Municipal secondary markets were lightly traded and benchmark yields were little changed on a quiet Monday in which U.S. Treasuries were slightly stronger and all muni eyes are on the week's new-issues, led by large state general obligation deals along with a diversity of credits from which to choose.
This month brings a larger calendar with varied credits, but most traders and analysts do not expect investor pullback because of the continued improving credit picture and better-than-expected revenue collections. Fund flows are also a contributing factor and most participants expect them to continue to be a third leg of support for current rates.
A more stable U.S. Treasury market — the 10- and 30-year saw yields fall slightly Monday and have been less volatile generally lately, adding to stability for munis.
Triple-A benchmarks were little changed, with Refinitiv MMD adding a basis point for certain maturities due to the May roll and a basis point cut on bonds in three- to five-years with some pressure there. Both Refinitiv and ICE Data Services' 10-year sits right at 1%, with investors indicating 1% around the 10-year is acceptable.
Municipal to UST ratios closed at 62% in 10 years and 69% in 30 years on Monday, according to Refinitiv MMD, while ICE Data Services had the 10-year at 61% and the 30 at 70%.
April returns were positive for munis with the Bloomberg Barclays Municipal Index posting a total return of +0.8% in April, bringing the year-to-date total return to +0.48%. The high-yield municipal index generated a total return of +1.5%, while the U.S. aggregate-eligible taxable muni index generated total and excess returns of +2.0% and +0.6%, respectively, according to Barclays PLC.
Munis outperformed the U.S. Treasury Index, which returned +0.75% during the month, Barclays noted. MMD/UST ratios decreased across the board, with 5-year, 10-year, and 30-year ratios ending the month at 51%, 61%, and 69%, respectively.
The best-performing revenue sectors were transportation (+1.07%), hospitals (+1.04%), and special tax (+1.02%); those with the lowest total returns were resource recovery (+0.46%), electric (+0.70%), and water and sewer (+0.76%).
Muni issuance in April totaled $35 billion, with net issuance of $13 billion and Barclays expects $35 billion to $40 billion of supply in May, with net issuance of about $10 billion to $15 billion, not including $10 billion in coupon payments.
Trading was light. Some trades of note include Virginia Public School Building Authority 5s of 2025 trading at 0.42% versus 0.32% original. California 5s of 2025 at 0.40%. California 5s of 2029 at 0.94%-0.93% Friday. Washington 5s of 2031 at 1.07%. New York City TFA 5s of 2033 at 1.41%. Maryland 5s of 2034 at 1.16%. Hennepin County, Minnesota, 5s of 2038 at 1.33%. Lamar Texas ISD 3s of 2039 at 1.52%-1.49% versus 1.54% original.
Scales
On Refinitiv MMD’s AAA benchmark scale, yields were at 0.09% in 2022 and 0.12% in 2023 (+1 bp May roll). The yield on the 10-year rose one basis point to 1.00% (May roll) and the 30-year was steady at 1.60%.
The ICE AAA municipal yield curve showed yields at 0.09% in 2022 and 0.14% in 2023, rising one and two bps, respectively, the 10-year at 1.00%, up one basis point, while the 30-year sat at 1.59%.
The IHS Markit municipal analytics AAA curve showed yields steady at 0.10% in 2022 and 0.13% in 2023, the 10-year at 0.96% and the 30-year at 1.60%.
The Bloomberg BVAL AAA curve showed yields steady at 0.06% in 2022 and 0.08% in 2023, with the 10-year sat at 0.96%, and the 30-year yield at 1.59%.
The three-month Treasury note was yielding 0.02%, the 10-year Treasury was yielding 1.61% and the 30-year Treasury was yielding 2.29% near the close. Equities were mixed with the Dow gaining 238 points, the S&P 500 rising 0.27% and the Nasdaq lost 0.48% near the close.
Competitive market
On Tuesday, Massachusetts (/AA//) is set to sell $200 million and $400 million general obligation bonds at 11 and 11:30 a.m. eastern.
The Port Authority of New York and New Jersey is set to sell $187 million of consolidated bonds at 10:45 a.m.
On Wednesday, Pennsylvania (Aa3//AA-/) is set to sell $1.04 billion of tax-exempt and taxable general obligation bonds at 11 a.m.
Seattle, Washington, (/AAA//) is set to sell $166 million of tax-exempt and taxable general obligation bonds. The first, $144.8 million of exempts at 10:45 a.m. and the second, $21.4 million of taxables, at 11:15 a.m.
On Thursday, Milwaukee, Wisconsin, (/A/AA-/) is set to sell $118.9 million of general obligation promissory notes at 11 a.m., $30.9 million of general obligation corporate purpose bonds at 11 a.m., $21.9 million of taxable general obligation promissory notes at 11:30 a.m., and $13.6 million of taxable general obligation corporate purpose bonds at 11:30 a.m.
Negotiated pricings
The Main Street Natural Gas, Inc. (Aa2//AA/) is on the day-to-day calendar with $747.1 million of gas supply revenue bonds, serials 2022-2028, a term in 2051, puts due 12/1/2028. RBC Capital Markets Inc. is lead underwriter.
The Washington State Housing Finance Commission (/BBB+//) is set to price $571.961 million of social municipal certificates Series 2021-1 Class X, serial 2035, on Thursday. Citigroup Global Markets Inc. is head underwriter.
The North Texas Tollway Authority (A2/A//) is set to price $448.7 million of system revenue and refunding second tier bonds, Series 2021B. J.P. Morgan Securities LLC will run the books.
The North Texas Tollway Authority is also set to see $402.9 million of system revenue and refunding first tier taxable bonds, Series 2021A, serials 2026-2038, term 2043, on Wednesday. RBC Capital Markets is head underwriter.
The California Infrastructure and Economic Development Bank (A2///) is set to price $281.4 million of California Academy of Sciences index mode sustainability revenue bonds on Wednesday. Series 2018A, Series 2018B, Series 2018C and Series 2018D remarketing. Wells Fargo Securities is bookrunner.
The California Department of Water Resources (Aa1/AAA//) is set to price $264 million of taxable Central Valley Project water system revenue bonds on Wednesday. Morgan Stanley & Co. LLC is lead underwriter.
The DWR is also set to price on Wednesday $212.2 million of Central Valley Project water system revenue bonds, Series BD. Morgan Stanley will also run the books.
The state of Ohio (Aa2/AA/AA/) is set to price on Wednesday $228.6 million of capital facilities lease-appropriation bonds, $150 million of Series MHF, serials 2022-2031 and $78.6 million of Series ABF, serials 2022-2041. Loop Capital Markets will run the books.
The Northside Independent School District, Texas, (Aaa//AAA/) is set to price on Tuesday $212.5 million of unlimited tax school building and refunding bonds, Series 2021, Permanent School Fund Guarantee Program. J.P. Morgan Securities LLC is lead underwriter.
The Iowa Finance Authority (Aaa/AAA//) is set to price on Tuesday $209.2 million of state revolving fund revenue green bonds, Series 2021A. Piper Sandler & Co. is head underwriter.
The Maine Health and Higher Educational Facilities Authority (A1/AA/A+/) is set to price on Wednesday $157 million of taxable revenue bonds, Series 2021B, serials 2022-2036, term 2043. Raymond James & Associates, Inc. will run the books.
The Wisconsin Housing and Economic Development Authority (Aa3/AA//) Is set to price $156.3 million of housing refunding revenue bonds, non-AMT, Series 2021 A, $75.5 million of serials 2023-2059, and Series 2021 B, $80.8 million, serials 2045-2051. Wells Fargo Securities is head underwriter.
The L’Anse Creuse Public Schools, Macomb County, Michigan, (/AA//) is set to price $149.7 million of taxable 2021 refunding bonds, insured by the Michigan School Building Qualified Loan Program. J.P. Morgan Securities LLC is head underwriter.
The Riverside Community College District of Riverside and San Bernardino Counties, California, (Aa1///) is set to price $140.6 million of 2021 general obligation refunding bonds on Wednesday. Piper Sandler & Co. is bookrunner.
The American Museum of Natural History (Aa3/AA//) is set to price $135 million of taxable sustainability corporate CUSIP bonds, term 2052. Morgan Stanley & Co. LLC is lead underwriter.
El Paso, Texas, (/AA/AA/) is set to price on Thursday $146.5 million of taxable and tax-exempt general obligation bonds, $105.6 taxable, $40.9 exempts. El Paso will also price $78 million of exempt certificates of participation. J.P. Morgan Securities LLC is bookrunner.
The School Board of Palm Beach County, Florida, (Aa3//AA-/) is set to price $112.9 million of tax-exempt and taxable certificates of participation. J.P. Morgan Securities LLC is lead underwriter.
Economy
Inflationary pressures remain high while the manufacturing sector continues to deal with supply chain woes that hold it back, analysts said.
The Institute for Supply Management’s manufacturing PMI slipped to 60.7 in April from 64.7 in March.
“The message from today's ISM manufacturing report is that the factory sector could be running even hotter were it not for a variety of constraints,” said Tim Quinlan and Sarah House, senior economists at Wells Fargo Securities, citing a shortage of input components and staffing issues.
The biggest constraint is supply chain bottlenecks, noted Scott Ruesterholz, portfolio manager at Insight Investment. “Given these bottlenecks, pricing pressures continue to increase. Combined with base effects, these price increases should push inflation higher in coming months, toward 3% on the consumer price inflation index.”
The prices index rose to 89.6 in April from 85.6 in March. These levels haven’t been hit since 2008, ISM said.
Excluding two months in 2008 when oil prices were soaring, the index hasn’t been this high since 1979, Quinlan and House wrote. “Yet unlike in 2008, demand is far from wavering. That has put manufacturers in a better position to pass on costs than see their margins squeezed.”
Fixed-income market participants are concerned about how long the inflationary pressures will remain elevated, and whether the Fed’s “transitory” narrative hold up, Ruesterholz said. “We do not believe that the economy has shifted in such a way that has made inflation structurally higher than pre-COVID norms.”
But the high savings levels and supply bottlenecks may extend “transitory” to as much as 18 months, instead of three orsix6 months, he said, which could lead to market volatility.
Separately, the economy is progressing, but "we still have a long way to go to achieve a robust and full economic recovery," according to Federal Reserve Bank of New York President John Williams.
"Despite the challenges and uncertainties we’ve faced since the pandemic took hold, the economy is now positioned to grow quickly," Williams told the Women in Housing and Finance 2021 Annual Symposium via video. "In fact, with accommodative financial conditions, strong fiscal support, and widespread vaccinations, I expect that the rate of economic growth this year will be the fastest that we’ve experienced since the early 1980s. And that’s not only a forecast — we are already seeing signs of this pivot to strong growth in the economic statistics."
He added, "But robust economic growth this year by itself isn’t enough to achieve the truly strong and full economic recovery that we are aiming for. We are still far from our goals of maximum employment and price stability,"
As for inflation, Williams warned to not "overreact" to price volatility caused by the pandemic, and rely on the underlying trends. His belief, as is the projection of the Federal Reserve, remains "once the price reversals and short-run imbalances from the economy reopening have played out, inflation will come back down to about 2 percent next year."
Also released Monday, construction spending nudged 0.2% higher in March after a revised 0.6% decline in February, first reported as a 0.8% drop. Year-over-year spending climbed 5.3%.
Economists polled by IFR Markets expected spending to rise 2% in the month.
“Builders are scrambling to make up for the shortage of existing homes,” said Yelena Maleyev, economist at Grant Thornton. “This summer will again be busy for builders and realtors.”
But supply issues will lift prices. “Strong activity in the residential sector over the spring and summer will continue to constrain supplies of materials and labor,” she added. “New demand in the hotel and restaurant industries will only exacerbate the shortages. All price spikes will be carefully monitored by the Federal Reserve but these are expected to be transitory because the bottlenecks are expected to be short-lived.”
Consumers will begin to spend more on services rather than goods later this year, she predicted.
Insight’s Ruesterholz believes with COVID-19 impacting seasonal adjustments, investors should prepare for more volatility in data over the next few months. “Against this backdrop, we urge clients to look through the noise and at the underlying trend,” he said. “For construction, we see the outlook as being unambiguously positive, driven by a booming housing market and elevated government infrastructure spending in the pipeline.”
