A touch weaker, but munis outperform U.S. Treasuries

Municipals were little changed to a touch weaker out longer Tuesday, outperforming U.S. Treasuries, which saw yields rise as much as five basis points, while equities were mixed on the day.

Ratios fell slightly out longer with the municipal to UST 10-year ratio at 70% and the 30-year at 77%, per Refinitiv MMD. The 10-year muni-to-Treasury ratio was at 70% and the 30-year was at 77%, according to ICE Data Services.

Triple-A benchmark yield curves were little changed to weaker outside of 10 years, cutting a basis point or two on very light trading and few deals pricing in the primary.

As the market prepares for a smaller primary calendar (little more than $4.5 billion) for the holiday-shortened week, and about $10.35 billion for 30-day visible supply, fund flows again are worth exploring as a strong demand component throughout 2021 and why.

“Although current tax-exempt yields do not appear to be compelling to most market participants, we are of the opinion that it is not yields that are attracting investors to munis but the fact that they are not stocks,” said Patrick Luby, senior municipal strategist at CreditSights. “We believe that investors are actively rebalancing their asset allocations to reduce equity market exposure. Consequently, significant sums of new money have been flowing into fixed income funds, not all of which appears to have been invested.”

Since the end of 2015, municipal bond mutual funds have held an average total of $42 billion of liquid assets, according to CreditSights.

Prior to the pandemic and last year’s massive flood of redemptions, managers held an average of $39 billion (12/31/15-12/31/19). As of the week ending August 25, funds held $69 billion, per the Investment Company Institute.

“We believe that the market environment has discouraged managers from locking in yields, but that because of the difficulty of finding block-sized well-structured bonds, an increase in new-issue supply can motivate mangers to put money to work — particularly since yields have ticked higher recently,” the CreditSights report said.

Part of this all has to do with the growth of assets in professionally managed products such as mutual funds and exchange-traded funds, as well as separately managed accounts, which are difficult to track accurately, according to CreditSights.

Those moves mean that portfolio managers are often much more interested in investing in the primary than in the secondary market.

“It is our opinion that one result of the ‘professionalization’ of the muni market is that a lack of primary supply can lead to a lack of interest in the market, but that a surge in new issuance can attract interstate from those managers who need to put money to work and want the block sizes and best available call protection that is available in the new issue market,” the report said.

“Of course a meaningful cheapening in yields can quickly attract buyers to the secondary market, as we saw last year when muni yields briefly got cheaper than the after-tax yields on comparably rated corporates and attracted money from corporate investors (such as banks and insurance companies) which had been mostly absent from the market,” the report said.

While CreditSights views current sector and credit spreads as having moved “about as far as they can, we think that the current back-up in yields and the likely seasonal increase in the new-issue volume may combine to encourage fund managers to put some of their liquidity to work in the new-issue market,” the report said.

“While aggressive new-issue scales and resultant bumps in the benchmark yield curves may help drive price evaluations and total returns, it may not translate into increased demand in the secondary market, particularly with spreads having so little room left to move.”

Secondary trading and scales
King County, Washington 5s of 2022 traded at 0.08%. Portland, Oregon 5s of 2023 at 0.13%. Hawaii 5s of 2024 at 0.29%.

Loudoun County, Virginia 5s of 2028 at 0.74%.

North Carolina 5s of 2031 at 1.02%. Delaware 4s of 2032 at 1.02%.

New York City 5s of 2035 at 1.49%. Washington 5s of 2035 1.27% versus 1.25% Friday.
California 5s of 2043 at 1.45%.

New York City TFA 4s of 2048 2.06% versus 2.05% original. New York Tribes 4s of 2051 at 1.87%.

Short yields were steady at 0.08% in 2022 and 0.11% in 2023 on Refinitiv MMD’s scale. The yield on the 10-year was up one to 0.94% while the yield on the 30-year rose one to 1.53%.

The ICE municipal yield curve showed bonds steady in 2022 at 0.08% and up one to 0.12% in 2023. The 10-year maturity rose to 0.95% and the 30-year yield two to 1.53%.

The IHS Markit municipal analytics curve showed short yields steady at 0.08% and 0.10% in 2022 and 2023. The 10-year yield rose one basis point to 0.94% and the 30-year yield also up one to 1.53%.

The Bloomberg BVAL curve showed short yields steady at 0.07% and 0.07% in 2022 and 2023. The 10-year yield sat at 0.93% and the 30-year yield up two to 1.53%.

The 10-year Treasury was yielding 1.372% and the 30-year Treasury was yielding 1.987% in late trading. The Dow Jones Industrial Average lost 254 points or 0.72%, the S&P 500 fell 0.30% while the Nasdaq gained 0.12%.

Primary to come
Piedmont Healthcare, Inc., Georgia (A1/AA-//) is set to price $1 billion of taxable bonds on Thursday, serials 2032, 2042, 2052. RBC Capital Markets.

The Hampton Roads Transportation Accountability Commission (Aa2/A+//) is set to price on Thursday $817.99 million of Hampton Roads Transportation Fund senior lien bond anticipation notes, serial 2026. Citigroup Global Markets Inc.

The New Hope Cultural Education Facilities Finance Corp., Texas, (nonrated) is set to price $498.865 million of Sanctuary LTC project senior living revenue bonds on Thursday, consisting of: $413.515 million of Series S21A1, serials 2025-2057; $16.95 million Series S21A2, serials 2022-2025; and $53 million of Series S21B, serials 2022-2057. HilltopSecurities.

Grand Forks, North Dakota (Baa2//BBB-/) is set to price on Wednesday $382.635 million of Altru Health System fixed rate bonds. BofA Securities.

The Windler Public Improvement Authority, Colorado (nonrated) is set to price $291.326 million of Limited Tax Supported Revenue Bonds, Series 2021A-1, $210.11 million and $81.216 million of Limited Tax Supported Convertible Capital Appreciation Revenue Bonds, Series 2021A-2. Piper Sandler & Co.

The CSCDA Community Improvement Authority, California (nonrated) is set to price on Wednesday $230.95 million of essential housing social revenue bonds (Orange Portfolio), consisting of $75 million of Series A-1, serial 2047, and $105.2 million, Series A-2, serial 2057, and $50.75 million of Series B, serial 2057. Goldman Sachs & Co. LLC.

The West Harris County Regional Water Authority, Texas (A1/AA/AA-/) is set to price $188 million of water system revenue and revenue refunding bonds, Series 2021, insured by Build America Mutual, serials 2032-2041, terms 2046, 2051, 2060. Jefferies LLC.

The Minnesota Housing Finance Agency (Aa1/AA+//) is set to price on Thursday $150 million of residential housing finance bonds, Series E AMT social bonds and Series F, non-AMT social bonds. RBC Capital Markets.

The Illinois Housing Development Authority (Aaa///) is set to price on Thursday $144.3 million of exempt and taxable social revenue bonds. J.P. Morgan Securities LLC.

The Michigan Strategic Fund (Ba2/BB//) is set to price on Thursday $100 million of variable rate limited obligation revenue green bonds (Graphic Packaging International, LLC Coated Recycled Board Machine Project), serial 2061. TD Securities LLC

Competitive deals
Minnesota (/AAA//) is set to sell $311 million of unlimited tax general obligation bonds at 10:30 a.m. eastern, $284.1 million of ULT GOs at 11 a.m. and $284 million at 11:30 a.m. Thursday.

The Dublin Unified School District, California is set to sell $116 million of general obligation bonds at 12:30 p.m. eastern on Thursday.

Athens Clarke County USD, Georgia (/AA//) is set to sell $93.175 million of unlimited tax general obligation bonds at noon Thursday.