Muni market is seeing more issuance while yields remain low
Municipal bond buyers are eagerly awaiting this week’s rather hefty — for 2020 at least — new-issue calendar that’s filling up with deals that had been formerly on the day-to-day slate. Action kicks off Tuesday, with a bevy of large taxable and Texas deals.
New York City reopened its doors slightly Monday for a Phase One of four that will take several weeks to achieve and test whether the financial capital of the world can safely reopen fully.
Municipal benchmarks were mostly steady with rates continuing to hold at early June levels, however, high-yield is rallying showing how much investors are seeking yield.
“High-grade tax exempt munis were unchanged week-over-week,” according to Wells Fargo Securities, “but high-yield continued its rally generating a total return of 212 basis points week-over-week.”
“Within high-yield, Puerto Rico and tobacco lead the index higher, outperforming the broader muni high yield index by 262 basis points and 121 basis points,” the firm said in its municipal dashboard report that came out Monday.
Some of the bigger deals still waiting in the wings include the Kentucky Public Energy Authority’s $536 million of gas supply revenue bonds, the New Hope Cultural and Educational Facilities Finance Corp., Texas’ $669 million of senior living revenue bonds and taxable bonds and Wisconsin’s $481 million of taxable GO and revenue bonds.
Year-to-date gross municipal supply totals $162 billion, or up 16.7% year over year, including $39 billion of taxables, according to Ramirez & Co.
“Over the next 30 days, we see net muni market supply at –$35.1 billion, comprised of $12.87 billion new issues, $33.54 billion maturing, and $14.43 billion announced calls,” wrote Peter Block, managing director at Ramirez.
The states that stand to experience the largest change in outstanding debt include California (-$7.63 billion), New York (-$7.11 billion), Florida (-$3.36 billion), Arizona (-$2.17 billion) and New Jersey (-$2.08 billion), Block said.
Net supply over the summer is expected to total -$55 billion, including -$15 billion, in June, -$21 billion in July and -$19 billion in August, Block said.
JPMorgan Securities is expected to price Princeton University’s (Aaa/AAA//) $500 million of taxable corporate CUSIP refunding bonds while BofA Securities is set to price the University of Michigan’s (Aaa/AAA//) $850 million of taxable general revenue bonds.
Texas deals move into the spotlight this week.
JPMorgan is set to price Dallas’ (NR/AAA/AA+/NR) $660 million of taxable waterworks and sewer system revenue refunding bonds on Tuesday.
In the competitive arena Tuesday, the state of Texas is selling $162.205 million of GOs in two offerings.
The sales consist of $88.865 million of student loan GOs subject to the alternative minimum tax and $73.34 million of college loan refunding GOs subject to the AMT.
Hilltop Securities is the financial advisor; McCall Parkhurst and the State Attorney General are the bond counsel.
Fort Worth, Texas, (Aa3/AA/AA/) is selling $152.515 million of GO refunding and improvement bonds and $25.23 million of tax notes on Tuesday,
Hilltop Securities and Estrada Hinojosa are the financial advisors; McCall Parkhurst and Kelly Hart are the bond counsel.
The city will come to market again on Wednesday to sell $169.18 million of revenue bonds.
Since 2010, Ft. Worth has issued about $2.5 billion of debt.
In the short-term sector, Ventura County, Calif., (MIG1/SP1+/NR/NR) will be selling $125 million of tax and revenue anticipation notes on Tuesday.
KNN Public Finance is the financial advisor on the TRANs sale while Norton Rose is the bond counsel.
Monday's trades included:
On the short end, Durham County, North Carolina 5 of 2022 traded at 0.28%-0.27%. Texas waters, 5s of 2024, traded at 0.31%. Utah GOs, 5s of 2026, traded at 0.56%. Recent Texas waters, 5s of 2028, traded at 0.84% versus the original 0.97% yield.
If the market is saying anything, high-grade 10-years are staying under 1%. Fairfax, Virginia GOs, 5s of 2030, were purchased from a customer at 0.95%.
Out longer, Washington GOs, 5s of 2038, traded at 1.59%-1.57%.
Secondary market data
Municipals started off the week keeping their balance as bonds remained steady after seeing stability last week.
Stocks rose for the sixth straight session after Friday’s strong employment report and ahead of this week’s Federal Reserve monetary policy meeting.
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 yields on the 10- and years GOs were steady at 0.89% and 1.70%.
The 10-year muni-to-Treasury ratio was calculated at 100.7% while the 30-year muni-to-Treasury ratio stood at 102.6%, according to MMD.
The ICE AAA municipal yield curve also showed yields unchanged in the 2021-2023 maturities, which yielded 0.170%, 0.194% and 0.251%, respectively. Out longer yields on the 10- and 30-year maturities were flat at 0.783% and 1.699%, respectively.
ICE reported the 10-year muni-to-Treasury ratio stood at 101% while the 30-year ratio was at 102%.
The IHS Markit municipal analytics AAA curve showed yields rising with the 2021 maturity at 0.19%, the 2022 maturity at 0.24% and the 2023 maturity at 0.27% while the 10-year muni was at 0.89% and the 30-year stood at 1.68%.
The BVAL curve showed the 2021 maturity flat at 0.11% and the 2022 steady at 0.17%. BVAL calculated the 10-year muni up one basis point at 0.85% while the 30-year was steady at 1.73%.
Munis were little changed on the MBIS benchmark scale.
The three-month Treasury note was yielding 0.167%, the 10-year Treasury was yielding 0.878% and the 30-year Treasury was yielding 1.655%.
The Dow rose 1.12%, the S&P 500 increased 0.74% and the Nasdaq gained 0.72%.
Nuveen: Worries grow about NYC bonds
New York City and New York State have been hit hard by the COVID-19 pandemic, both in terms of human cost and economic hardship.
Investors in New York municipal bonds are becoming concerned as the city and state face declining revenue, according to a report from Nuveen.
“These bonds tend to have strong bondholder protections, stemming back to the aftermath of New York City’s close brush with bankruptcy in the 1970s,” Nuveen said.
The New York municipal market is dominated by a number of large issuers, including the city and the state, the Metropolitan Transportation Authority and the Port Authority.
The state of New York is a large issuer of municipal debt, as it is the 11th largest economy in the world. New York City has a bigger economy than all but four states.
Mayor Bill de Blasio has cut the fiscal 2021 budget by $6 billion. The executive budget forecasts the city will see declines in tax revenue of $2.2 billion for the rest of fiscal 2020 and $5.2 billion in fiscal 2021.
“New York City has a relatively high debt burden, but most of that debt carries significant safeguards,” Nuveen said. “The financial control board created to oversee New York City during its fiscapl crisis in the 1970s remains today, although a number of its more potent powers have lapsed. Those powers could be restored by the state legislature.”
On Monday, the city instituted its Phase One reopening plan.
"This is a powerful day — day 100 of the coronavirus crisis and it is the day that we start to liberate ourselves from this disease, the day we move forward," de Blasio said.
The city is one of the largest issuers of municipal debt in the United States. At the end of the second quarter of fiscal 2020, the city had about $38 billion of GO debt outstanding and that's not counting the various city authorities that issue debt.
The city’s GOs are rated Aa1 by Moody’s Investors Service and AA by S&P Global Ratings and Fitch Ratings.
The NYC Transitional Finance Authority has $38.9 billion of debt outstanding while the NYC Municipal Water Finance Authority has $30.8 billion of debt outstanding.
The TFA’s debt consists of future tax secured senior bonds (Aaa/AAA/AAA), future tax-secured subordinate bonds (Aa1/AAA/AAA) and building aid revenue bonds (Aa2/AA/AA). The MWFA’s debt consists of general resolution bonds (A1/AAA/AA+) and second general resolution bonds (Aa1/AA+/AA+).
Currently the debt service for the city, the TFA and city appropriation debt, excluding the effect of pre-payments, is 7.1% of the city’s total budgeted revenue in fiscal 2020. The ratio is projected to rise to 9.3% in fiscal year 2024.
As a percentage of tax revenues, the debt service ratio is 11.2% in fiscal 2020 and is projected to rise to 13.4% in fiscal 2024.