Municipals ended slightly firmer on an otherwise lackluster trading session on Monday fueled by new strength in the U.S. Treasury market.
Triple-A benchmark yields were stronger on the short end with two basis point bumps to scales on bonds inside 2027, while ratios held to recent levels. Municipal to UST ratios were at 67% in 10-years and 75% in 30, according to Refinitiv MMD, while ICE Data Services showed ratios at 67% in 10 years and 76% in 30.
Trading was sparse in the secondary, though gains were made on the short end, as investors await the week's calendar.
“In secondary, they don't like to buy until it calms down or turns around and that’s what's happening today,” a New York trader said. “We have gone through the recent supply and it’s been well-received” on a new-issue basis. “For new issues, investors will buy the deals even if the Treasury market is getting weaker."
The firmness in the 10-year Treasury benchmark put the yield at 1.67%, below last week's highs when it reached above 1.73%, which was a confidence booster for investors, he noted.
“That reassures them and calms them down especially with the bump in yields,” he said.
Although the ratios to Treasuries are “not that great,” according to the trader, he said the enormous supply — especially in New York — the last two weeks has fed the voracious appetite among the buy side.
Ramirez & Co. priced $1.01 billion of future tax-secured subordinate bonds for the New York Transitional Finance Authority (Aa1/AAA/AAA/). The first series, $888.5 million of refunding bonds, had 5s of 2023 yielding 0.33%, 5s of 2026 at 0.81%, 5s of 2031 at 1.60%, 4s of 2036 at 2.09% and 4s of 2038 at 2.17%. The second, $121.5 million of future tax secured bonds, had bonds in 2021 with a 2% coupon yield 0.12%, 4s of 2026 at 0.81%, 5s of 2036 at 1.60% and 5s of 2038 at 1.97%.
The New York City TFA is also set to sell three taxable competitive deals Wednesday; $95 million, 2022-2023, at 10:45 a.m.; $67 million, 2022-2026, at 11:15 a.m.; and $163.2 million at 10:45 a.m.
Traders expect the TFA to be oversubscribed as last week’s $2 billion New York Dormitory Authority deal was.
“I can't remember the last deal where we saw balances,” the trader said, noting that a small $250 million balance after the DASNY deal was quickly snapped up by one dealer.
Municipals continue to be in demand as suggested by the recent positive fund flows, and valuations that have been fairly resilient in the sell-off as they play catch-up with higher yields the past two sessions, noted Karel Citroen, head of municipal research, global investment management firm Conning.
Refinitiv Lipper reported $1.276 billion of tax-exempt municipal bond mutual fund inflows for the week ending March 17, after $1.092 billion of inflows the week prior.
Taxable demand remains strong, according to Citroen, who pointed to the roughly $16 billion of orders for the $1.2 billion Illinois deal, which was oversubscribed top to bottom last week.
On the other hand, dealer inventories are light and there is limited secondary activity, he noted.
Looking ahead, under Congress and the Biden administration’s support for higher corporate tax rates, Citroen believes municipal bonds may regain the “luster and appeal” they lost after being a victim of the Tax Cut and Jobs Act back in 2017.
“The latest rescue act will have a significant positive impact on the municipal market,” Citroen said, noting that every state will receive $500 million and will get anywhere from 10% to 30% of their fiscal 2020 operating budgets.
The New York trader agreed the stimulus package will be of great assistance to local governments — especially large states like New York, New Jersey, and California.
“It will be very helpful for states and school districts, and give investors less concern about credit quality and other negative credit issues,” the New York trader said.
Citroen believes the aid will prevent budget cuts and stabilizes finances for the remainder of fiscal 2021 and into fiscal 2022.
“Across all aid packages, muni-related aid now exceeds $1 trillion, which will protect against further negative rating agency actions as well,” Citroen said.
This will be a positive for property and casualty insurers who traditionally allocated a meaningful portion of their portfolios to tax-exempts given their attractive yields with higher credit ratings, he said.
“More broadly speaking, munis effectively enhance portfolio diversification, for example geographies and revenue sources, and coupled with historically lower default rates, municipals have provided insurers with meaningful value,” Citroen added.
Secondary market
High-grade municipals were bumped on Refinitiv MMD's scale. Short yields fell two basis points to 0.14% in 2022 and to 0.17% in 2023. The 10-year was steady at 1.16% and the 30-year steady at 1.81%.
The ICE AAA municipal yield curve showed short maturities fall two basis points to 0.14% in 2022 and two basis points to 0.19% in 2023. The 10-year was steady at 1.14% and the 30-year yield at 1.81%.
The IHS Markit municipal analytics' AAA curve showed yields at 0.14% in 2022 and 0.19% in 2023, the 10-year steady at 1.10%, and the 30-year also steady at 1.78%.
The Bloomberg BVAL AAA curve showed yields fall a basis point to 0.12% in 2022 and to 0.17% in 2023, while the 10-year was steady at 1.12%, and the 30-year yield held at 1.82%.
The 10-year Treasury was at 1.68% and the 30-year Treasury was yielding 2.38% at the close. The Dow gained 113 points, the S&P 500 rose 0.79% and the Nasdaq gained 1.45%.
Economy
Monday’s economic data suggested weakness, with existing home sales declining for the first time in four months and the Federal Reserve Bank of Chicago’s National Activity Index slipping into negative territory, but one economist said these numbers don't reflect “economic slowing” or even a “lack of demand.”
The National Association of Realtors said existing home sales declined 6.6% in February to a seasonally adjusted annual rate of 6.22 million from an upwardly revised 6.66 million a month earlier, first reported as 6.61 million. Economists surveyed by IFR Markets had expected sales at a 6.49 million pace.
Sales year-over-year climbed 9.1% from 5.70 million in February 2020.
“The lower [monthly] number doesn’t indicate economic slowing or a lack of demand, it was quite the opposite,” said Karissa McDonough, senior vice president and chief fixed income strategist at People’s United Advisors. “Supply continues to be constrained, meaning that a big contributor to the drop was simply that there weren’t enough available homes on the market for all the interested buyers.”
Looking beyond the headline, she said, including time on market and sales of higher-end homes suggests “in areas with less of a supply/demand imbalance, activity remains brisk. Generally speaking the economic rebound remains strong which is what becomes clear once we take a closer look at the dynamics underlying the data points.”
Housing has been a bright spot during the pandemic, but has slowed a bit recently.
“A significant part of the slowdown reflects supply disruptions – a lot of demand for either new or existing homes is met through new supply,” McDonough said. “Since there is so much demand for building materials for new homes and those supply chains are a bit disrupted, that lack of new home availability is spilling over and reducing availability in existing home supply as well.”
The recent drop-off is related to supply, not demand, she said.
Median existing price jumped 15.8% to $313,000 from $270,400 in February of last year, prices have risen 108 months in a row on an annual basis.
“The 15.8% surge in home prices over the past year has raised concerns that the housing market is on the verge of another bubble,” according to Mark Vitner, senior economist at Wells Fargo Securities, LLC. “While that always remains a possibility at some point in the future, home prices appear to have been pulled higher this past year due to the imbalance of the supply and demand of existing homes rather than an increase in speculation.”
While price gains “will slow,” Shannon Brobst, economist at Moody’s Analytics said she doesn’t expect “a large house price correction,” in part due to low mortgage rates and depressed inventory.
“As fiscal stimulus wears off and mortgage rates rise, demand will cool over the coming quarters, alleviating some of the upward price pressures,” said Brobst. “Affordability will weigh on demand,” specifically for the more expensive homes.
Once the foreclosure moratorium ends in June, she said, supply will rise.
“With more COVID-19 vaccinations being distributed and available to larger shares of the population, the nation is on the cusp of returning to a sense of normalcy,” said NAR Chief Economist Lawrence Yun said. “Many Americans have been saving money and there’s a strong possibility that once the country fully reopens, those reserves will be unleashed.”
Elsewhere, the Federal Reserve Bank of Chicago’s National Activity Index dropped to negative 1.09 in February from positive 0.75 in January.
The CFNAI-MA3, the three-month moving average, fell to negative 0.02 in February from positive 0.46 a month earlier, while the diffusion index fell to positive 0.17 from positive 0.34.
Half of the four categories were negative in February, and all declined from the prior month.
Sales, orders and inventories along with employment, unemployment and hours were the positive contributors, while production-related and personal consumption and housing were negative.
Primary market
The State Public Works Board of the State of California (Aa3/A+/AA-/) is set to price $694.8 million of lease revenue refunding bonds (Department of Corrections and Rehabilitation, Kern Valley State Prison) forward delivery. First series, $585.2 million, serials: 2022-2036. Second, $109.6 million, serials: 2023-2028. UBS Financial Services Inc. is lead underwriter.
The Tennergy Corp. (A1///) is set to price $580.9 million of gas supply revenue bonds, serials: 2022-2028. Morgan Stanley & Co. LLC will run the books.
The Black Belt Energy Gas District (Aa2///) is set to price $550 million of gas supply revenue refunding bonds, serials: 2021-2032, term: 2051. RBC Capital Markets is head underwriter.
The Central Texas Regional Mobility Authority is set to price $510 million of senior lien revenue bonds, Series 2021B, $264.7 million (Baa1/A-//) and Series 2021C, $245 million of subordinate lien revenue bond anticipation notes (Baa2/BBB+//). J.P. Morgan Securities LLC will run the books.
The Mayo Clinic (Aa2/AA//) is set to price $500 million of taxable Series 2021 bonds on Tuesday. BofA Securities is lead underwriter.
The Geo L. Smith II Georgia World Congress Center Authority is set to price $479.5 million of convention center hotel first tier revenue bonds, series 2021a $253 million (/bbb-//), terms: 2031, 2036, 2054, and convention center hotel second tier revenue bonds (///) $253.9 million Series 2021B, term: 2031, 2036, 2054. Citigroup Global Markets Inc. is head underwriter.
The Triborough Bridge and Tunnel Authority (Aa3/AA-/AA-/AA) is set to price $400 million of MTA bridges and tunnels general revenue bonds, Series 2021A. J.P. Morgan Securities LLC will run the books.
The City of San Jose, California, (A2/A-/A/) is set to price $297.5 million of taxable airport revenue refunding bonds. Morgan Stanley & Co. LLC is head underwriter.
San Jose (A2/A-/A/) is also set to price $140.1 million of AMT and non-AMT airport revenue refunding bonds, both series serials 2024-2034. Citigroup Global Markets Inc. is set to price the deal on Tuesday.
The Carrollton-Farmers Branch Independent School District (Dallas and Denton Counties, Texas) (Aaa/AAA//) is set to price on Thursday $225.8 million of unlimited tax school building bonds, Series 2021, insured by Permanent School Fund Guarantee Program, serials: 2021-2041; terms: 2046, 2051. Siebert Williams Shank & Co. is lead underwriter.
The Pennsylvania Economic Development Financing Authority (A2/A/A/) is set to price $225.9 million of UPMC revenue bonds, series 2021A, serials: 2022-2041; terms: 2046, 2051. RBC Capital Markets will run the books.
The Arizona Board of Regents of Arizona State University (Aa2/AA//) is set to price on Wednesday $161.8 million of taxable series 2021A and 2021B bonds. Goldman Sachs & Co. LLC is head underwriter.
The Arizona Board of Regents of Arizona State University (Aa2/AA//) is also set to price on Wednesday $118 million of system revenue bonds. Goldman Sachs & Co. LLC is lead underwriter.
The Tennessee Housing Development Agency (Aa1/AA+//) is set to price on Tuesday $149.9 million of residential finance program refunding bonds, non-AMT, serials: 2022-2033; terms: 2036, 2041, 2046, 2051. Raymond James & Associates, Inc., is lead underwriter. Retail pricing Tuesday, institutional pricing Wednesday.
The Rhode Island Housing and Mortgage Finance Corp. (Aa1/AA+//) is set to price $135.1 million of homeownership opportunity social bonds on Wednesday. Serials: 2022-2033; terms: 2036, 2041, 2043, 2049. RBC Capital Markets is set to run the books.
The City of New York (Aa2/AA/AA-/) is set to price $129.6 million of tax-exempt general obligation adjustable rate remarketed securities, term in 2042. Barclays Capital Inc. is lead underwriter.
New York City is also set to price $129. 6 million of fiscal 2021 tax-exempt GO adjustable rate remarketed securities on Monday, led by BofA Securities.
The Wisconsin Public Finance Authority (Ba2///) is set to price $126.2 million of Noorda College of Osteopathic Medicine Project taxable educational facilities revenue bonds on Wednesday. $47.96 million Series A, term: 2050. $78.31 million Series B, term: 2045. Oppenheimer & Co. is lead underwriter.
The City of Montgomery, Alabama, (/AA//) is set to price on Tuesday $126.1 million of general obligation warrants, Series 2021-A, general obligation refunding warrants, Series 2021-B, taxable general obligation refunding warrants, Series 2021-C. J.P. Morgan Securities LLC is set to run the books.
The Ohio Housing Finance Agency (Aaa///) is set to price on Wednesday $125 million of mortgage-backed securities program residential mortgage revenue bonds, 2021 Series A (Non-AMT) Social Bonds, serials: 2022-2033; terms: 2036, 2041, 2046, 2051, 2052. Citigroup Global Markets Inc. is bookrunner.
In the competitive markets, the New Jersey Educational Facilities Authority (/AAA//) is set to sell two deals. The first, $250 million of Princeton revenue bonds, 2022-2051, will sell at 10:45 a.m. Tuesday. The second, $182.3 million of Princeton revenue bonds, 2022-2041, at 11:15 a.m.
On Wednesday, Palo Alto, California, is set to sell $100 million of certificates of participation at noon, serials 2023-2050.
Knoxville, Tennessee, (Aa2/AA+//) is set to sell three competitive deals Thursday; $34 million of water system revenue bonds at 10:15 a.m.; $198.9 million of water system revenue bonds, 2022-2043 at 11:15 a.m.; $73 million of electric system revenue bonds 2023-2044 at 10:15 a.m.; $42 million of gas system revenue bonds 2022-2033.
