Short-term munis rally as investors contemplate negative UST rates
The short end of the municipal curve rallied hard on Friday as ratios enticed crossover buyers, investors considered the potential for a negative Fed funds rate, and the Fed buying on the one- to three-year pushed yields down by as much as 15 basis points.
Triple-A benchmarks also saw bumps out longer of three to four basis points — still meaningful for a market that just saw California update its potential revenue losses to top $120 billion.
The week ahead will see large taxable corporate CUSIP deals from Duke University and Emory along with a large New York City Transitional Finance Authority deal and Texas and California issuers with about $5 billion on tap.
High-grade trading Friday showed the disparate credit picture that investors are facing; they now need to dig deeper into municipal financials and the backstops they have on certain bonds to make investment decisions.
Georgia GO 5s of 2021 traded early Friday at 0.54%-0.52%. Washington GO 5s of 2023, 0.64%-0.60%. Another Georgia GO, 5s of 2023, 0.61%-0.60%.
“We are seeing very strong trading in the one-to-three year sector of the market today (a continuation of what began Thursday) as extremely attractive municipal to U.S. Treasury ratios entice crossover buyers,” said Greg Saulnier, municipal analyst at Refinitive MMD.
Additionally, he said, the January 2021 Fed funds futures contract briefly traded above $100 Thursday, implying the possibility of a negative Fed funds rate in the future.
“This led to hefty short covering in the front end of the Treasury complex and as such, has spilled over into munis where, coincidentally, the Fed can purchase tax-exempt paper in the one- to three-year maturity range,” Saulnier said.
The front end of the muni bond curve is getting a big boost from continued Fed action in the space coupled with the potential for short Treasuries to move to a negative yield, according to ICE Data Services.
The move in the long end is just enough to push 30-year yields below 2% (1.98%), the first time since April 21, ICE said.
The curve currently stands at a relatively steep 142 bps for 1 to 30 years. The sharp drop in short rates is bringing down the muni percent of Treasury yields by substantial amounts, but they still remain elevated.
The Treasury yield curve from three months to two years is essentially flat, with only two basis points between them (0.1% and 0.12%).
“With two years yields at this level, a new issue would come with a 0% if auctioned today,” ICE said.
Meanwhile, Illinois was trading cheaper than Buckeye Ohio tobacco bonds this week, with Illinois facing 425- to 450-plus basis point spreads against AAA benchmarks. Unrated Buckeyes were trading at 350-plus Refinitiv MMD. Price talk on Illinois in the Street was they would likely face 7% yields. The state has a $1.2 billion GO short-term note sale that was put on hold this week with state officials saying it will announce via MuniAuction a new date and time for the sale of the certificates at least 12 hours prior to such alternative date and time for receipt of bids.
This week's New York MTA green taxable bonds sold at 5.175% in 2049 traded as low as 4.82% in massive blocks Friday. The exempt MTAs, 4.75s of 2045, traded at 4.75%-4.78%.
On the buy side of the market, there continues to be a focus on new-issuance, as well as high credit quality and attaining the best relative value, according to Chris Brigati, managing director and head of municipal trading at Advisors Asset Management.
“The market appears to remain cautious, but overall there is solid activity and interest,” he said on Friday, noting that the market is becoming increasingly more discerning with regard to credits.
He said higher credit quality paper — such as better name general obligation paper and water and sewer revenue bonds — are much more liquid and trading at much narrower spreads than more risky issuers.
“The primary new-issue market appears to be receiving better attention by market participants for all but the safest credits in the market,” Brigati said. “Professional investors appear to be consistently showing up to buy new issues.”
Brigati also said there is potential relative value on paper inside of five years, which is trading at above 250% to 400% of U.S. Treasury debt.
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 (Aa2) is planning $800 million of taxable corporate CUSIPs with Morgan Stanley running the books.
The Great Lakes Water Authority continues to keep its $715 million sewage disposal system revenue refunding taxable deal on the day-to-day calendar.
In what could be a bellwether deal for New York City, the New York City Transitional Finance Authority (Aa1/AAA/AAA/NR) said plans issue about $726 million of future tax secured subordinate bonds next week.
The deal is composed of $500 million of tax-exempt fixed-rate bonds and $226 million of taxable fixed-rate bonds. Book-running lead manager Loop Capital Markets is expected to price the $500 million exempts on Wednesday, May 13, after a one day retail order period.
The TFA also expected to competitively sell around $226 million of taxable fixed-rate bonds on May 13.
The Dormitory Authority of the State of New York (Aa3//AA-/) also plans to bring $464 million of school districts revenue bond financing program revenue bonds with RBC Capital Markets running the books.
The City of Ontario, California (/AA/AA-) has $339 million of taxable pension obligation bonds on tap for Wednesday led by HilltopSecurities.
The Lower Colorado River Authority (NR/A/A+/NR) plans $304.5 million of LCRA Transmission Services Corporation Project transmission contract refunding revenue bonds on Wednesday. Citi is set to run the books.
The Southern California Public Power Authority (Aa2//AA-/) plans $276 million of Windy Point/Windy Flats Project refunding revenue green bonds Wednesday. RBC is lead underwriter.
The State of Wisconsin also has a taxable refunding on tap of $200 million with Wells Fargo running the books.
In the competitive markets, Miami-Dade County, Florida has a $365 million general obligation deal scheduled and Fayetteville School District #1, Arkansas has a $173 million refunding and construction bond deal on tap.
Short-term high-grades were substantially stronger on Friday.
On Refinitiv Municipal Market Data’s AAA benchmark scale, yields fell 12 basis points to 0.58% in 2021, 0.63 in 2022 and 0.67% in 2022.
The ICE municipal yield curve had the short-term maturities down 11 basis points, to 0.560% in 2021, 0.609% in 2022 and 0.692% in 2023.
Longer-term munis were also stronger.
MMD’s scale showed the yield on the 10-year GO falling five basis points to 1.16% while the 30-year declined five basis points to 1.97%.
The 10-year muni-to-Treasury ratio was calculated at 170.6% while the 30-year muni-to-Treasury ratio stood at 111.8%, according to MMD.
IHS Markit’s municipal analytics curve had the 10-year muni at 1.21% and the 30-year at 2.04%.
On the ICE municipal yield curve, the 10-year yield decreased five basis points to 1.161% while the 30-year fell four basis points to 1.983%.
The 10-year muni-to-Treasury ratio was calculated at 182.0% while the 30-year muni-to-Treasury ratio stood at 138.%, according to ICE.
BVAL showed the 10-year falling three basis points to 1.18% while the 30-year fell four basis points to 2.03%.
Munis were also stronger on the MBIS benchmark and AAA scale, with yields falling in both the 10- and 30-year maturities.
Muni CUSIP requests surge in April
Municipal CUSIP request volume increased sharply in April after declining in March, CUSIP Global Services reported on Friday.
Total requests for all municipal securities – including municipal bonds, long-term and short-term notes, and commercial paper – rose 12.6% last month to 1,002 from 890 in March.
“Based on CUSIP request volume for April, it is clear that corporate and municipal borrowers see an opportunity to raise new capital and they are getting into position to access the debt markets,” said Gerard Faulkner, director of operations at CUSIP Global.
On an annualized basis, municipal request volume is up 7.8% to 4,051 compared to 3,757 in the same four months last year.
For municipal bonds specifically, requests rose to 852 in April from 767 in March; for this year, muni bond requests total 3,470 compared to 3,066 in the same period in 2019.
Among top state issuers, Texas, New York and California were the most active in April.
U.S. and Canadian corporate requests totaled 6,350 in April 2020, up 12.1% from March, and 28.8% on a year-over-year basis. April volume increases were driven by 1,432 requests for new U.S. corporate debt identifiers, a gain of 12.3% from March.
Lipper reports outflow
Investors continued to take cash out of the municipal market, albeit at a slower pace than in the previous week.
In the week ended May 6, weekly reporting tax-exempt mutual funds saw $408.424 million of outflows, after outflows of $1.256 billion in the previous week, according to data released by Refinitiv Lipper Thursday.
Exchange-traded muni funds reported outflows of $18.992 million, after outflows of $259.315 million in the previous week. Ex-ETFs, muni funds saw outflows of $427.416 million after outflows of $996.447 million in the prior week.
The four-week moving average remained negative at $189.238 million, after being in the red at $663.721 million in the previous week.
Long-term muni bond funds had outflows of $804.309 million in the latest week after outflows of $1.323 billion in the previous week. Intermediate-term funds had outflows of $37.521 million after outflows of $36.397 million in the prior week.
National funds had outflows of $243.507 million after outflows of $982.938 million while high-yield muni funds reported outflows of $736.606 million in the latest week, after outflows of $790.359 million the previous week.
Bond Buyer indexes mostly strengthen
The weekly average yield to maturity of the Bond Buyer Municipal Bond Index, which is based on 40 long-term bond prices, dropped two basis points to 3.87% from 3.89% the week before.
The Bond Buyer's 20-bond GO Index of 20-year general obligation yields rose four basis points to 2.60% from 2.56% in the previous week.
The 11-bond GO Index of higher-grade 11-year GOs increased four basis points to 2.113% from 2.09% the prior week.
The Bond Buyer's Revenue Bond Index rose four basis points to 3.02% from 2.98% from the previous week.
The yield on the U.S. Treasury's 10-year note dipped to 0.63% from 0.64% the week before, while the yield on the 30-year Treasury moved up to 1.31% from 1.28%.