Signals point to retail return to munis, for now

Municipals were steady to firmer in spots Monday, while U.S. Treasuries strengthened inside five years but key parts of the curve remained inverted while equities ended in the black.

Triple-A municipal yield curves were relatively stable, while the two-, three-, five- and seven-year UST were still sitting above the 10- and 30-year.

More activity surfaced in the municipal market on Monday as the first full week of the second quarter got underway and after last week ended with more of a bid from retail accounts.

“We have seen some pretty good situations coming out on the longer end; the maturities have a firmer tone compared to last week,” a New York trader said Monday afternoon.

The overall appetite for municipal bonds, he said, picked up noticeably at the end of last week.

“I would say just because ratios got to such cheap levels people are now willing to get involved,” he noted, adding the window of opportunity is bringing in crossover buyers, like arbitrage accounts.

“They seemed to reappear after last week when munis got beyond 100% of Treasuries. That makes it interesting for investors,” he said.

Muni to UST ratios were at 78% in five years, 90% in 10 years and 102% in 30, according to Refinitiv MMD's 3 p.m. read. ICE Data Services had the five at 76%, the 10 at 92% and the 30 at 103% at 4 p.m.

Although this week has a heavy calendar of large “mega deals” he expects demand to be solid. “Outside of that, I would say the calendar is pretty manageable and the demand is still very strong.”

The Bond Buyer 30-day visible supply sits at $17.08 billion. As supply ticks up after a lackluster start to the year, retail will need to step in.

In the primary Monday, Goldman Sachs held a one-day retail order period for the New York Power Authority's (A1/AA/AA-/) $626.465 million of green transmission project revenue bonds, Series 2022A. Bonds in 11/2024 with a 5% coupon yield 1.93%, 5s of 2027 at 2.24%, 5s of 2032 at 2.70%, 4s of 2036 at 3.15%, 4s of 2047 at 3.38% and 4s of 2052 at 3.45%, callable 11/15/2031.

Officials said the deal, verified green by Sustainalytics, saw strong interest, with more than $300 million of retail orders with some maturities two times oversubscribed.

It is the authority's first 100% green deal and also the first ever with bonds backed solely by revenue earned by specific transmission projects, instead of the authority’s underlying credit.

Municipals have taken a hit in the first months of 2022, but higher yield levels and cheaper ratios have offered possibilities for both retail and institutional buyers, said Jeff Lipton, managing director of credit research at Oppenheimer Inc.

Since the start of the year, 10- and 30-year muni rates have risen by more than 100 basis points. Similar maturity relative value ratios now stand at 92% and 103%, according to ICE Data Services at the 3 p.m. read.

For both secondary and primary business, Lipton said, retail is dipping more than a toe into the market. Although daily Street bids have been robust, they have remained below normal. Syndicate bidding is cautious, despite competitive agreements being completed. To be comfortably placed, negotiated deals are priced at lower levels, Lipton said.

Although munis had a bid late in the week, total fund flows were once again negative, according to Refinitiv Lipper. “There is still outsized volatility and liquidity challenges that lie ahead, but maybe more extended relief is not too far off,” Lipton said.

Municipal exchange-traded funds experienced inflows, even as the overall fund complex saw outflows. Part of that may be due to crossover buyers as the higher yields have settled in.

"While many retail investors are reducing their mutual fund positions, relative value investors are putting money to work, and we believe that part of that money is finding its way into muni ETFs,” CreditSights said in a report.

Muni yield movements are closely tracking the Treasury market's high volatility, Lipton said, and it will likely require a calming of that volatility, as well as a more favorable technical muni backdrop, to ignite persistent market conviction and sustained outperformance.

Although muni bond prices may have some potential to fall further, Lipton expects yields will trade range-bound as better technicals loom on the horizon. He said it's possible that Treasury market volatility won't subside until after the Federal Open Market Committee meeting in early May, and if that's the case, there won’t be a return to continuous muni inflows until then.

Many issuers are anticipating the Fed's actions in the impending policy sessions and are concerned about a recession. The lower supply so far in 2022 has been exacerbated by the conflict in Eastern Europe and UST curve inversions, Lipton said.

Surprisingly, taxable issuance has increased month-over-month but decreased year-over-year, stemming from, in part, several prominent colleges issuing long-term taxable debt to lock in existing rates and stockpiling capital that does not need to be designated like tax-exempt bond proceeds, he said.

As tax efficiency, capital preservation, solid credit features, and diversification qualities overcome current difficult times, Lipton said the time-tested muni advantages should eventually restore the asset class to favor.

“While we do not see any realistic chances of new higher taxes on the horizon, any ramped-up discussion could very well turn out to be accretive to muni bond performance,” he said. “Even without higher taxes, munis can be expected to book positive performance when volatility subsides and flows turn positive.”

Secondary trading
California 5s of 2023 at 1.64% versus 1.78%-1.75% on 3/28. District of Columbia 5s of 2024 at 1.80%. Baltimore County, Maryland, 5s of 2024 at 1.76%-1.65% versus 1.78% original. District of Columbia 5s of 2025 at 1.95%.

Mecklenburg County, North Carolina, 5s of 2028 at 2.04% versus 2.06% Friday. California 5s of 2028 at 2.19% versus 2.05% on 3/23.

New York City 5s of 2030 at 2.38%-2.35% versus 2.55%-2.54% on 3/28, 2.52% on 3/25 and 2.47% original. Maryland 5s of 2032 at 2.26%. New York City 5s of 2032 at 2.55% versus 2.68%-2.66% Tuesday, 2.70% on 3/28, 2.67%-2.70% on 3/25 and 2.61% original. Broward County, Florida, 5s of 2033 at 2.77% versus 2.91% original.

Triborough Bridge and Tunnel Authority 5s of 2041 at 2.96%. New York City Municipal Water Finance Authority 5s of 2045 at 2.92%. MTA 5s of 2045 at 2.98%-2.97%. LA DPW 5s of 2047 at 2.80%-2.79% versus 2.77% Friday, 2.83%-2.81% Thursday and 2.99%-2.86% original.

Triborough Bridge and Tunnel Authority 5s of 2051 at 3.19%-3.20% versus 3.14% Thursday, 3.12% Wednesday, 3.15% Tuesday and 3.13%-3.16% on 3/28.

AAA scales
Refinitiv MMD’s scale was bumped up to two basis points at the 3 p.m. read: the one-year at 1.57% (unch) and 1.77% in two years (unch). The five-year at 1.98% (unch), the 10-year at 2.16% (-2) and the 30-year at 2.51% (-2).

The ICE municipal yield curve was bumped up to one basis point: 1.53% (-1) in 2023 and 1.81% (unch) in 2024. The five-year at 1.96% (unch), the 10-year was at 2.20% (-1) and the 30-year yield was at 2.57% (-1) in a 4 p.m. read.

The IHS Markit municipal curve was bumped up to two basis points: 1.52% (unch) in 2023 and 1.74% (unch) in 2024. The five-year at 1.97% (unch), the 10-year at 2.15% (-2) and the 30-year at 2.55% (-2) at a 4 p.m. read.

Bloomberg BVAL was bumped a basis point: 1.53% (unch) in 2023 and 1.77% (unch) in 2024. The five-year at 2.00% (unch), the 10-year at 2.22% (unch) and the 30-year at 2.54% (-1) at a 4 p.m. read.

Treasury yields rose outside the five-year and equities ended in the black.

The two-year UST was yielding 2.420% (-4), the three-year was at 2.600% (-4), five-year at 2.555% (unch), the seven-year 2.511% (+1), the 10-year yielding 2.409% (+2), and the 30-year Treasury was yielding 2.470% (+4) at the close.

Primary to come:
The New York Transportation Development Corp. (Baa1//BBB//) is set to price Tuesday $1.355 billion of tax-exempt/alternative minimum tax Terminal 4 John F. Kennedy International Airport Project special facilities revenue bonds, Series 2022. J.P. Morgan Securities.

The Cities of Dallas and Fort Worth, Texas, (A1/A+/A+/AA/) is set to price Wednesday $1.188 billion of taxable Dallas Fort Worth International Airport joint revenue improvement bonds, Series 2022A, terms 2051 and 2051. Citigroup Global Markets.

The Triborough Bridge and Tunnel Authority (/AA+/AA+/AA+) is set to price Tuesday $1 billion of forward delivery payroll mobility tax senior lien refunding bonds, Series 2022B, serials 2023-2042. Jefferies.

The Maryland Economic Development Corporation (Baa3//BBB/) is set to price Wednesday $625.425 million of green Purple Line Light Rail Project private activity revenue bonds, consisting of $100 million of Series 2022A and $525.425 million of Series 2022B. J.P. Morgan Securities.

The Allegheny County Hospital Development Authority, Pennsylvania, (A2/A/A/) is set to price Tuesday $400 million of University of Pittsburgh Medical Center revenue bonds, Series 2017D-2, consisting of: $9.600 million of Series D2-A, $9.985 million of Series D2-B, $10.385 million of Series D2-C, $10.800 million of Series D2-D, $11.235 million of Series D2-E, $11.690 million of Series D2-F and $336.305 million of Series D2-G. J.P. Morgan Securities.

El Paso, Texas, (/AA+/AA+/) is set to price Thursday $356.325 million of water and sewer revenue improvement and refunding bonds, Series 2022, serials 2023-2052. Ramirez & Co.

The Missouri Health and Educational Facilities Authority (A1/AA-/AA-/) is set to price Thursday $323.510 million of SSM Health health facilities revenue bonds, serials 2025-2034, terms 2047 and 2052. RBC Capital Markets.

The Board of Regents of the University of Texas System (Aaa/AAA/AAA/) is set to price Tuesday $302.045 million of revenue financing system bonds, Series 2022A. Morgan Stanley.

The Massachusetts Bay Transportation Authority (/AAA/AAA/) is set to price Tuesday $290.820 million of sustainability refunding assessment bonds, 2022 Series A, consisting of: $185.905 million of Series A-1, serials 2022-2023 and 2028-2041 and $104.915 million of Series A-2, term 2052. Wells Fargo Bank.

The Pennsylvania Economic Development Financing Authority (A2/A/A/) is set to price Tuesday $211.505 million of University of Pittsburgh Medical Center revenue and refunding bonds, Series 2022A, serials 2023-2052. RBC Capital Markets.

The authority (A2/A/A/) is also set to price Tuesday $135 million of University of Pittsburgh Medical Center revenue bonds, Series 2017C, consisting of $3.240 million of Series C-1, $3.370 million of Series C-2, $3.505 million of Series C-3, $3.645 million of Series C-4 and $121.240 million of Series C-5. J.P. Morgan Securities.

The Monroeville Finance Authority, Pennsylvania, (A2/A/A/) is set to price Tuesday $172.900 million of University of Pittsburgh Medical Center revenue bonds, Series 2022B, serials 2023-2024 and 2028-2042. Barclays Capital.

The San Jose Financing Authority (Aa3/AA/AA//) is set to price Thursday $165.795 million of taxable Convention Center Refunding Project lease revenue bonds, Series 2022A. Morgan Stanley.

The Chino Valley Unified School District, California, (Aa2/AA-//) is set to price Wednesday $148.205 million, consisting of $75 million of current interest bonds, serials 2023-2027 and 2033-2041, terms 2046, 2051 and 2055; $65 million of capital appreciation bonds, serials 2028-2046; and $8.205 million of refunding bonds, serials 2022-2023 and 2025-2027. Stifel, Nicolaus & Co.

The Illinois Housing Development Authority (Aaa////) is set to price Tuesday $125 million of social non-alternative minimum tax revenue and refunding bonds, 2022 Series A, serials 2022-2034, terms 2037, 2044 and 2052. Wells Fargo Bank.

The Florida Development Finance Corp. (/BBB//) is set to price Thursday $121.535 million of Mater Academy Projects educational facilities revenue bonds, Series 2022, serials 2025-2056. PNC Capital Markets.

Hempfield Area School District, Pennsylvania, (/AA//) is set to price Thursday $115.035 million of general obligation refunding bonds, consisting of $475,000 of Series A, serial 2025, $6.040 million of Series B, serials 2023-2027 and $108.520 million of Series 1, serials 2027-2047. PNC Capital Markets.

The Dormitory Authority of the State of New York (//BBB-//) is set to price next week $110 million of Wagner College revenue bonds, Series 2022. Morgan Stanley.

The Henrico County Economic Development Authority, Virginia, (//A-//) is set to price Wednesday $103.995 million of Westminster Canterbury Richmond residential care facility revenue bonds, Series 2022A. Ziegler.

Competitive:
Eugene School District #4J, Oregon (Aa1///) is set to sell $120 million of Oregon School Bond Guaranty general obligation bonds, Series 2022, at noon eastern Tuesday.

The Virginia Public Building Authority (Aa1/AA+/AA+/) is set to sell $20.065 million of taxable public facilities revenue bonds, Series 2022B, at 11:30 a.m. Tuesday; $199.995 million of public facilities revenue bonds, Series 2022A Bidding Group 2, at 11 a.m. Tuesday and $236.655 million of public facilities revenue bonds, Series 2022A Bidding Group 1, at 10:30 a.m. Tuesday.

Christine Albano contributed to this report.