Washington State and the New York Metropolitan Transportation Authority sold bonds in the competitive market to strong bidding, bumping municipal benchmarks lower and moving one- and two-year yields to record lows as investors clamor for paper even with historically rich valuations hanging overhead.
Short municipal yields fell to 0.06% in one year and 0.08% in two years, lower than previous records of 0.08% and 0.09% in August 2020, according to reads of Refinitiv MMD. Triple-A benchmarks were bumped two basis points across the curve, according to MMD.
Municipal to U.S. Treasury ratios were at 61% in 10 years and 70% in 30 years, according to Refinitiv MMD. ICE Data Services showed ratios fall to 59% in 10 years and 72% in 30. BVAL showed 10-year ratios at 0.60% and 75% in 30 years.
With the 30-year Treasury currently trading around 1.95%, even if there was some hesitation in the past two sessions to accept lower municipal yields given rich valuations, municipals continue grinding lower. New issues pushed the secondary lower.
"For example, NY MTA 4% coupons in the longer part of the curve were trading at or behind +100 basis points last week and with the ongoing search for yield (in addition to increased stimulus hopes and vaccine rollout) they priced today at +84/+86 bps," said Greg Saulnier, managing analyst at Refinitiv MMD. "Likewise, the Washington GO was able to sell over $850 million of bonds into the market at or through current secondary trading levels, also indicating a strong response from the market given the deal size."
BofA Securities won three of the four Washington deals, while J.P. Morgan won the smallest of the four. J.P. Morgan won two of the three MTA deals and Wells Fargo rounded out the MTA slate.
Washington saw tight yields and strong bids for its $885 million of general obligation bonds.
Secondary trading showed Washington 5s of 2026 trading at 0.33%-0.30% while the same maturity and coupon yielded 0.23% and 0.27% in their sales Tuesday. Washington 5s of 2031 traded at 0.85% Tuesday and were won at 0.78% and 0.80%. Washington 5s of 2034 traded at 1.03% Tuesday, 1.07% Monday and yielded 0.99% and 0.97% in the deals sold Tuesday. Bonds in 2035 with a 5% coupon traded at 1.07% and 5s were won at 1.05%, 4s at 1.10%. Bonds in 2036 with 5% coupon yielded 1.11% in the secondary and yielded 1.09% in Tuesday's sale. Bonds in 2037 with a 5% coupon traded at 1.14% and were won at 1.13% (5% coupon) and at 1.20% (4% coupon).
Strong technicals helped maintain a solid footing on Tuesday where robust demand from both direct and fund purchases continues year to date, according to Chris Brigati, managing director of municipal investments at Valley National Bancorp.
“The cyclical strength the market usually experiences in January arrived right on schedule this year, and does not appear to be showing any signs of slowing down,” Brigati said.
The strength he is observing in the new-issue market is leading to strong performance in the secondary.
“Most new-issue order periods are oversubscribed given the strong demand for paper, resulting in lower yields and tighter spreads upon final pricing,” he said.
The supply of secondary market paper is limited as investors are seeking yield paper further out on the credit spectrum to gain higher rates, according to Brigati.
Single-A and triple-B-rated credits, he said, are trading at spreads very close to the lows observed just prior to the market sell-off last March in response to the COVID-19 pandemic.
“This can be a double-edged sword, however, when the market eventually corrects or unwinds, credit spreads usually widen out under such circumstances leading to portfolio underperformance,” Brigati said.
He suggested investors select the best securities within the lower-rated credits to minimize risk.
On the rate front, Brigati said since the Federal Reserve is expected to continue its accommodative policy, inflation concerns do not appear to be imminent.
“As much as many participants would welcome higher yields, I am not expecting any change to the market unless something else influences investor participation,” Brigati said.
Interest rates, he said, are the highest they have been since last April and with the equity markets near all-time highs, “a corrective move could lead to a flight-to-quality trade in fixed-income.”
As a result, Brigati said that would invariably pull the municipal market along with it toward lower yields.
Primary in full swing
The State of Washington (Aaa/AA+/AA+/) sold $258 million of various purpose general obligation bonds to BofA Securities. Bonds in 2022 with a 5% coupon yield 0.075%, 5s of 2026 at 0.23%, 5s of 2031 at 0.78%, 5s of 2036 at 1.09% and 5s of 2037 at 1.13%.
BofA also won $260 million of various purpose general obligation bonds, with 5s of 2038 at 1.17%, 5s of 2041 at 1.30% and 5s of 2046 at 1.46%.
J.P. Morgan Securities won $109.6 million of motor vehicle fuel tax and vehicle-related fees GOs. Bonds in 2022-2023, 2035 and 2037-2040 were all away. Bonds in 2022 with a 5% coupon yield 0.075%, 5s of 2026 at 0.27%, 5s of 2031 at 0.80%, 4s of 2036 at 1.15%, 4s of 2041 at 1.36% and 4s of 2046 at 1.50%.
BofA won $234.7 million of motor vehicle fuel tax and vehicle-related fees GOs, with 5s of 2022 at 0.08%, 5s of 2026 at 0.26%, 5s of 2031 at 0.77%, 5s of 2036 at 1.09%, 5s of 2041 at 1.30% and 5s of 2046 at 1.46%.
The New York Metropolitan Transportation Authority (A3//A-/) sold three competitive loans on Tuesday. J.P. Morgan won $205 million of transportation revenue bonds, with 4s of 2041 at 2.03%, 4s of 2042 at 2.07% and 4s of 2043 at 2.10%.
J.P. Morgan also won $266 million of transportation revenue green bonds (CBI certified), with 4s of 2044 at 2.13%, 4s of 2045 at 2.16%, 4s of 2046 at 2.17% and 4s of 2047 at 2.18%.
Wells Fargo Securities won $229 million of transportation revenue green bonds (CBI certified), with 5s of 2048 at 2.21%, 4s of 2049 at 2.22% and 4s of 2050 at 2.23%.
Richland County, South Carolina, (Aaa/AAA//) sold $100 million of transportation sales and use tax general obligation bonds to Citigroup Global Markets Inc. Bonds in 2022 with a 5% coupon yield 0.08%, 5s of 2021 at 0.21% and 5s of 2028 at 0.40%.
A look at trading across the secondary
Fairfax County, Virginia, 4s of 2023 traded at 0.10%-0.11% versus 0.13% on Friday. Florida PECO 5s of 2024 at 0.13%. Washington Suburban Sanitation District 5s of 2024 at 0.15%. California GO 5s of 2026 at 0.30% versus 0.31% Monday.
Howard County, Maryland, 5s of 2026 at 0.30%. New York City G, 5s of 2028 at 0.66%.
Maryland GO 5s of 2029 yield 0.56%.
Washington Suburban Sanitation District 4s of 2032 at 0.88%-0.87% versus 0.88% Monday.
Austin, Texas, water 5s of 2038 traded at 1.13%. To see how far yields have fallen, the maturity priced at 1.67% on Oct. 19.
Arlington, Texas, ISD 4s of 2040 traded at 1.13%-1.05% versus 1.22% Monday and original yields of 1.26%.
New York City Transitional Finance Authority bonds from last week's sale showed tightening. NYC TFA 4s of 2039 traded at 1.61% versus .63% Friday and 1.66% original; 4s of 2049 traded at 1.91%-1.89% versus 1.96% original; 3s of 2051 at 2.18%-2.17% versus 2.22% original.
High-grade municipals were stronger, according to final readings on Refinitiv MMD’s AAA benchmark scale. Short yields were at 0.06% in 2022 and 0.08% in 2023. The 10-year fell two basis points to 0.71% and the 30-year fell to 1.36%.
The ICE AAA municipal yield curve showed short maturities fall a basis point to 0.08% in 2022 and 0.10% in 2023. The 10-year fell two bps to 0.68% while the 30-year yield fell two basis points to 1.39%.
The IHS Markit municipal analytics AAA curve showed yields at 0.08% in 2022 and 0.09% in 2023 while the 10-year fell a basis point to 0.67% and to 30-year at 1.36%.
The Bloomberg BVAL AAA curve showed yields at 0.07% in 2022 and 0.09% in 2023, while the 10-year fell two bps to 0.67%, and the 30-year yield fell two bps to 1.40%.
The three-month Treasury note was yielding 0.09%, the 10-year Treasury was yielding 1.16% and the 30-year Treasury was yielding 1.95% near the close. Equities were mixed with the Dow up 11 points, the S&P 500 fell 0.03% and the Nasdaq gained 0.21%.
Economy
Only one piece of economic data was released Tuesday. The National Federation of Independent Business’ Small Business Optimism Index fell to 95.0 in January from 95.9 in December.
The index remains below the average 98. And the future expectations dropped to the lowest level (net negative 23%) since November 2013.
“The COVID-19 pandemic continues to dictate how small businesses operate and owners are worried about future business conditions and sales,” NFIB Chief Economist Bill Dunkelberg said.
Separately, The Conference Board reported U.S. consumers are turning to the stock market, as the indices soar and savings accounts offer next to nothing in interest.
COVID restrictions limiting in-person spending also played a role in the use of discretionary funds for investing.
“The booms and busts of a few unlikely ‘meme stocks’ have grabbed recent headlines, but the rise of individual investors tells a broader story about spending habits during COVID-19,” according to Denise Dahlhoff, senior researcher at the think tank. “Trends like low interest rates and declining debt concerns — alongside below-normal spending on vacations and out-of-home entertainment due to pandemic restrictions — have left a portion of Americans with more disposable income and fewer ways to spend it. Stocks, which continue to yield strong returns, have become an increasingly attractive option for these consumers.”
Inflation continues to be on the minds of investors. Peter Wilson, global fixed income strategist at Wells Fargo Investment Institute said, “inflation expectations, rather than a rise in real yields, have pushed 10-year Treasury yields up.”
And the curve steepened on “premature speculation of Federal Reserve tapering,” rather than concern the Fed will soon shift from accommodative policy, he said.
Therefore, he expects “the rise in yields will remain relatively benign,” and “further curve steepening should be measured rather than extreme.”
Negotiated primary market still to come
The Tennessee State School Bond Authority (Aa1/AA+/AA+/NR) is set to price $716 million of taxable higher education facilities second program bonds, serials 2021-2035; terms 2040, 2045. Jefferies LLC is bookrunner.
The New York City Industrial Development Agency (A2/AA//) is set to price $507.8 million of Queens Baseball Stadium Project PILOT refunding bonds on Wednesday. Assured Guaranty insured. Goldman Sachs & Co. LLC is head underwriter.
The Lower Colorado River Authority, Texas, (/A//) is set to price $407.4 million of LCRA transmission services corporation project revenue bonds on Wednesday. BofA is lead underwriter.
The City of Chula Vista, California, (/AA//) is set to price $398.4 million of taxable pension obligation bonds on Wednesday, serials 2022-2036; terms 2041, 2045. Stifel, Nicolaus & Company, Inc.
The University of Washington (Aaa/AA+//) is set to price $325 million of taxable and tax-exempt general revenue and refunding bonds on Wednesday. Goldman Sachs is head underwriter.
The Tobacco Securitization Authority of Northern California is set to price $236.5 million of tobacco settlement asset-backed refunding bonds (Sacramento County Tobacco Securitization Corp.). $124.6 million Series 2021A, serials 2021-2040; term 2049. $33.1 million Series B1, terms 2030, 2049, $78.7 million Series B2, term, 2060. Jefferies leads the deal.
The Maryland Department of Transportation (A1/NR/A/) is set to price $211.9 million of Baltimore/Washington International Thurgood Marshall Airport special transportation project taxable refunding revenue bonds. The deal was moved to the day-to-day calendar. Serials 2023-2030. Citigroup Global Markets Inc. will run the books.
The California Statewide Communities Development Authority is set to price $198 million of essential housing revenue social bonds. Goldman Sachs leads the deal.
The Connecticut Housing Finance Authority (Aaa/AAA//) is set to price $193 million of housing mortgage finance program bonds, $111.3 million Series A-1, serials, 2021-2022, 2024-2032; term 2034, 2038, $17.25 million Series A-2, serials 2021-2024; $64.2 million Series A-3, serials 2021, 2025-2032, term 2034. Citigroup is lead underwriter.
The San Francisco Municipal Transportation Agency (Aa2/AA-//) is set to price $175 million of taxable and tax-exempt refunding revenue bonds on Wednesday. Series A, $170.5 million of taxable, serials 2023-2036, term 2044; Series B, $4.5 million of exempts, serial 2031. RBC Capital Markets is head underwriter.
The City of Austin, Texas, (A3//A-/) is set to price $149.3 million of Travis, Williamson and Hays Counties rental car special facility revenue refunding bonds on Tuesday. Serials 2024-2036, term 2042. Wells Fargo Securities will run the books.
Wisconsin (Aa2//AA/) is set to price $118.5 million of taxable general fund annual appropriation refunding bonds on Thursday, serials 2022-2031. Barclays Capital Inc. is lead underwriter.
Shoreline School District No. 412 King County, Washington, (Aaa///) is set to price tax-exempt and taxable unlimited tax general obligation improvement and refunding bonds on Tuesday, Series A exempts, $59 million of refunding, serials 2021-2022, 2024-2029, 2039, and $55.9 million Series B, serials 2021-2022, 2024-2030. RBC is head underwriter.
The City of Downey, California (/AA//) is set to price $113.7 million of taxable pension obligation bonds on Tuesday. BofA is bookrunner.
Competitive issues to come
On Wednesday, the Las Vegas Valley Water District, Nevada, is set to sell $154 million of general obligation limited tax water refunding bonds (additionally secured by SNWA pledged revenues) at 10:45 a.m. and $35 million of general obligation limited tax water refunding bonds (additionally secured by pledged revenues) at 11:15 a.m.
Cherry Creek SD #5, Colorado, is set to sell $150 million of general obligation bonds at 11 a.m.
On Thursday, the Maryland University System is set to sell $108 million of auxiliary facility and tuition taxable refunding revenue bonds at 10:45 a.m. and $230 million of auxiliary facility and tuition tax-exempt refunding revenue bonds at 10:30 a.m.
Gary Siegel contributed to this report.
