvania Economic Development Financing Authority’s (A2/A/A/ ) $258.630 million of revenue non-alternative minimum tax bonds for UPMC.

It was priced as 5s to yield 2.38% in 2030 and as 4s to yield 3.58% and as 3.5s to yield 3.78% in a split 2050 maturity.

Barclays priced Wisconsin’s ( /AAA/AAA/ ) $80 million of environmental improvement fund revenue green bonds.

David Erdman, capital finance director said he was “very excited and pleased with the results.”

“The 15 bids show not only interest in this transaction but also the current interest in the municipal market,” said Erdman.
As of press time, he hasn’t yet reviewed pricing to determine the benefits from the green bonds designation, but he did notice increased investor interest in the transaction.

“It was appropriate timing for the state’s first series of green bonds as we celebrate today the 50th anniversary of Earth Day, which was founded in Wisconsin in 1970 by then U.S. Senator Gaylord Nelson.”

It was priced as 5s to yield 1.28% in 2030 and as 5s to yield 1.90% in the long-bond (2039 maturity).

In the competitive arena, Anne Arundel County, Maryland (Aa1/AAA/NR/ ) sold $225.555 million of GO bonds consisting consolidated general improvements.

Citi won the bidding with a true interest cost of 2.4943%. The deal was priced as 5s to yield 1.33% in 2030 and as 3s to yield 2.78% in 2049.

The county also sold $74.58 million of GO consolidated water and sewer and refunding bonds, which were won by JPM with a TIC of 2.920%.

It was priced as 5s to yield 1.33% in 2030 and as 5s to yield 2.18% in 2049.

Secondary market data
Munis were slightly stronger on the MBIS benchmark scale Wednesday, with yields falling by a basis point in the 10-year maturity and no more than one basis point in the 30-year maturities. On the MBIS AAA scale, munis were also mixed with yields decreasing by as much as two basis points in the 10-year maturity and increasing by less than a basis point in the 30-year maturity.

On Refinitiv Municipal Market Data’s AAA benchmark scale, the yield on the 10-year muni rose seven basis points to 1.18% and the 30-year increased nine basis points to 2.03%.

The MMD muni to taxable ratio was 190.0% on the 10-year and 166.4% on the 30-year.

On the ICE muni yield curve late in the day, the 10-year yield was up one four basis points to 1.21% while the 30-year was higher by eight basis points to 2.04%.

The ICE muni to taxable ratio on the 10-year was 205% and the 30-year was 162%.

BVAL saw the 10-year moved up six basis points to 1.23% and the 30-year high by seven basis points to 2.11%.

The IHS muni curve saw the 10-year rose to 1.23% and the 30-year increased to 2.03%.

Stocks were in the green breaking a two day negative streak and Treasury yields were mostly higher.

The Dow Jones Industrial Average rose 2.27%, the S&P 500 index increased 2.55% and the Nasdaq was up 3.07%.

The three-month Treasury was yielding 0.104%, the Treasury two-year was yielding 0.221%, the five-year was yielding 0.366%, the 10-year was yielding 0.620% and the 30-year was yielding 1.220%.

ICI reports inflows for first time since Feb. 26
Long-term municipal bond funds and exchange-traded funds saw a combined inflow of $ZXXXXXXXXXXX billion in the week ended April 15, the Investment Company Institute reported on Wednesday.

It was the first inflows in seven weeks as the previous week, ended April 8, saw $2.903 billion of outflows.

Long-term muni funds alone had an inflow of $1.129 billion after an outflow of 2.490 billion in the previous week; ETF muni funds alone saw an inflow of $185 million after an outflow of $414 million in the prior week.

Taxable bond funds saw combined inflows of $4.796 billion in the latest reporting week after revised outflows of $7.618 billion in the previous week.

ICI said the total combined estimated inflows from all long-term mutual funds and ETFs were $19.560 billion after outflows of $4.524 billion in the prior week.

The biggest laggard was world equities which saw an outflow of $4.261 billion this past week, after an outflow of $2.043 billion the week before.

Healthy Diagnosis for Now
While there is some concern on the horizon in the municipal market, the overall diagnosis is better than expected, according to Guy LeBas, chief fixed income strategist at Janney Capital Markets.

“The good news for the moment is the selling has slowed and Federal Reserve and Congressional support programs appear to have placed a liquidity floor under the markets,” LeBas said in an April 21 report, “Coronavirus and the Municipal Bond Market.”

“That said, the fundamental credit risks that vary starkly from issuer to issuer are just starting to come into focus,” he added.

While widespread defaults among high-grade municipal issuers are not expected, LeBas said some credit downgrades are likely — even with the federal assistance programs in place.

“While the Federal Reserve addressed a short-term liquidity vacuum and fiscal authorities have offered grants to support short-term deficits, fundamental deterioration remains a risk for many areas of the municipal markets,” he wrote.

“For this reason, and until there is better long-term clarity on economic trends, we continue to recommend an up-in-quality bias when it comes to the municipal markets despite historically low yields.”

The funding support from the federal government is doing its part to help small and large municipalities, according to LeBas.

He called the Federal government’s Municipal Liquidity Facility (MLF) lending program “complicated,” but said he said it sends a clear signal that monetary authorities are providing enough cash to ensure that government entities will not fail because of a lack of liquidity.

“The $500-billion size is large in comparison to the overall $3.9-trillion municipal markets and should be sufficient for short-term needs,” he wrote.

He said the additional Coronavirus Aid, Relief, and Economic Security (CARES) Act includes a $150-billion relief fund, which is being disbursed to states presently, and talks of an additional $500 billion in aid are in progress.

“Unlike the Fed-supplied cash, these funds are grants, not loans, and exist to fill sizable budget holes at the state and, indirectly, the local level,” LeBas said.

Coping
Municipalities are bridging the gap between lower revenues and higher expenditures with several options, including rainy day funds, federal aid, and borrowing from either the Fed’s programs or, more likely, through the municipal bond markets, LeBas noted.

Borrowing proved to be a successful option for California, which sold $1.4 billion on April 16 when it sold 30-year bonds yielding 2.36%, he pointed out.

Rather than raising revenues in the current pandemic climate, “borrowing at low interest rates is the best choice for many general obligation bond issuers,” LeBas wrote.

Credit Quality Risks
Many municipal issuers will ultimately be more concerned with credit quality — not default risk, according to LeBas.

“As municipalities drain rainy day funds or borrow to cover budget gaps, the debt they take on will increase the overall risk, leading, in some cases, to ratings downgrades,” he wrote.

Whether the credit deterioration is temporary or permanent depends on the course of the coronavirus spread, pace of economic reopening, and socio-economic shifts that accompany the economic recovery, LeBas added.

“Healthcare sector bonds bear perhaps the clearest connection to the COVID-19 crisis, but the story is less positive than one might think,” LeBas wrote.

Early in the outbreak many hospital systems eliminated elective inpatient and outpatient procedures that make up a substantial portion of revenue for hospital systems.

Larger research-based institutions, meanwhile, have had to slow or pause projects for which they obtain a significant amount of their funding. Sadly, increased hospitalization for coronavirus patients should support revenues to some degree for the vast majority of municipal bond issuers. “These revenues, however, are unlikely to exceed the costs of lost elective procedures nationwide,” LeBas pointed out.

More recently, discussion of Congressional grants has helped support the sector, with $75 billion earmarked for hospital support in the most recent fiscal proposal, he noted.

“Larger, diversified healthcare systems in the single A and double A ratings categories are generally in a better position to offset reduced revenues than are lower-rated single hospital or small regional systems,” he wrote. “Ironically, hospitals that support lower income and uninsured populations may also fare better than their counterparts given the social and political movement to support these institutions.”

Meanwhile, LeBas said already-stressed geographies and credits face the greatest likelihood of tipping over into more severe deterioration, including Illinois, Connecticut, and New Jersey, as well as larger cities within those states.

“These states were the lowest-rated states prior to the COVID-19 outbreak, and all three appear to be near the limit in ability to raise tax rates without inciting population outflows,” he said.

Geographies and credits which face a more severe outbreak and longer resulting shutdown will be more acutely affected including New York State and New York City; New Jersey, Connecticut, Louisiana, including New Orleans; Michigan and Detroit; Massachusetts, and Illinois, as well as Chicago, based on severe cases as a percentage of population as of April 16, he said.

Tourism-heavy destinations such as Hawaii and Las Vegas, as well as bonds issued via authorities to finance stadiums, convention centers, and similar high-density projects are also included in this risk category, according to LeBas.

Airport bonds, whose revenue declines vary widely, are also at risk.

“In the short term, passenger enplanements are down sharply, and will remain depressed,” LeBas explained. “Airline payments to airports are also down, but CARES Act funding for airlines helps put a floor under those revenues for the moment.”

Since air travel is an essential national function, according to LeBas, particularly for larger metropolitan areas, he expects airports to likely receive some degree of federal support longer term — not unlike what happened after the September 11 terrorist attacks, he noted.

In the higher education sector, state institutions and the top-tier universities and liberal arts schools are well-cushioned against a demand decline, but many less-selective colleges and universities may find themselves with reduced student numbers, he added.

“Since the changes to the higher education markets are very much a social phenomenon, it is hard to estimate how the credits will fare in the intermediate to longer term.”

Yvette Shields contributed to this report.

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Primary bond market Secondary bond market Ohio Water Development Authority State of Washington Pennsylvania Economic Development Financing Authority State of Wisconsin County of Anne Arundel, MD
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