Municipal yields were steady throughout the day as the tax-exempt market saw the launch of the retail order period on $868 million of Port Authority of New York and New Jersey revenue bonds, N.J. turnpikes priced and Joe Biden was inaugurated as the 46th president of the United States.
Municipal bond yields on triple-A benchmarks were unchanged once again (five sessions in a row) and ratios were mostly unchanged.
The Investment Company Institute reported $3.4 billion of inflows into municipal bond mutual funds, the highest figure since June.
Muni yields have been in a nine-basis point range since the beginning of the year while UST yields have fluctuated more than 20 basis points. With so little supply, muni credit spreads continue to compress.
Issuance remains sluggish but investors came off the sidelines to participate in the few large deals priced Wednesday with the backdrop of strong demand, according to a New York trader.
“New issues come and do well; there’s not an abundance of supply, but a lot of cash,” he said. “It’s the same story,” he continued, noting that the municipal yield curve from 2022 to 2051 has been unchanged by Refinitiv/Municipal Market Data for several trading sessions in a row.
“It’s steady again throughout the curve,” he said, adding that the presidential inauguration helped keep Treasuries firm, but stocks rose as the new administration brings with it market expectations of additional stimulus for state and local governments.
“As U.S. Treasury prices witnessed some support, muni yields have not followed suit, and rather have chosen to hold steady,” said Jeff Lipton, head of municipal credit and market strategy and municipal capital markets at Oppenheimer & Co.
“We are certainly experiencing a rather conventional January Effect, with active reinvestment needs and contained weekly calendars,” he added.
He noted the 10 consecutive weeks of positive flows into municipal bond mutual funds as evidence.
“We have no reason to think that this trajectory will shift any time soon given still ample amounts of sidelined cash,” Lipton said, agreeing with the trader that new issues are seeing welcome placement with oversubscriptions a common occurrence as demand remains strong.
“While relative value ratios have retraced modest ground, they are still historically low, displaying the relative richness of the asset class,” Lipton added.
The trader noted the Port Authority deal, recently downgraded by Fitch, is a combination of tax-exempt and taxable term bonds that were doing well in the order period Wednesday. Exempts with 5% coupons maturing in 2056 offered sub-2.00% yields at 1.97%.
“I haven’t seen any new deals that haven’t done well,” he said.
Meanwhile, in the competitive market, two school offerings led brisk demand for paper and were attractively priced on the long end.
A $274 million offering of Dallas Independent School District, Texas, triple-A unlimited tax school building bonds was competitively won by Bank of America Securities. The bonds were priced from 0.13% with a 4% coupon in 2022 to 1.93% with a 2% coupon in 2045.
Meanwhile, Wells Fargo won $125 million of Channelview Independent School District, Texas, unlimited tax school building bonds, which were priced to yield from 0.15% with a 5% coupon in 2022 — two basis points cheaper than the generic AAA scale — to 2.01% with a 2% coupon in 2046.
Lipton said until there is a material shift in market technicals or a policy change, municipal yields will likely hold to a narrow trading range and ratios of municipals to Treasuries will remain depressed.
“It would take a period of sustained muni underperformance before ratios move away from their historically rich position,” Lipton said. However, he is skeptical that ratios can move much lower, but does see continued prospects for municipal outperformance with “compelling” technicals.
While Lipton’s outlook calls for lower new issue volume in 2021, he noted that volatility in bond prices is likely given a new administration with “a re-focused agenda, an uncertain rollout of the COVID-19 vaccine, and what will likely be further evidence of a choppy recovery.”
Primary market
The retail order period for the $868 million Port Authority of New York and New Jersey (Aa3/A+/A+) AMT and non-AMT consolidated bonds, books run by BofA Securities, saw demand and traders expect yields to fall during institutional pricing Thursday. AMT bonds in 2021 with a 5% coupon yield 0.25%, 5s of 2026 at 0.68%, 5s of 2031 at 1.37%, 4s of 2036 at 1.88%, 4s of 2040 at 2.04%, 3s of 2051 at 2.31%, 4s of 2051 at 2.17%, 5s of 2056 at 2.17%, 4s of 2061 at 2.47%.
Exempts were priced as 5s of 2030 at 1.00%, 5s of 2031 at 1.12%, 4s of 2036 at 1.68%, 4s of 2041 at 1.88%, 4s of 2051 at 2.09%, 5s of 2056 at 1.97% and 4s of 2061 at 2.30%. In another tranche, 3s of 2046 were at 2.25%.
Goldman, Sachs & Co. priced $502 million of turnpike revenue bonds for the New Jersey Turnpike Authority (A2/A+/A). Bonds in 2042 with a 4% coupon yield 1.88% while 4s of 2051 yield 2.04%, both priced to the call in 1/1/2031.
BofA Securities won $274.3 million of unlimited tax school building bonds from the Dallas Independent School District, Texas (Aaa/AAA/AAA) (PSF insured). Bonds in 2022 with a 4% coupon yield 0.13%, 4s of 2026 at 0.33%, 4s of 2031 at 0.90%, 1.75s of 2036 at 1.66%, 2s of 2041 at 1.75% and 2s of 2045 at 1.93%.
Citigroup Global Markets won $107.3 million of general obligation bonds from Montgomery County, Pennsylvania (Aaa///). Bonds in 2022 with a 5% yield 0.13%, 5s of 2026 at 0.27%, 5s of 2031 at 0.79%, 5s of 2036 at 1.08% and 5s of 2041 at 1.28%.
Morgan Stanley & Co. priced $105 million of general obligation bonds for the Mt. San Jacinto Community College District, California (Aa1/AA). Bonds in 2021 with a 3% coupon yield 0.13%, 4s of 2026 at 0.32%, 3s of 2031 at 0.98%, 3s of 2036 at 1.48%, 2s of 2041 at par and 2s of 2043 at 2.11%.
ICI: Muni bond funds see $3.341B inflows
Long-term municipal bond funds and exchange-traded funds saw combined inflows of $4.037 billion in the week ended Jan. 13, the Investment Company Institute reported Wednesday.
In the previous week, muni funds saw a revised inflow of $3.180 billion, originally reported as a $3.482 billion inflow, ICI said.
Long-term muni funds alone had an inflow of $3.341 billion in the latest reporting week after an inflow of $2.670 billion in the prior week.
ETF muni funds alone saw an inflow of $697 million after an inflow of $510 million in the prior week.
Taxable bond funds saw combined inflows of $19.053 billion in the latest reporting week after a revised inflow of $20.631 billion in the prior week, originally reported as a $19.527 billion inflow.
ICI said the total combined estimated inflows from all long-term bond funds and ETFs were $23.090 billion after a revised inflow of $23.811 billion in the previous week, originally reported as a $23.877 billion inflow.
Money market muni funds rise $474.2M
Tax-exempt municipal money market fund assets rose $44.8 million, putting their total to $106.54 billion in the week ended Jan. 19, according to the Money Fund Report, a publication of Informa Financial Intelligence.
The average seven-day simple yield for the 185 tax-free and municipal money-market funds was unchanged at 0.01% from the previous week.
Taxable money fund assets decreased by $25.83 billion to end the reporting week at $4.116 trillion. Government institutional fund assets were down $22.25 billion. Prime institutional fund assets gained $408.8 million. Taxable retail fund assets fell $3.99 billion.
The average, seven-day simple yield for the 777 taxable reporting funds remained at 0.01% from the prior week.
Overall, the combined total net assets of the 962 reporting money funds fell $25.79 billion in the week ended Jan. 19.
Secondary market
Trading showed little movement in yields and light trading.
High-grade municipals were steady, according to final readings on Refinitiv MMD’s AAA benchmark scale. Short yields were steady at 0.13% in 2022 and 0.14% in 2023. The 10-year remained at 0.78% and the 30-year at 1.47%.
The ICE AAA municipal yield curve showed short maturities fall a basis point to 0.13% in 2022 and 0.16% in 2023. The 10-year was at 0.76% while the 30-year yield sat at 1.49%.
The IHS Markit municipal analytics AAA curve showed yields at 0.16% in 2022 and 0.17% in 2023 while the 10-year sat to 0.77% and the 30-year yield at 1.46%.
The Bloomberg BVAL AAA curve showed yields at 0.12% in 2022 and 0.14% in 2023 while the 10-year was at 0.75% and the 30-year yield at 1.50%, also unchanged.
The three-month Treasury note was yielding 0.09%, the 10-year Treasury was yielding 1.09% and the 30-year Treasury was yielding 1.84%. The Dow rose 257 points, the S&P 500 rose 1.48% and the Nasdaq rose 2.09%.
The economy
The only economic indicator released Wednesday showed builder confidence slipped in January. An increase in lumber prices and other materials combined with a rise in coronavirus cases was blamed for a drop to 83 from 86 in the NAHB/Wells Fargo Housing Market Index.
Economists polled by IFR Markets expected the index to hold at 86.
The current sales conditions index slid to 90 in January from 92 in December, while expectations declined to 83 from 85 and traffic of prospective buyers dropped to 68 from 73.
Separately, Megan Horneman, director of portfolio strategy at Verdence Capital Advisors, addressed the rise in rates on the 10-year Treasury, which is up 60 basis points since August. “The rise in yields has been gradual and has taken place over the past five months and is more of a normalization off emergency type levels,” she said. “The rise is also the result of the outlook for future growth, especially with a vaccine, and that has also translated into better earnings growth potential.”
Scott Colbert, executive vice president and chief economist at Commerce Trust Co., in a video economic preview said, “interest rates will continue to rise and bond returns will likely be negative.” He also sees high-yield outperforming investment grade.
The economy is “rebounding nicely,” he added, and he expected a full recovery by midyear. “That’s a surprising turnaround,” Colbert said, since it generally takes longer to recover. For example, GDP wasn’t back to levels from before the Great Recession until three years after.
Fed won’t be raising rates for a long time, he said because the “output gap is still largely driven by the employment sector,” which is still 9.8 million jobs lower than before the pandemic.
The Fed, he said, “will let the economy run hot for quite a while, until employment recovers.”
Gary Siegel contributed to this report.
