Risk-on moves emerge after vaccine news; Equities soar, UST sell off, munis weaker

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Municipals weakened on Monday as U.S. Treasuries sold off while stocks soared on positive news about a COVID-19 vaccine and a Biden presidency became clearer.

Yields on top-rated municipals rose by as much as five basis points on the long end of the AAA scales. Treasuries weakened substantially, with yields rising as much as 14 basis points.

The Dow Jones Industrial Average rose 4.4%, although it moved off highs after Mayor Bill de Blasio said New York City was nearing a "second wave" of virus-related cases.

Municipal yields ticked up Monday from last week's post-election rally, but outperformed Treasury losses as dealer inventories were light, planned issuance still paltry compared to October figures and secondary activity was sparse.

The moves Monday were more so vaccine-driven than Biden, with a reallocation into equities and out of fixed income, a risk-on trade was apparent.

"The fact that there is so little issuance this week (under $2 billion total) paired with last week (under $1 billion) is helping munis outperform Treasuries for the time being," said Greg Saulnier, managing analyst at Refinitiv MMD.

High-yield sectors, including airports and hospitals and recently beaten up names, such as New York issuers, performed better.

"Puerto Rico is also seeing a notable jump — the infamous 8s of 2035 are trading with a $63 handle as opposed to $60 at the end of last week," Saulnier said.

Muni yields on 10-year AAA curves on Friday fell to about 0.81% and were about five basis points higher on Monday. The low was reached in August when the 10-year muni stood around 0.54%. The high during the COVID crisis reached upward of 2.87% on March 23.

Muni traders said if equities continue to rally and the UST 10-year breaks above 1.00% the muni market may play some catch up this week.

What appeared to be potentially good news on the health front was not exactly good news for the municipal bond market, as a possible COVID-19 vaccine from Pfizer was announced amid other challenges, trading sources said Monday.

“The financial markets are digesting the news of outsized clinical success with regards to Pfizer’s COVID-19 vaccine,” according to Jeffrey Lipton, managing director and head of municipal research at Oppenheimer & Co. “As a result, we are seeing a risk on trade with interest being pulled from fixed income.”

Despite that trend, Oppenheimer still anticipates “compelling” technicals to drive municipal performance over the near-term with net positive fund flows, according to Lipton. “We believe that a Biden presidency will have a constructive impact on muni market tone.”

“There are so many cross-currents in the market it’s hard to say where it is going,” a New York traded said. With year end approaching and the presidential swearing in and inauguration set for the end of January, a lot of the volatility may not be settled until then, he said.

“Today, markets are jumping on news of a promising vaccine trial. The election ‘process’ seems far from over,” said Lynn Martin, president of fixed income and data services at Intercontinental Exchange. “Like the rest of 2020, market catalysts abound. And they’ve been some interesting assumptions about what the election result means for various asset classes.”

What would a new president and a potential vaccine for mean for markets?

“U.S. Treasuries were volatile through election week. Yet post-election, a key measure for bond volatility — the MOVE Index — dropped a stunning ~17 points to 47.74, and has since fallen further,” she said in a Monday comment. “For context, only 10 days have had larger one-day changes over the past decade, and most were in March 2020. Meanwhile, equities had their biggest post-election gain ever last Wednesday.”

She said some have suggested that markets expect a Republican Senate and Democratic President will mean legislative gridlock. But she asked whether that is true and if market bullishness is justified.

“The U.S. recently topped a record 126,000 new virus cases in a day. Several European nations are in lockdown. The Fed has already responded aggressively by slashing rates and, effectively, backstopping markets,” she said. “It could be argued that what the economy needs now, is a truly robust fiscal response.”

The prospect of a slimmer fiscal aid package has seemingly also dampened inflation expectations, Martin said.

“Hard-hit municipalities which hoped to shore up their finances may be squeezed,” she said. “October saw defaults in the ~$4 trillion muni market at an eight-year high, according to Municipal Market Analytics.”

Ahead of the election munis had rallied, said Eric Kazatsky, senior municipal strategist at Bloomberg Intelligence.

“Looking at broader rates, the U.S. Treasury curve bull flattened last week as preliminary election results showed a split government to be the most likely outcome,” Kazatsky said. “Not to be outdone, tax-free bonds asked the market to hold their proverbial cup and proceeded to rally over 13 basis points in the long end of the curve. While some of the outperformance came with a flight to quality amid election uncertainty, it was more the lack of new issuance on the calendar and thin trading supply that pushed munis into richer territory.”

He noted that muni performance has been solid to start November, with a 0.54% total return for the Bloomberg Barclays Municipal Index.

“While general obligation bonds have led revenue-backed debt year to date, that trend has reversed so far this month,” he said.

The U.S. Capitol building in Washington, D.C.

He said that the worst case for the municipal market would be a split government.

“This outcome would create headwinds to any higher-tax scenario, which would be the bull case for tax-free bonds,” he said. “However, the strong technicals for munis serve to offset these risks and could leave munis sailing into the new year.”

He said that because of a pre-election rush to market of almost $70 billion of issuance in October, there's a dearth of new bonds this month.

“The $14 billion in negative net issuance portends positive performance for munis,” he said. “The scarcity factor for bonds has helped, and continues to help, drive prices higher and buffer against any near-term credit issues in headlines.”

Primary market
On Tuesday, the market will kick into gear as some large new issue sales start off the holiday-truncated trading week.

RBC Capital Markets is set to price the North Dakota Housing Finance Agency’s (Aa1///) $125 million of housing finance program bonds not subject to the alternative minimum tax for the state’s home mortgage finance program.

BofA Securities is expected to price the Missouri State Environmental Improvement and Energy Resources Authority’s (Aaa/AAA//) $100 million of Series 2020B taxable water pollution control and drinking water refunding revenue bonds. BofA is also set to price Gardena, Calif’s (/AA-//) $101 million of Series 2020 taxable pension obligation bonds.

Morgan Stanley is expected to price the Contra Costa Community College District, Calif.’s (Aa1/AA+//) $110 million of Election of 2014 general obligation bonds.

RBC Capital Markets will price the Bush Foundation of Minnesota's (Aaa////) $100 million taxable corporate CUSIP social bond issue.

In the competitive arena Tuesday, Portland, Ore., (Aa2/AA//) is selling $223.805 million of Series 2020A second lien sewer system revenue bonds. PFM Financial Advisors is the financial advisor; Hawkins Delafield is the bond counsel.

Markets are closed for Veterans Day on Wednesday.

On Thursday, Wells Fargo Securities will remarket Louisiana’s (Aa3/NR/AA-/NR) $424 million of gasoline and fuels tax second lien revenue refunding bonds in a conversion from interest-rate mode.

Also Thursday, Citigrip will price the California Earthquake Authority’s (NR/NR/A/AA-) $300 million of Series 202B taxable revenue bonds.

Secondary market
Some notable trades Monday:

Huntsville, Ala. 5s of 2028 traded at 0.82%. Maryland GOs, 5s of 2028, at 0.66%-0.65%. Delaware GOs, 5s of 2029, at 0.72%-0.70%. Maryland GOs, 5s of 2030 at 0.90%. (AAA yields in 10 years were in the high 80s near the close.)

NYC TFA subs, 5s of 2031, at 1.32%-1.31%. Maryland GOs, 5s of 2033 at 1.14%-1.13%. Cypress Fairbanks, Texas ISD 2.25s of 2043 at 2.26%-2.28%.

Last week, the most traded muni sector was industrial development followed by education and utilities, according to IHS Markit.

On Monday, high-grade municipals were mostly weaker, according to final readings on Refinitiv MMD’s AAA benchmark scale. Short yields in 2021 were unchanged at 0.18% while the 2022 yiled rose one basis point to 0.20%. The yield on the 10-year muni rose five basis points to 0.86% while the yield on the 30-year increased five basis points to 1.61%

The 10-year muni-to-Treasury ratio was calculated at 88.3% while the 30-year muni-to-Treasury ratio stood at 91.9%, according to MMD

"The vaccine news this morning is driving investment grade muni bond yields higher," ICE Data Services said. "Some higher-yielding credits are trading higher on the day, including bonds from N.Y.’s MTA and issues linked to airlines."

ICE said that except in one- and two-year maturities, the muni to Treasury ratios have fallen below 100%

The ICE AAA municipal yield curve showed short maturities unchanged ao 0.18% in 2021 and 0.20% in 2022. The 10-year maturity rose four basis points to 0.85% and the 30-year yield increased five basis points to 1.63%.

The 10-year muni-to-Treasury ratio was calculated at 88% while the 30-year muni-to-Treasury ratio stood at 93%, according to ICE.

The IHS Markit municipal analytics AAA curve showed short yields rising to 0.19% and 0.20% in 2021 and 2022, respectively, with the 10-year rising to 0.86% and the 30-year yield up to 1.60%.

The BVAL AAA curve showed the yields on the 2021 and 2022 maturities up one basis point to 0.15% and 0.17%, respectively, while the 10-year rose four basis points to 0.87% as the 30-year increased five basis points to 1.65%.

Treasuries were weaker as stock prices traded higher.

The three-month Treasury note was yielding 0.10%, the 10-year Treasury was yielding 0.96% and the 30-year Treasury was yielding 1.75%. The Dow rose 4.40%, the S&P 500 increased 1.54% and the Nasdaq gained 0.12%.

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