Illinois came to market Tuesday, earlier than expected, with yields lowered by as much as 25 basis points from price talk Monday, as investor demand for high-yield paper welcomed the lowest-rated U.S. state. New deals from Oregon also re-priced to lower yields and New York State sold tax-exempt and taxable general obligation bonds in the competitive market to strong demand.
Triple-A benchmarks were little changed in mixed trading as the primary did the talking. U.S. Treasuries rose ahead of the Federal Reserve's FOMC meeting conclusion Wednesday while equities lost ground.
Investors sitting on the sidelines in the secondary since Friday got a sense of what the primary had to offer and new deals were easily digested and underwriters bumped levels with the state of New York selling exempts through triple-A levels.
A repricing of Illinois general obligation bonds saw bonds bumped by 12 to 20 basis points from preliminary pricing wires Tuesday and 17 to 25 basis points from Monday's price talk.
Morgan Stanley & Co. priced $1.25 billion of general obligation bonds for the State of Illinois (Baa3/BBB-/BBB-/). Bonds in 2022 with a 5% coupon at 0.69% (~63 basis points above triple-A benchmarks), 5s of 2026 at 1.51% (+108), 5s of 2031 at 2.22% (+102), 5s of 2036 at 2.47% (+119), 4s of 2041 at 2.81% (+132), 5s of 2046 at 2.75% (a 25 bps bump from Monday and about +111 bps). The second two series, $150 million priced with 5% coupons in 2022 to yield 0.69%, 1.51% in 2025, and 1.70% in 2031. The $258 million priced with 4% coupons in 2022 at 0.69%, 2025 at 1.30% and 2031 at 2.22%.
Municipal yields were little changed in the face of rising Treasury yields, which is keeping the municipal to Treasury ratios at extremely rich levels, noted Roberto Roffo, managing director and portfolio manager at SWBC Investment Company.
Municipal to UST ratios were lower again, with Tuesday's 10-year at 63% and the 30-year at 69%, according to Refinitiv MMD. ICE Data Services showed ratios at 62% in 10-years and 72% in 30.
“There is still a significant amount of cash on the sidelines from the positive year-to-date inflows, which should support not only new large issues, but also the market in general,” Roffo said Tuesday.
The State of New York (Aa2/AA+/AA+/) sold $103 million of tax-exempt general obligation bonds to BofA Securities. Bonds in 2022 with a 5% coupon yield 0.06%, 5s of 2026 at 0.41%, 5s of 2031 at 1.01% and 3s of 2035 at 1.42%.
New York also sold $358.78 million of taxable GOs to BofA Securities. Bonds in 2022 priced to par at 0.25%, in 2026 with a 1.50% coupon yield 1.02% while bonds in 2031 at 1.94% par.
The state sold $174.9 million of taxable GOs to Morgan Stanley & Co. Bonds priced at par in 2032 at 2.05%, 2036 with a 2.38% coupon to yield 2.40%, 2041 with a 2.68% coupon at 2.70% and 2042 with a 2.73% coupon at 2.75%.
Morgan Stanley & Co. re-priced $453.5 million of general obligation bonds for the State of Oregon (Aa1/AA+/AA+/). The first series, $299.3 million, saw 5s of 2022 yield 0.06% (-3 basis points), 5s of 2026 at 0.48% (-2), 5s of 2031 at 1.11% (-4), 5s of 2036 at 1.34% (-6), 4s of 2041 at 1.65% (-10) and 4s of 2046 at 1.80% (-10).
The second series, $48 million, had 3s of 2022 yielding 0.06% (-3), 4s of 2026 at 0.49% (-2), 5s of 2031 at 1.11% (-4), 5s of 2036 at 1.34% (-6) and 4s of 2041 at 1.65% (-10).
The last series, $90 million, 5s of 2022 yield 0.06%, 5s of 2026 at 0.49%, 5s of 2031 at 1.11%, 5s of 2036 at 1.34% and 5s of 2041 at 1.55%.
The week's largest deal is expected from the Dormitory Authority of the State of New York (/AA+/AA+/), which is set to price $2.2 billion of tax-exempt and taxable personal income tax bonds with Morgan Stanley & Co. running the books on Thursday. DASNY is also set to price $210.2 million federally taxable PITs.
“The $2 billion DASNY deal should do well as New York will be the recipient of a significant windfall from the last COVID relief package, strengthening its financial stability,” Roffo said.
As analysts digest the stimulus law — and most agree it will be a boon for muni credits — some, such as Municipal Market Analytics, argue the American Rescue Plan Act is more likely to reduce rather than grow 2021 primary market issuance in 2021.
"This is a function of it backfilling state and local revenues, helping at least some governments avert the use of rescue financings and taxable restructurings: a positive for both credit quality and reinvestment challenges in 2022-2024."
It may encourage more issuers to finance new-money projects, which would be additive to supply, "but this is easily exaggerated," according to MMA.
Secondary market trading
Secondary trades showed a slightly firmer tone. California GOs traded up in large blocks. Cal 5s of 2026 traded at 0.54%-0.52% versus 0.63% original, 5s of 2027 at 0.73%-0.72% versus 0.79% original, 5s of 2028 at 0.85% versus 0.92% original. Cal 5s of 2030 at 1.10% versus 1.13% original, 5s of 2033 at 1.33% versus 1.35% original.
On the short end: New York City GOs, 5s of 2022, traded at 0.19%-0.13%. New York Dorm PITs, 5s of 2022, at 0.15%.
Arlington County, Virginia 5s of 2025 traded at 0.36%-0.35%. Delaware GOs, 5s of 2026 at 0.42% versus 0.46% Monday. San Francisco transportation 4s of 2026 at 0.46%. Los Angeles MTA 5s of 2026 at 0.45%.
Anne Arundel County, Maryland 5s of 2031 at 1.11% (original 1.10%). New York City TFAs, 5s of 2031 at 1.28%. Baltimore County, Maryland 5s of 2034 at 1.22% versus 1.39% original. Baltimore County 5s of 2035 at 1.27% versus 1.25%-1.24% on Thursday and 1.43% original. Ohio waters, 5s of 2033 at 1.20%-1.18%.
Washington GOs, 5s of 2038 at 1.51%-1.50%, in line with Friday's levels. Ohio waters, 5s of 2038 at 1.51%-1.50%.
New York City TFAs, 4s of 2043 at 2.24%-2.23%.
CUSIP requests rise 2.5% year-over-year
The aggregate total of all municipal securities — including municipal bonds, long-term and short-term notes, and commercial paper — CUSIP requests rose 23.8% year-over-year in February from January, but was down 0.6% through February, according to CUSIP Global Services. For muni bonds though, there was an increase in request volumes of 24.9% month-over-month and an increase of 2.5% on a year-over-year basis.
“CUSIP request volumes have swung widely in the span of one month, signaling that the volatility we saw in 2020 may be with us for some time," said Gerard Faulkner, director of operations for CUSIP Global Services. "With continued uncertainty in the economy and interest rates possibly mounting a slow-but-steady increase, we can expect to see continued swings in the CUSIP Issuance Trends indicator throughout the first part of the year.”
CUSIP identifier requests for the broad category of U.S. and Canadian corporate equity and debt rose 43.0% in February from last month. The monthly increase was driven largely by U.S. corporate equity and debt identifier requests, which increased by 21.2% and 111.9%, respectively. On a year-over-year basis, corporate CUSIP requests were down 25.3%, reflecting a significant year-over-year decline in January of 2021.
How mixed economic indicators are moving the sentiments
A drop in retail sales can be discounted as a large upward revision to January’s numbers and the stimulus money about to reach consumers will lead to a big number in March, economists say.
Retail sales declined 3% in February to $561.7 billion, after a revised 7.6% in January to $579.1 billion.
Economists polled by IFR Markets estimated retail sales to drop 0.6%.
Excluding autos it was down 2.7%, compared to a 8.3% increase last month. Economists predicted a drop-off of 0.1%.
“January’s numbers were revised up rather noticeably and [according to data from the Federal Reserve Bank of St. Louis], the dollar amount is still way above pre-pandemic levels,” said Kevin Flanagan, head of fixed income strategy at WisdomTree. “Texas winter weather and the fading of the $600 checks likely played a role … guess what’s coming? Better weather and $1,400 stimulus checks.”
He said February's number doesn't make him concerned about the economy, in general, or about inflation.
“I think this was just a one-month occurrence,” Flanagan said. “It is now a matter of when we will reach immunity and not if we have a different take on the virus now. I am not concerned about inflation right now, but I do think we hit 2% sooner than what the Fed is anticipating. If that does happen, what is their threshold for how long they will let it run above the target? Where and when does the Fed stand and step in from a policy perspective? Those are things I'll be keeping an eye on.”
He also added noted the forecast for gross domestic product for the first quarter is around 8% to 8.5% growth.
“We believe the consumer will be the economic engine of this recovery as their balance sheets were relatively clean coming into the COVID-induced economic shutdowns last year,” said Komson Silapachai, vice president of research & portfolio strategy at Sage Advisory Services. “Three rounds of stimulus have resulted in a sky-high savings rate for the consumer, which we think will continue to be released in the form of higher spending as the economy reopens in the coming months. We think that retail sales will trend higher throughout the summer.”
Sameer Samana, senior global market strategist for Wells Fargo Investment Institute, believes the U.S. consumer continues to be the major force behind U.S. economic growth, and will play a major role in the recovery.
“While retail sales for February were a little weaker than expected, they follow a very strong January and the upcoming stimulus checks and unemployment benefits will also help the consumer to recover in March, as some were fearful that a fiscal cliff was approaching,” he said. “Overall, the trend in consumption is one of the underpinnings of our positive outlook on the U.S. economy and equity markets.”
Scott Ruesterholz, portfolio manager at Insight Investment, has a slightly different view, as he thinks that Tuesday’s retail sales report “painted a complicated picture” of the U.S. economy.
“As such, the dollar value of February retail sales was actually in-line with expectations. Most categories showed declines, led by department stores, e-commerce, and sporting goods,” he said. “Overall, the report painted a complicated picture on the U.S. economy.”
He said that January’s report was “greatly” aided by the $600 checks passed in late December, and with that “effect fading, spending normalized in February.”
“This highlights that the U.S. economy is still quite reliant on stimulus measures,” Ruesterholz said. “The fact that stimulus measures provided a one-time surge in spending growth, rather than ongoing increases, may ease worries of fiscal stimulus causing spiralling inflation. Instead, while inflation is poised to rise in coming months, this bump may similarly fade as fiscal stimulus fades, as we saw with consumption growth.”
Another impactful component of the report, according to Ruesterholz, is the slower-than-normal tax refund payments, which can boost February spending in the seasonal adjustments.
“Seasonal adjustments may increase the volatility of economic data over the next quarter due to reopening and the impact of last year’s lockdown,” he said. The potential for seasonally distorted data increases the risk of investors misjudging the pace of economic recovery. This type of uncertainty can cause periods of increased volatility, and higher levels of uncertainty and volatility may continue to characterize the investing landscape for fixed-income investors.”
Other indicators on Tuesday included, import and export prices. Import prices increased 1.3% in February after a 1.4% climb in January. Meanwhile, export prices rose 1.6% in the latest month after a 2.5% jump in the previous month.
Economists predicted imports to increase 1.2% and export prices to advance 1.0%.
Industrial production dropped 2.2% in February after a gain of 1.1% in January, while Capacity utilization came down 1.7% to 73.8%, compared to 75.6% last month.
Economists estimated production to be 0.4% higher, while they predicted capacity to come in at 75.6%.
Business inventories inched up 0.3% in February, as economists correctly predicted the gain. This compares to a 0.8% gain in January.
Secondary market
High-grade municipals were unchanged, according to Refinitiv MMD. Short yields were flat at 0.06% in 2022 and to 0.07% in 2023. The 10-year at 1.02% and the 30-year at 1.65%.
The ICE AAA municipal yield curve showed short maturities at 0.07% in 2022 and 0.10% in 2023. The 10-year was flat at 1.00% while the 30-year yield stayed at 1.71%.
The IHS Markit municipal analytics' AAA curve showed yields fall one basis point to 0.05% in 2022 and 0.10% in 2023, the 10-year to 0.97%, and the 30-year to 1.65%.
The Bloomberg BVAL AAA curve showed yields at 0.05% in 2022 and at 0.09% in 2023, while the 10-year stayed at 1.00%, and the 30-year yield steady at 1.69%.
The 10-year Treasury ended at 1.61% and the 30-year Treasury was yielding 2.39% near the close. The Dow dropped 101 points while the S&P 500 fell 0.05% and the Nasdaq gained 0.23%.
Christine Albano contributed to this report.
Updated with Illinois repricing.
