Short end of the municipal curve feeling the Fed effects as yields fall again

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On a day when the world’s fifth largest economy said it faces a $54 billion deficit due to the coronavirus-fueled shutdown, the municipal market saw a five-basis-point rally on the short end, with yields lower by as much as three basis points out long.

New issues were priced in the primary to decent reception from a Broward County School Board, Fla. deal to the Tennessee Housing Development Agency’s taxable bonds to Richland County School District No. 1, S.C.’s taxable debt.

Secondary trading on Thursday of the short-term high-grade market showed yields as low as 0.62% on bonds in 2022. Triple-A benchmark yields fell four or five basis points even with the news out of California.

Refinitiv Lipper reported $408 million of outflows out of municipal bond mutual funds, the first sub-billion figure since April 22 when there were $73.844 million of inflows.

Traders are also pricing in a potential negative Federal funds rate.

“Current conditions have created favorable entry points for issuers with targeted maturity and couponing structuring, but the wider spreads needed for distribution are largely absent in secondary bidding,” said Kim Olsan, FHN Financial senior vice president.

Olsan noted, though, that an approximate 10-basis-point rally from the end of April may begin to find some resistance, particularly where the first 1% and 2% targets have slid further out the curve.

“Owing to the effectiveness of the [Municipal] Liquidity Facility on short maturities, what were 1% yields in one- to two-year range at the beginning of April have now declined to an implied 75 basis points,” she said.

“However, both pure AAAs and prerefunded bonds are trading as low as 50 basis points where high relative value against taxable products has generated a meaningful crossover trade.”

New York Metropolitan Transportation Authority green bonds began to move in the secondary to what some traders said was standard for a new issue —15 to 20 basis points — especially a negotiated deal, to “trade up” given the size of the deal and yield/spread. The 5s of 2050 traded in large blocks (59261AG4), a $3 million trade at 4.93% (+288) and was pieced out 4.86% (+281).

New Braunfels, Texas ISD, 5s of 2022, traded at 0.69%-0.68%. Dallas Texas ISD 5s of 2022 traded at 0.62%. Texas waters, 5s of 2022, traded at 0.70%.

Utah GOs, 5s of 2022, traded at 0.70%-0.69%. Charlotte North Carolina GOs 5s of 2023 were at 0.79%. Arlington County, VA, 5s of 2025 traded at 0.91%-0.90%. Fairfax County, VA, 5s of 2025, at 0.93%-0.91%.

“While overall daily trade counts remain below $15 billion, MSRB data show the range past 12 years is drawing 50% of all flows—indicative of sustained interest where the curve is its steepest (the 20-year/10-year slope is 60 basis points),” Olsan said.

“New issue bidding shows the market biased toward tighter spreads for the one-off high grade names” and she noted the AAA Denver Water competitive sale Wednesday drew a -5/AAA spread in the 5-year maturity and the 10-year essentially came at no spread to AAA GOs.

Meanwhile, BlackRock’s Peter Hayes, head of the municipal bonds group, James Schwartz, head of municipal credit research, and Sean Carney, head of municipal strategy, said they “continue to view the muni market’s current weakness as a liquidity crunch rather than a solvency crisis.”

“The dramatic decline in municipal revenues resulting from the economic shutdown is a temporary phenomenon and, in most cases, should not impact an issuer’s capacity to pay its long-term obligations,” they wrote. “In the near-term, the disrupted revenue stream puts a strain on municipal governments and public authorities that ordinarily maintain limited cash balances.”

They noted that credit concerns will likely be concentrated on the sectors hardest hit by the ongoing health crisis and not directly covered by the Municipal Liquidity Fund, including senior living, mass transit, airlines, airports, higher education and healthcare.

“We could see significant credit rating downgrades in these segments. Notably, those currently rated Baa could fall into junk territory. (Baa-rated bonds represent only 8% of the broad S&P Municipal Bond Index),” they wrote.

“The high-yield segment of the market remains vulnerable to market dislocations, although this can lead to attractive buying opportunities,” they wrote. “Security selection is more critical than ever and investors must remain vigilant for risks yet to emerge.”

Primary market
JPMorgan Securities priced the Broward County School Board, Fla.’s (Aa3/NR/A+/NR) $202.195 million of certificates of participation. The deal was priced as 5s to yield from 2.13% in 2030 to 2.50% in 2034.

Raymond James priced the Tennessee Housing Development Agency’s (Aa1/AA+/NAF/NAF) $108.5 million of taxable residential finance program bonds.

The bonds were priced at par to yield from 1.08% and 1.13% in a split 2021 maturity to 2.708% and 2.758% in a split 2033 maturity; a 2036 term bond was priced at par to yield 2.958% and a 2040 term was priced as 4s to yield 2.195%.

In the competitive arena, Morgan Stanley won the Richland County School District No. 1, S.C.’s (Aa1/AA//) $150.405 million of taxable general obligation refunding bonds with a true interest cost of 1.6077%.

BofA Securities won the Georgetown County School District, S.C.’s (Aa2/AA/NR/NR) $120 million of GOs with a TIC of 2.5347%. Proceeds will be used to finance various school improvements including the purchase of land.

Meanwhile, two universities have put large taxable corporate CUSIP deals on the calendar next week. Duke University (Aa1/AA+/NR) plans $1.3 billion with terms in 2044, 2050, 2055. The deal is set to be priced by Barclays Capital Inc. Emory University is planning $800 million of taxable corporate CUSIPs with Morgan Stanley running the books.

Secondary markets
On Refinitiv Municipal Market Data’s AAA benchmark scale, the yield on the 10-year GO dropped three basis points to 1.21% while the 30-year declined three basis points to 2.02%.

The 10-year muni-to-Treasury ratio was calculated at 192.7% while the 30-year muni-to-Treasury ratio stood at 153.4%, according to MMD.

IHS Markit had the 10-year at 1.24% and the 30-year at 2.07%.

On the ICE municipal yield curve, the 10-year yield decreased three basis points to 1.21% while the 30-year fell three basis points to 2.02%.

BVAL showed the 10-year at 1.22%, three basis points down while the 30-year was at 2.07%, another three basis points lower.

Munis were also stronger on the MBIS benchmark and AAA scale, with yields falling in both the 10- and 30-year maturities.

Money market muni funds fall $1.16B
Tax-exempt municipal money market fund assets fell $1.16 billion, bringing total net assets to $136.04 billion in the week ended May 4, according to the Money Fund Report, a publication of Informa Financial Intelligence.

The average seven-day simple yield for the 187 tax-free and municipal money-market funds dipped to 0.10% from 0.11% in the previous week.

Taxable money-fund assets increased $38.97 billion in the week ended May 5, bringing total net assets to $4.555 trillion.

The average, seven-day simple yield for the 797 taxable reporting funds declined to 0.16% from 0.18% in the prior week.

Overall, the combined total net assets of the 984 reporting money funds rose $37.80 billion to $4.690 trillion in the week ended April 28.

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