The world remains on edge about the rapidly spreading COVID-19 and those fears once again have Treasury yields digging down even deeper. COVID-19 fears have now impacted fund flows, as municipals suffer outflows for the first time in 60 weeks.
After 60 weeks in a row of inflows, many of which were in exess of $1 billion and even $2 billion, Lipper reported outflows of $249.657 million for the week ended March 4. This comes after last week's huge inflow of $2.266 billion.
Meanwhile, analysts are beginning to explore the implications of the virus on various business sectors, many of which will have direct impacts on the municipal industry.
“When we first wrote about the virus in January we concluded that the impact to airports would be negligible, factoring in outbreaks limited to mainland China and Hong Kong,” Eric Kazatsky, municipal strategist at Bloomberg Intelligence, said. “It has obviously been a hectic few weeks and the virus is making its way across the U.S. at varied speeds. Today we take revisit which airports and areas may feel most acute impacts if economic slowdown continues.”
With the virus now spreading in the U.S. and affecting business and leisure travel, a look at U.S. airport spreads is in order.
“At 13 basis points, the spreads for 10-year AA-rated U.S. airports are almost two standard deviations below their longer-term average, signaling richer valuations,” Kazatsky said. “With headwinds such as declines in enplanements, concessions and parking revenue, a continued widening of spreads wouldn't be surprising over the next few months.”
The first reported case of COVID-19 was reported in Clark County, Nevada and that virus could affect one-third of Las Vegas workers.
“Not only do credits for large hub airports have virus-associated risk, but so do the local economies that have jobs rooted in accommodation and food service, or tourism,” Kazatsky said. “A loss of jobs could have a ripple effect on local tax collections and sales-tax-related credits. According to metrics from ACRe Data, employment surrounding large airports shows that Las Vegas stands out with 31% of local employment dependent on tourism, followed by Orlando at 17.5%. While just outside of the top 10, the counties surrounding JFK and Newark airports each have tourism dependency of 10.2%.”
Secondary market
Munis were mixed and little changed on Thursday on the MBIS benchmark scale, with yields falling less than a basis point in the 10-year and rising no more than one basis point in the 30-year maturiy. High-grades were mixed, with yields on MBIS' AAA scale increasing by less than one basis point in the 10-year maturity and decreasing by no more than one basis point in the 30-year maturity.
Munis were steady on Refinitiv Municipal Market Data’s AAA benchmark scale, as the yield on both the 10-year and 30-year muni GO were unchanged at 0.96% and 1.56%, respectively.
The 10-year muni-to-Treasury ratio was calculated at 103.7% while the 30-year muni-to-Treasury ratio stood at 99.2%, according to MMD.
After a raucous rally on Wednesday, stocks were selling off once again and all major indexes were down by at least 3% on renewed fears of COVID-19, while Treasuries rallied and yields were sharply south.
The Dow Jones Industrial Average was down about 3.69%, the S&P 500 index was lower by 3.56% and the Nasdaq lost roughly 3.15% late in the session Thursday.
The three-month Treasury was yielding 0.647%, the Treasury two-year was yielding 0.582%, the five-year was yielding 0.673%, the 10-year paved a new low at 0.906%, before ticking back up and was now yielding 0.929% and the 30-year was yielding 1.571%.
“I think we are pretty near the low right now. I mean, maybe we get to 80 basis points on the 10 year,” said Jeffrey Gundlach, CEO of DoubleLine Capital, on CNBC’s Fast Money Halftime Report. “I don't really believe in the 25-basis point 10-year; I think that's just extrapolating the move that already happened. I mean, I think that the short rates are definitely going lower. There is absolutely no upward pressure on short rates. But we are starting to see a steepening yield curve in a way that's noticeable."
Primary market
While demand has been steady throughout the curve on most of the new deals this week, the short-end has cheapened relative to Treasuries quickly over the past few weeks.
“Another topic of debate has been how quickly munis, in the front end of the curve, have cheapened,” Kazatsky said. “There is little doubt this move is significant, but when you take a more expanded time horizon, I think we have a significant way to go for those who are trying to compare the turbulence here to 2008/2009 or even 2014 time frames when front-end ratios were are several hundred percent of UST.”
He added that right now it is not a matter of relative value, it is a matter of absolute value and with the 10-year UST sputtering below .90%, that absolute value is becoming more elusive.
JP Morgan received the verbal award on California Earthquake Authority’s $400 million of federally taxable revenue bonds.
JP Morgan also priced the Board of Regents of the University of Texas System’s (NR/AAA/AAA/NR) $347.58 million of revenue financing system bonds.
Morgan Stanley priced Philadelphia Authority for Industrial Development’s ( /A-/ / ) $186.020 million of refunding revenue bonds for Saint Joseph’s University.
Morgan Stanley received the written award on Oregon Facilities Authority’s (A3/A-/ / ) $150.03 million of revenue bonds for the Lewis and Clark College Project.
Ramirez and Co., priced Dallas Area Rapid Transit’s (Aa2/AA+/ /AAA) $128.035 million of revenue improvement and refunding bonds.
Louisiana (Aa3/AA-/ / ) sold a total of $365.36 million of general obligation bonds. Citi won $264.59 million of GO bonds with a true interest cost of 2.1753%.
The deal was priced as 5s to yield 1.06% in 2030 and as 5s to yield 1.62% in 2040. For comparison, the top-rated Maryland competitive deal was priced as 5s of 2030 to yield 0.99% in the $245.055 million offering won by Morgan Stanley.
That puts the Louisiana deal 10 basis points above the benchmark MMD scale on the 10-year and 25 basis points above the scale in 2040. The Maryland deal came in at three basis points above the MMD on the 10-year maturity.
“Maryland sold a 3-part state GO sale with 10-year yields 27 basis points lower than its August 2019 issue,” said Kim Olsen, senior vice president of municipal bond trading at FHN Financial. “The new 10-year came at 0.99% as compared to a 1.26% yield from the August sale. Not only did the state receive a lower yield, but buyers locked in a 101% ratio to the UST, well above the 79% ratio in August.”
Wells Fargo won $100.77 million of Louisiana GOs with a TIC of 0.5988%.
Muni money market funds see outflows
Tax-exempt municipal money market fund assets decreased by $2.63 billion, lowering their total net assets to $133.29 billion in the week ended March 2, according to the Money Fund Report, a publication of Informa Financial Intelligence.
The average seven-day simple yield for the 187 tax-free and municipal money-market funds increased to 0.75% from 0.74% in the previous week.
Taxable money-fund assets were up $7.34 billion in the week ended March 3, bringing total net assets to $3.460 trillion. The average, seven-day simple yield for the 797 taxable reporting funds was decreased to 1.24% from 1.25% the prior week.
Overall, the combined total net assets of the 984 reporting money funds grew by $4.71 billion to $3.594 trillion in the week ended March 3.
Most Bond Buyer indexes rise
The weekly average yield to maturity of the Bond Buyer Municipal Bond Index, which is based on 40 long-term bond prices, slipped two basis points to 3.39% from 3.41% the week before.
The Bond Buyer's 20-bond GO Index of 20-year general obligation yields was up four basis points to 2.31% from 2.27% the week before.
The 11-bond GO Index of higher-grade 11-year GOs rose four basis points to 1.84% from 1.80% the prior week.
The Bond Buyer's Revenue Bond Index was higher by four basis points to 2.81% from 2.77% from the previous week.
The yield on the U.S. Treasury's 10-year note dropped to to 0.92% from 1.30% the week before, while the yield on the 30-year Treasury was much lower to 1.56% from 1.80%
Previous session's activity
The MSRB reported 39,225 trades Wednesday on volume of $22.101 billion. The 30-day average trade summary showed on a par amount basis of $13.11 million that customers bought $6.70 million, customers sold $4.30 million and interdealer trades totaled $2.10 million.
Texas, California and New York were most traded, with the Lone Star State taking 14.578% of the market, the Golden State taking 13.409% and the Empire State taking 10.126%.
The most actively traded security was the Buckeye Tobacco Settlement Financing Authority’s senior refunding bonds 2020 B-2 CL 2, 5s of 2055, which traded 45 times on volume of $93.370 million.
Data appearing in this article from Municipal Bond Information Services, including the MBIS municipal bond index, is available on The Bond Buyer Data Workstation.
