Fears about the COVID-19 virus continued to run rampant Tuesday, causing investors to resume selling off equities, resulting in municipal bond yields following Treasury yields down to all-time lows once again.
Munis were firm with a flattening bias along the yield curve following Monday’s price gains, according to Michael Pietronico, chief executive officer of Miller Tabak Asset Management.
The gains “seemed to slow down the interest in the market today from participants who seem concerned with the low overall level of rates,” he said.
“We believe we are close to the bottom in yields and as such are more biased to buy defensive structures that perform relatively well should rates correct higher,” he said.
With equities near all-time highs and credit spreads near all-time lows, investors need to be prepared for the risk of a market correction, said Pramod Atluri, fixed-income portfolio manager at Capital Group.
“It should not come as a surprise that heightened global uncertainty — like news about the further spread of coronavirus and its impact on global supply chains — can hurt valuations, which in some areas look priced to perfection, “ he said. “This week’s drop in equities and rise in price of 10-year Treasuries is a timely reminder that high-quality bonds can protect investor portfolios against losses during volatile times.”
What many investors may not realize, he said, is that not all bonds or bond funds are created equal. Many funds say they are high quality, but own a lot of lower-quality bonds that may not provide the protection and stability investors need when markets fall.
“We’d encourage investors to do a health-check and ensure the bonds in their portfolios are high-quality, like U.S. government bonds, AAA mortgages and investment-grade corporate credit,” Atluri said. “In my view, they’re more likely to be resilient when shocks occur, helping to preserve investors’ capital while also providing some income.”
He also noted, while it can be tempting to increase holdings of riskier bonds, such as high-yield corporate debt in a reach for yield as interest rates fall, it is important that investors know high-yield bonds can be highly correlated to equities.
“When equity prices fall, so too may high-yield bonds, which means investors have not really reduced risk in their overall portfolio,” he said. “We would advise investors to focus on the important role of bonds in an overall portfolio. When valuations are near their all-time highs, we believe investors should prioritize capital preservation and diversification from equities over adding a few more basis points of yield.”
Secondary market
Munis were stronger on Tuesday on the MBIS benchmark scale, with yields dropping five basis points in the 10-year maturity and three basis points in the 30-year maturity. High-grades were also stronger, with yields on MBIS' AAA scale decreasing by five basis points in the 10-year maturity and by two basis points in the 30-year maturity.
On Refinitiv Municipal Market Data’s AAA benchmark scale, the yield on the 10-year muni GO slipped three basis points to 0.98%, setting a record low. The previous record of 1.01% was set Monday. The 30-year GO muni fell three basis points to a record low of 1.57%, beating the prior low of 1.60%, also set Monday.
MMD yields have gone significantly lower over the past year. On Feb. 25, 2019, the 10-year yield was 2.10% and the 30-year was at 2.99%.
The 10-year muni-to-Treasury ratio was calculated at 73.7% while the 30-year muni-to-Treasury ratio stood at 86.9%, according to MMD.
All three major indexes were again in the red, as equities continued to sell-off because of COVID-19 concerns, as the virus is approaching epidemic and pandemic levels, and containment is questionable.
Tuesday, the CDC said Americans should prepare for COVID-19 to spread in U.S. and cause major disruption. “It’s not a question of if, but when,” Dr. Nancy Messionier said. “We are asking the American public to prepare for the expectation that this might be bad.”
Separately, a Harvard scientist predicted that COVID-19 will infect up to 70% of humanity and an IOC member said that Tokyo Olympic organizers have until late May to see if the virus is under control. If not, “you’re probably looking at a cancellation.”
As a result, Treasuries are rallying and we are seeing new all-time lows in the 10-year and 30-year.
The Dow Jones Industrial Average was down about 2.56%, the S&P 500 index was lower by 2.51% and the Nasdaq fell roughly 1.95% late in the session Tuesday.
The three-month Treasury was yielding 1.495%, the Treasury two-year was yielding 1206%, the five-year was yielding 1.64%, the 10-year hit a record low of 1.318%, before inching back up to 1.332% as of press time and the 30-year was yielding 1.797%, hitting another record low before retracing to 1.808% by press time.
Primary market
“I thought after yesterday that you might see one or two deals come in earlier than anticipated and LAX did just that,” said one New York trader. “At this point in time, the only ones who are enjoying this market are the issuers. As if bonds were not hard enough to come by, the ever-lowering yields are making it even harder.”
Citigroup priced the Department of Airports for the City of Los Angeles’ (Aa2/AA/AA/NR) $738.575 million of senior refunding revenue private-activity and non-alternative minimum tax bonds for both retail and institutional investors.
“The deal was scheduled to price for retail Tuesday and for institutions Wednesday, but due to the strength of the book and feedback from the underwriting desk, we accelerated the pricing today due to current market conditions,” a spokeswoman from the Los Angeles World Airports said Tuesday.
Citi also priced Louisville/Jefferson County Metro Government’s (NR/A/A+/NR) $400 million of health system revenue bonds for Norton Healthcare Inc.
Bank of America Securities priced the Dormitory Authority of the State of New York’s (Aa2/AA+/ / ) $358.765 million of taxable revenue bonds for New York University.
Barclays priced Ohio University’s (Aa3/A+/NR/NR) $222.045 million of general receipts federally taxable refunding bonds.
Competitively, Washington Suburban Sanitary District, Maryland ( / /AAA), sold $100.330 million of consolidated public improvement refunding bonds, which were won by BofA Securities with a true interest cost of 0.8791%.
"Almost every deal that came today was upsized from its original par amount, this isn't new, and we will certainly be seeing more of it going forward," the New York trader said.
Previous session's activity
The MSRB reported 29,514 trades Monday on volume of $10.060 billion. The 30-day average trade summary showed on a par amount basis of $11.92 million that customers bought $6.02 million, customers sold $3.85 million and interdealer trades totaled $2.06 million.
Texas, New York and California were most traded, with the Lone Star State taking 13.285% of the market, the Empire State taking 12.88% and the Golden State taking 12.794%.
The most actively traded security was the Reno, Nevada, sales tax revenue subordinate refunding capital appreciation bonds, zeros of 2058, which traded 7 times on volume of $35 million.
Christine Albano contributed to this report.
Data appearing in this article from Municipal Bond Information Services, including the MBIS municipal bond index, is available on The Bond Buyer Data Workstation.
