A firmer tone welcomed investors returning from a long weekend on Monday, as triple-A benchmarks were mostly unchanged, while the primary and secondary markets were quiet to start the first full week of the second quarter. Better economic data moved stocks higher and U.S. Treasuries were steady.
“The first official week of the second quarter has started out on a firmer tone because of the continued inflow of cash into the municipal market and the perceived strengthening of municipal credits due to the last COVID relief package,” Roberto Roffo, portfolio manager at SWBC Investment Company.
“The current market technicals are adding to the positive tone of the market as there is more than enough cash on the sidelines to support all the deals being priced this week,” he said Monday. “I would expect the long-term strategies to consist of buying deals with any spread to them as the demand for municipals should stay strong and lead to a further tightening of spreads.”
Others agreed that a lackluster tone encompassed the post-holiday market, characterized by few very trades on Monday in what has been an otherwise overall steady market lately.
“The market has been fairly stable for the past couple of weeks; there are still inflows coming in, deals are getting received fairly well, and there’s a strong bid in the secondary market,” Howard Mackey, managing director at NW Financial.
He noted that yields on triple-A benchmarks improved over the past week, but pressures could emerge.
“Our expectation is for the market to weaken as the month progresses as ratios to Treasuries are too expensive — especially around five to seven years on the yield curve,” Mackey said.
Municipal to UST ratios continue to sit around the low 60% and 70% in 10-and 30-years. The ratio was at 65% in 10 years and 73% in 30 on Monday, according to Refinitiv MMD, while ICE Data Services showed ratios at 63% in 10 years and 74% in 30.
Secondary market
Trading showed a firm to steady tone. New York City GOs, 5s of 2022, traded at 0.09%. New York City TFA 5s of 2022 at 0.12%. California 4s of 2023 at 0.17%. North Carolina 5s of 2023 at 0.16%.
Maryland GOs 5s of 2027 at 0.70%. North Carolina 5s of 2028 at 0.84%. Wake County, NC 5s of 2029 at 0.92%. California 5s of 2032 at 1.07%-1.05%. Ohio 5s of 2030 at 1.12%. NY Dorm PITs 5s of 2031 at 1.43% versus 1.45%-1.44% Thursday and 1.60% original.
NYC TFA 5s of 2032 at 1.50%. TFA 5s of 2032 at 1.56%. NYCwaters 5s of 2032 at 1.31%.
Princeton 5s of 2039 at 1.96%-1.95%.
NYC TFA 4s of 2046 at 2.20%.
High-grade municipals were little changed on Monday, according to final readings on Refinitiv MMD’s AAA benchmark scale. Short yields were steady at 0.09% in 2022 and 0.15% in 2023. Out longer, the yield on the 10-year sat at 1.11% while the yield on the 30-year remained at 1.73%.
The ICE AAA municipal yield curve showed short maturities flat at 0.10% in 2022 and at 0.15% in 2023. The 10-year maturity steady at 1.08% while the 30-year stayed at 1.74%.
The IHS Markit municipal analytics AAA curve showed yields at 0.08% in 2022 and 0.13% in 2023, the 10-year at 1.04%, and the 30-year at 1.69%.
The Bloomberg BVAL AAA curve showed yields at 0.08% in 2022 and 0.12% in 2023, while the 10-year steady at 1.06%, and the 30-year yield steady at 1.74%.
Treasuries were stronger as stock prices traded higher Monday. The three-month Treasury note was yielding 0.03%, the 10-year Treasury was yielding 1.72% and the 30-year Treasury was yielding 2.36%. The Dow was up 382 points, the S&P 500 rose 1.43% and the Nasdaq gained 1.70%.
Economy
The services sector showed improvement and employment made big gains in March, but economists note the labor market remains far from full employment.
The Institute for Supply Management’s services PMI rose to a record 63.7% in March from 55.3% in February, surpassing the October 2018 high of 60.9%.
The business activity/production index soared to 69.4%, also a new high, from 55.5% a month earlier.
Economists polled by IFR Markets expected a rise to 58.5%.
New orders, employment and prices also grew in March, with orders also at record levels.
“The record high in the ISM Services PMI is just the latest data pointing to an economy starting to boom,” said Sarah House, senior economist and Shannon Seery, an economist at Wells Fargo Securities. “The jump in the new orders and employment components is indicative of coming activity and suggests the hard-hit service sector is finally gaining some real momentum.”
But they warn of supply chain disruptions, which “are rippling through the broader economy.”
The ISM report “confirmed what everyone knows, the U.S. economy is headed in the right direction,” according to Edward Moya,senior market analyst, New York, at OANDA. “The service sector is bouncing back stronger-than-expected and that is great news.”
And while factory orders dropped 0.8% in February, compared to the 0.5% decline expected by economists, that number did “not matter” in the wake of the ISM services report, he said.
Also released Monday, the Federal Reserve Bank of New York’s current business index rose to 37.2 in March from 35.5 in February, while the six-month ahead index climbed to 57.0 from 51.5. The employment index soared to a 19-month high of 63.0 from 41.1 in February, while the prices index slid to 70.8 from 76.5.
The Conference Board’s Labor Trends Index rose to 102.44 in March from 100.01 in February, and is 7.7% higher than a year ago.
The report “signals that job growth will be very strong over the coming months,” said Gad Levanon, Head of The Conference Board Labor Markets Institute. While the number of COVID cases has risen recently, with vaccinations occurring fast enough to “significantly reduce the spread of the virus in the next couple of months,” the service sector reopening will continue.
“Consumers flush with cash due to a year of elevated savings and strong government stimulus will be willing and able to spend,” he added. “All this will lead to historically fast employment growth in the coming quarters.”
The unemployment rate will drop to about 4% in a year, the think tank predicts, and continue to fall next year, Levanon said.
On Friday, the Labor Department reported nonfarm payrolls jumped 916,000 in March, after a 468,000 rise in February. The unemployment rate fell to 6.0% from 6.2%, and the labor participation rate inched up to 61.5% from 61.4%.
“The hiring spree has officially started in the U.S. and Wall Street knows that it will take several months of monstrous job gains to trigger the taper tantrum,” OANDA’s Moya said.
The gains were “a big step closer to a full recovery,” Wells Fargo’s House noted. “The broader re-opening of the economy, growing optimism that the end of the pandemic is in sight and a reversal of last month's unseasonably cold weather generated broad gains in hiring,” she said.
The Federal Reserve will likely continue “to emphasize that there remains significant ground to recover, and that the labor market recovery remains uneven,” House added. While that will allow policy to remain accommodative “for a while yet,” she said, “but the Federal Open Market Committee may not be able to point to the jobs market as a reason to look through rising inflation pressures as long as previously thought.”
Primary market
Novant Health Inc. is set to sell $1.5 billion of corporate CUSIP taxable bonds on Thursday on behalf of Novant Health Obligated Group. JPMorgan is the lead underwriter.
The Tobacco Settlement Authority is scheduled to offer $673.8 million of tobacco settlement asset-backed senior refunding bonds in three series. The serials and terms range from 2027 to as far as 2065. Jefferies LLC is the lead. The deal is rated by Standard & Poor’s as A on the serials from 2027 to 2030; A-minus from 2031 to 2040; BBB-plus in 2049; BBB in 2049; while the 2065 term is not rated.
Miami-Dade County, Fla., is set to price $622.2 million of water and sewer system revenue bonds on Thursday. Banc of America Securities is the lead.
The Massachusetts Bay Transportation Authority is set to price $598.2 million of subordinated sales tax refunding bonds as $559.1 million of Series A-1 and $39 million of Series A-2 sustainability bonds. Goldman, Sachs & Co. will be bookrunner.
The Central Florida Expressway Authority is set to price $585 million of senior lien refunding revenue bonds on Tuesday insured by Assured Guaranty Municipal Corp. Serial bonds mature from 2022 to 2040 and Wells Fargo Securities will run the books.
San Francisco Airport Commission is set to price $560.1 million of second series revenue refunding bonds on behalf of the San Francisco International Airport on Wednesday. Series 2021A is subject to the alternative minimum tax, while 2021B is non-AMT. Series 2021C is taxable. Goldman Sachs is the bookrunner.
The University of Southern California will sell $400 million of taxable bonds (Aa1/AA// ) on Wednesday, but
university will take indications of interest as early as the afternoon of Tuesday. The taxable bullet structure is 2051 subject to a make-whole call. Barclays Capital is the bookrunner.
The Board of Regents of the University of Texas System is set to sell $400 million of refunding revenue financing system bonds, maturing as serials from 2027 to 2051. Wells Fargo Securities is the lead.
The CSCDA Community Improvement Authority is set to price $326.5 million of essential housing revenue bonds on behalf of the Altana-Glendale project. Goldman Sachs is the bookrunner.
Denver is set to price $273.8 million of dedicated tax revenue bonds on Tuesday. Morgan Stanley is the lead.
The California Health Facilities Financing Authority is set to price $217 million of refunding revenue bonds on behalf of the Lucile Salter Packard Children’s Hospital at Stanford on Thursday. Morgan Stanley is the lead.
Northern Kentucky University is set to price on Tuesday $205.2 million of general receipts bonds. Morgan Stanley is the lead.
In the competitive market, meanwhile, the Elk Grove, Calif., Unified School District is set to sell $140 million of general obligation bonds (Aa2/ /AAA) on Tuesday.
Forsyth County, N.C. is set to sell two series of general obligation public improvement and one series of refunding bonds totaling $144 million on Tuesday.
Nassau County, N.Y. will sell $146.9 million of general improvement bonds on Tuesday.
The East Side Union, Calif., High School District is set to sell $127.3 million of general obligation bonds on Wednesday.
The Los Angeles County, Calif., Metropolitan Transportation Authority is set to sell $325 million of senior sales tax revenue bonds on Wednesday.
Louisiana is set to sell $227 million of general obligation bonds on Wednesday.
California will sell two series of various purpose general obligation and general obligation refunding bonds (Aa2/AA-/AA) on Thursday totaling $634.2 million. Both the $241 series of various purpose GO and GO refunding bonds and the $392 million of various purpose GO bonds are federally-taxable.
