This week's taxable deals should fetch 'robust' demand
Issuers bringing taxable deals this week should see robust buying interest as the strong performance of the corporate market has pushed yields down, making double-A taxable municipal bond yields attractive for corporate investors in the 21% tax bracket.
Five out of the top six largest scheduled deals and six out of the top 11 deals this week are either taxable or have taxable portions.
“We expect strong buying interest for these bonds because the issuer has not been in the market for several years and also because of the recent outperformance of power bonds,” said Patrick Luby, senior municipal strategist at CreditSights “The Power Authority of the State of New York last issued bonds in February of 2017 and has only $1.8 billion of municipal debt outstanding.”
Luby added that in contrast, South Carolina Public Service Authority has $7.8 billion of municipal debt outstanding and Energy Northwest has $5.9 billion.
“Buying interest in the taxable bonds should be particularly robust because the strong performance of the corporate market has pushed yields down, making double-A taxable municipal bond yields attractive for corporate investors in the 21% tax bracket,” Luby said. “We expect that demand for this issue will help to tighten the benchmark taxable municipal bond curves.”
A taxable trader in New York agreed, saying that muni taxables are cheap to corporates the most in roughly four to five years.
“There are different buyers, different sets of credit fundamentals and liquidity issues versus corporate investment grade index bonds but the comparisons still will work in munis favor,” the trader said. “From an X over perspective (muni tax-exempts to muni taxables) the relative value still looks favorable to taxables but narrowing some last week as treasuries rallied, spreads tightened and MMD cheapened. So I think the deals will do fine but none will be priced on the offered side however.”
It was a typical slow Monday start with little activity — compounded by a heavier market tone lingering from last week, according to a Charlotte trader.
“It’s very soft again, with very little activity as we speak,” the trader said Monday morning.
Investors, he noted, are still cautious as market volatility continues to curtail demand and activity.
“Things have backed off over the last week or so as people are trying to get an assessment of everything going on in the world right now,” he said.
The heavier tone stems from the cloud of uncertainty overhanging the market as the COVID-19 pandemic continues to displace the market, according to the trader.
“There is a lot of concern about the overall market and a lot of the rhetoric coming out of Washington,” he said. “There continues to be a concern about credit widening.”
In the meantime, new issuance is beginning to inch up slowly, but surely, but he said there is still a significant amount of deals on the day to day calendar.
“It’s a case by case basis,” he said of the slight improvement in new issuance. “We are trying to see where some of the primary deals that are getting priced this week will lead us and what kind of reception they will get.”
He said the flow continues to be slowed by issuers watching the daily market technicals and volatility.
The secondary muni market was dislocated Friday with high-grade block trading showing swings in yields and rate volatility as price discovery remained problematic for investors and issuers alike.
Triple-A benchmark yields rose by about five basis points across the curve.
“We thought the market — beginning last week -- was a little overpriced in terms of where the curve was,” he said. “I think the curve adjustment will persist into this week and it will need to be a pretty good adjustment” to help bring deals to market.
“We are expecting several notable new issues to be in the market next week and with the continuing market volatility we believe that yields may come at slightly wider-than-usual concessions to clear quickly,” said Luby. “This presents both an opportunity for incremental yield as well as the need for investors to be nimble and react quickly as deals get priced.”
However, he noted that total new issue volume for the week is likely to end up being lower than the year-to-date average.
“The bonds that do come to market will benefit from more attention so investors should also be prepared for repricings before deals are finalized — especially if the broader market is stable,” he said.
Citi priced Howard County, Maryland’s (Aaa/AAA/AAA/ ) $168.355 million of consolidated public improvement project and metropolitan district project bonds.
The $117.325 million of series A bonds was priced as 5s to yield 1.50% in 2030 and as 4s to yield 2.36% in 2039.
The $50.225 million of series B bonds was priced as 5s to yield 1.50% in 2030 and as 3s to yield 2.94% in 2049.
It was then repriced as 5s to yield 1.50% in 2030 and and as 4s to yield 2.36% in 2039 in series A and as 5s to yield 1.50% in 2030 and as 3s to yield 3.05% in 2049.
Goldman Sachs is expected to price the New York State Power Authority’s (Aa1/AA/AA/NR) $1.1 billion of taxable and tax-exempt revenue bonds this week.
Additionally Monday, BofA Securities priced the U.S. International Development Finance Corp.’s $150 million of U.S. government guaranteed weekly rate certificates of participation, for the Union Bank of Nigeria and the 2x Women's Initiative.
The U.S. IDFC, formerly the Overseas Private Investment Corp., is an independent agency of the U.S. Government that provides financing for private development projects and was created under the Better Utilization of Investments Leading to Development Act of 2018.
The unrated COPs were priced at par to yield 0.88% in 2030, with a weekly reset.
Proceeds will be utilized by the Union Bank of Nigeria to expand its small and medium enterprise lending and expand on-lending to women-owned SMEs, women-led SMEs, women-supporting SMEs, and individual women borrowers.
Secondary market data
Munis were mixed on the MBIS benchmark scale Monday, with yields falling by one basis points in the 10-year maturity and rising by two basis points in the 30-year maturities. On the MBIS AAA scale, munis were stronger with yields decreasing by four basis points in the 10-year maturity and by six basis points in the 30-year maturity.
On Refinitiv Municipal Market Data’s AAA benchmark scale, the yield on both the 10-year muni and 30-year were unchanged at 1.28% and 2.13%, respectively.
The MMD muni to taxable ratio was 195.1% on the 10-year and 170.4% on the 30-year.
On the ICE muni yield curve late in the day, the 10-year yield was up three basis points to 1.33% while the 30-year was higher by three basis points to 2.16%.
The ICE muni to taxable ratio on the 10-year was 213% and the 30-year was 135%.
BVAL saw the 10-year nudged up to 1.31%, while the 30-year inched up to 2.21%.
The IHS muni curve saw the 10-year rise to 1.29% and the 30-year increased to 2.09%.
Stocks were positive as Tresuries were mixed.
The Dow Jones Industrial Average rose 1.59%, the S&P 500 index increased 1.55% and the Nasdaq was up 1.14%.
The three-month Treasury was yielding 0.112%, the Treasury two-year was yielding 0.220%, the five-year was yielding 0.404%, the 10-year was yielding 0.657% and the 30-year was yielding 1.253%.