Secondary trades indicate economic concern; yields mostly flat

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Triple-A benchmark yields were little changed Tuesday, despite secondary market trading that demonstrated concern for the recovery of the U.S. economy amid nightly protests and civil unrest in cities across the country.

“The fragility of the economy right now has dealers unloading risk and as such, even some triple-A names are trading erratically,” a New York trader said.

A Washington general obligation bond, 5s of 2039, traded at 1.51% inter-dealer, and then were sold to a customer at 1.39%. A Texas water bond, 4s of 2049, traded inter-dealer at 1.82% then sold to a customer at 1.75%.

There is genuine concern within the municipal market about how state and local government revenues will rebound from both the COVID-19 virus and the transpiring civil unrest. Some participants believe defaults are more likely now than ever before.

However, there is also optimism.

“To be sure, there will probably be a few defaults that make splashy headlines, but we believe the vast majority of municipal bonds will continue to pay coupons and principal as they come due,” Mark Paris, CIO and head of municipals at Invesco, said. “What makes us confident in stating this? The federal government has taken decisive action, arriving like a knight in shining armor with financial support. The Municipal Liquidity Facility was established to provide market access for states, large cities and large counties and is almost up and running. The mere establishment of the MLF has provided comfort and stability to the municipal market and we believe it will likely help troubled borrowers the most.”

The economy had experienced an unprecedented period of growth before the pandemic, he said, which resulted in strong balance sheets and ample cash on hand among many municipal issuers.

“As the U.S. Congress debates additional stimulus to aid municipal issuers, we can’t help but think of who will pay the resulting bill,” he said. “Much of the burden will potentially fall onto taxpayers, which makes the tax-exemption provided by municipal bonds that much more attractive.”

Meanwhile, historically low rates on the front end of the yield curve persisted amid brisk new-issue activity as the spring redemption season was in full swing.

“Front-end rates are at all-time lows, which will be under pressure especially with a growing note calendar” over the next two months, a New York trader said Tuesday.

“There is a general concern about investor demand at these levels in light of a $10 billion calendar,” he added, pointing to this week’s $7 billion tax-exempt and $3 billion taxable calendar combined.

With continued pressure on the front end of the curve, the trader said deals this week will need to be priced attractively to gauge investors’ attention, especially in the two- to five-year range.

Primary market
Siebert Williams Shank priced the New York City Municipal Water Finance Authority’s (Aa/AA+/AA+/NR) $669.33 million of Fiscal 2020 tax-exempt water and sewer system second general resolution revenue bonds for institutions after a one-day retail order period.

The $269.33 million of Series FF bonds were priced to yield 0.49% with 4% and 5% coupons in a split 2025 maturity; 0.75% with a 5% coupon in 2027; 0.86% with a 5% coupon in 2028; and 1.76% with a 5% coupon, 1.98% with a 4% coupon and 2.23% with a 3% coupon in a triple-split 2041 maturity.

The $300 million of Series GG-1 bonds were priced to yield 1.05% with a 5% coupon in 2030, 1.94% with a 5% coupon in 2048 and 1.96% with a 5% coupon, 2.18% with a 4% coupon and 2.45% with a 3% coupon in a triple-split 2050 maturity.

The $100 million of Series GG-2 refundable principal installments bonds were priced with 5% coupons to yield 0.50% in 2026 and 0.85% in 2029.

On Monday, the $280.275 million of Series FF bonds were priced for retail to yield 0.52% with 4% and 5% coupons in a split 2025 maturity; 0.79% with a 5% coupon in 2027; 0.88% with a 5% coupon in 2028; 1.76% with a 5% coupon, 1.98% with a 4% coupon and 2.23% with a 3% coupon in a triple-split 2041 maturity.

The $300 million of Series GG-1 bonds were priced for retail to yield 1.08% with a 5% coupon in 2030, 1.94% with a 5% coupon in 2048 and 2.18% with a 4% coupon and 2.45% with a 3% coupon in a split 2050 maturity.

The $50 million of Series GG-2 bonds were priced for retail with 5% coupons to yield 0.50% in 2026 and 0.85% in 2029.

Proceeds will be used to fund capital projects and refund outstanding bonds for savings.

JPMorgan Securities priced Henderson, Nevada's (Aa2/AA+/NR/NR) $299.17 million of limited tax general obligation bonds.

The deal consists of $125.53 million of tax-exempt Series 2020A-1 utility system bonds additionally secured by pledged revenues, $29.565 million of Series 2020B-1 various purpose GOs, $93.72 million of taxable Series 2020B-2 various purpose and refunding GOs and $50.355 million of taxable Series 2020A-2 utility system refunding bonds.

Piper Sandler priced the San Jose-Evergreen Community College District, Santa Clara County, Calif.’s (Aa1/AA+/NR/NR) $225 million of Series B Election of 2016 general obligation bonds.

The deal was priced to yield from 0.21% with a 4% coupon in 2021 to 2.45% with a 2.50% coupon in 2042; a 2045 term bond was priced to yield 2.55% with a 2.59% coupon.

Since 2012, the district has issued $1 billion of debt, with the most issuance prior to this year being in 2014 when it sold $251 million of securities.

JPMorgan received the written award on the New Jersey Economic Development Authority’s (A1e/A+e/NR/NR) $150 million of water facilities refunding revenue bonds for the New Jersey-American Water Co.

In the competitive arena, Citigroup won the New Jersey Infrastructure Bank’s (Aaa/AAA/AAA/NR) $58.405 million of taxable environmental infrastructure refunding green bonds with a true interest cost of 1.4677%.

TD Securities won the Infrastructure Bank’s $17.78 million of tax-exempt environmental infrastructure refunding green bonds with a TIC of 0.3954%.

On Wednesday, Wisconsin will sell $219.295 million of taxable GOs. Proceeds will be used for various governmental purposes.

Municipal officials are acting as the financial advisor; Foley & Lardner is the bond counsel.

Secondary market data
On the short end: Texas GOs, 5s of 2022, traded at 0.25%. Gilt-edged Georgia GOs, 5s of 2023, traded at 0.23%. Prince George's County, Maryland 5s of 2023, traded at 0.25%-0.23%. Mecklenburg County, North Carolina, 5s of 2025 were at 0.33%. Washington GOs, 5s of 2026, 0.56%-0.53%. Baltimore County 4s of 2046, traded at 1.98%-1.95%.

However, municipals ended Tuesday 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 10-year muni-to-Treasury ratio was calculated at 123.2% while the 30-year muni-to-Treasury ratio stood at 111.6%, according to MMD.

The ICE AAA municipal yield curve also showed yields remaining flat Tuesday, with the 2021-2023 maturities yielding 0.150%, 0.181% and 0.231%. Out longer it was the same story with yields on the 10- and 30-year maturities unchanged at 0.821% and 1.647%, respectively.

ICE reported the 10-year muni-to-Treasury ratio stood at 129% while the 30-year ratio was at 109%.

“Puerto Rico bonds are seeing some follow through higher from yesterday’s Supreme Court ruling,” ICE Data Services said in a market report.

ICE reported the following trades: Commonwealth 8% due 7/1/35 (74514LE8), up 3 ¼ points to $60 ¼; Commonwealth GO bonds 2012 dated (74514LB7), up 2 points to $61 ¾; Public Buildings Authority revenue bonds, Pre-2011 dated (745235VR), up two 1/8 points to $71 3/8; Public Buildings Authority revenue bonds 2011 dated (745235P7), up 2 ½ points to $75 3/8; and Public Buildings Authority revenue bonds 2012 dated (745235R3), up three points to $67 ¾.

The IHS Markit municipal analytics AAA curve showed 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 0.84% and the 30-year stood at 1.64%.

The BVAL curve showed the 2021 maturity 0.09% and the 2022 up one basis point at 0.15%. BVAL also showed the 10-year muni 0.81% up one bp while the 30-year was flat at 1.68%%.

Munis were little changed on the MBIS benchmark scale.

Treasuries were weaker as equities traded higher.

The three-month Treasury was yielding 0.147%, 10-year Treasury was yielding 0.682% and the 30-year was yielding 1.482%.

The Dow rose 0.56%, the S&P 500 increased 0.34% and the Nasdaq gained 0.12%.

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Coronavirus Secondary bond market Primary bond market Volatility New York City Municipal Water Finance Authority Commonwealth of Puerto Rico
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