Taxable issuance may be expanding muni base; NYC tops $9.8B slate
Municipals finished little changed on Friday with yields remaining steady along most of the AAA GO scales.
Almost $10 billion of new deals are on the calendar for the upcoming week and once again taxable issuance is well represented with offerings from issuers in Texas, New York and California high on the list.
“The theme with taxable munis this year continues to remain interesting,” said Kim Olsan, senior vice president at FHN Financial. “More supply on the heels of debt refundings appears to have tapped a broader investor base.”
Olsan said that after Federal Reserve quarterly figures are reported later this month it wouldn’t be surprising to see the corporate-based buyer category of international, life/Property and Casualtyinsurers adding to their municipal holdings.
Looking at issuance for taxable and tax-exempt munis, with their respective 2020 returns, “an impressive increase to $90 billion in taxable volume would imply some performance lag, and yet the sector is up nearly 9% this year (for all of 2019 $25 billion was issued in the category),” she said.
She said that on the tax-exempt side, supply is on pace with last year, but returns are nearly three times lower.
“One nuance in taxable pricings is the spread disparity between state- and locally issued debt: Aa1/AAA Oregon Department of Transportation 10-years priced +85/10-year UST but Aa2/AA+ Metro Atlanta Rapid Transit sold its same maturity 10 basis points wider,” Olsan said. “All told, these spreads are 10 basis points or tighter than comparable taxable issuance from May through June when the market posted a large rally.”
PIMCO agreed, saying they expect taxable issuance to stay high through the rest of the year.
“We expect taxable supply to remain elevated through the second half of 2020 and into 2021. Because of changes resulting from the 2017 Tax Cut and Jobs Act (TCJA), municipal issuers are refinancing tax-exempt bonds with taxable munis at a record pace,” David Hammer of PIMCO wrote in a Friday report. “Absent a policy change, this activity is likely to continue and turn 2020 into the largest year of taxable municipal issuance since the Build America Bonds program expired in 2010.”
In the backdrop of an otherwise somber day, activity was relatively quiet as the nation and market participants reflected on the 3,000 lives lost on Sept. 11 — many of them from the public finance sector.
With little activity seen, many looked forward to the upcoming week. IHS Ipreo estimates supply for the upcoming week at $9.8 billion. The calendar is composed of $5.9 billion of negotiated deals and $3.9 billion of competitive sales.
Leading the slate is the New York City Transitional Finance Authority (Aa1/AAA/AAA/NR), which is coming to market with $1.3 billion of future tax-secured subordinate bonds.
Jefferies is set to price the $1.1 billion of tax-exempt fixed rate bonds on Tuesday, after a one-day retail order period. BofA Securities, Citigroup, JPMorgan Securities, Loop Capital Markets, Ramirez & Co., RBC Capital Markets, Siebert Williams Shank & Co. and Wells Fargo Securities are co-senior managers.
Proceeds from the sale will be used to fund capital projects and convert certain floating rate debt to fixed rate debt.
Also on Tuesday, the TFA will competitively sell $173 million of taxables.
Public Resources Advisory Group and Frasca & Associates are the financial advisors. Norton Rose and Bryant Rabbino are the bond counsel.
“Expectations for next week are quite similar as low absolute yields and an uptick in demand cancel themselves out as the market is poised to run in place for a while,” Michael Pietronico, chief executive officer at Miller Tabak Asset Management, said on Friday.
“The NYC TFA deal should offer some wider spreads due to its size, but ultimately the buyers will show up as tax-exempt paper continues to be hard to find,” he said.
Close behind is another New York issuer — the Metropolitan Transportation Authority (A3//A+/AA+). Ahead of the sale, Moody's Investors Service downgraded the MTA’s outstanding $24.4 billion of bonds to A3 from A2 and assigned an A3 rating to its $900 million offerings. The outlook is negative.
Moody’s said Friday the downgrade “reflects an expectation that the system's ridership and revenue recovery from the coronavirus pandemic will be slower than originally forecast and result in larger budget gaps after 2020, higher leverage metrics, and significant capital program deferrals. We expect that the ridership recovery will be slower than our April forecast, resulting in larger budget gaps beginning in fiscal 2021.”
Last month, the N.Y. MTA rejected all competitive bids on its $451 million note sale and instead sold them to the Federal Reserve Bank, tapping its little used Municipal Liquidity Facility.
On Tuesday, the N.Y. MTA is competitively selling $900 million of Series 2020D transportation revenue climate bond certified green bonds in three offerings of $300 million each.
PRAG and Rockfleet Financial Services are the financial advisors. Nixon Peabody and D Seaton & Associates are the bond counsel.
Green bond issuance is surging in the municipal market this year, according to BofA Securities.
“Muni green bond issuance reached $13.3 billion year-to-date through August, 20.3% larger than the 2019 total,” Ian Rogow, BofA municipal strategist, said in a Friday report.
Last month, about $3 billion of green bonds were sold, a 69.2% jump year over year. This followed July’s $1.3 billion issuance and a strong first half showing of $9 billion.
This year’s muni green bond issuance of $13.3 billion is “nearly $400 million more than our original full year 2020 upper-bound issuance target of $12.9 billion,” BofA said.
“We now anticipate 2020 green bond issuance to reach between $17 billion and $19 billion,” Rogow said. “Should our prediction prove accurate, 2020's green bond issuance could be about 73% larger than 2019's.”
Another New York issuer will be in the market Tuesday when Citigroup prices the Mount Sinai Obligated Group’s (A3/A-/NR/NR) $400 million of corporate CUSIP taxable bonds.
Houston, Texas, (A1/A//) will be in the market with $620 million of Series 2020C taxable airport system subordinate lien revenue refunding bonds. Morgan Stanley is expected to price the deal on Thursday.
The Illinois Finance Authority is selling $428 million of revenue bonds for the OSF Healthcare System. JPMorgan Securities is set to price the deal on Thursday.
Sharp Healthcare (A3/AA/NR/NR) of California will be coming to market with $341 million of taxable corporate CUSIP bonds. Citi will price the deal on Thursday.
And BofA will price Brown University's (Aa1/AA+//) $370 million of taxables on Wednesday.
In the competitive arena, Pennsylvania (Aa3/A+/AA-//) is selling $470 million of general obligation bonds on Wednesday.
PFM Financial Advisors and Sustainable Capital Advisors are the financial advisors. Stradley Ronon and the Tucker Law Group along with the State Attorney General are the bond counsel.
High-grade municipals were unchanged, according to final readings on Refinitiv MMD’s AAA benchmark scale Friday. Yields were flat in 2021 and 2022, at 0.12% and 0.13%, respectively. The yield on the 10-year muni was steady at 0.84% while the 30-year yield remained at 1.58%.
The 10-year muni-to-Treasury ratio was calculated at 125.6% while the 30-year muni-to-Treasury ratio stood at 111.5%, according to MMD.
The ICE AAA municipal yield curve showed the 2021 maturity unchanged at 0.13% and the 2022 maturity flat at 0.14%; the 10-year maturity was steady at 0.80% and the 30-year was flat at 1.59%.
The 10-year muni-to-Treasury ratio was calculated at 125% while the 30-year muni-to-Treasury ratio stood at 110%, according to ICE.
The IHS Markit municipal analytics AAA curve was unchanged, showing the 2021 maturity yielding 0.15%, the 2022 maturity at 0.16%, the 10-year muni at 0.85% and the 30-year at 1.59%.
The BVAL AAA curve showed the yield on the 2021 maturity unchanged at 0.12%, the 2022 maturity steady at 0.15%, the 10-year flat at 0.80% and the 30-year unchanged at 1.58%.
Treasuries were stronger as stock prices traded mixed.
The three-month Treasury note was yielding 0.119%, the 10-year Treasury was yielding 0.672% and the 30-year Treasury was yielding 1.417%.
The Dow rose 0.30%, the S&P 500 decreased 0.15% and the Nasdaq lost 0.97%.