Higher yields, higher ratios settle in
11 min readThe municipal secondary was quiet after a volatile week that moved municipal rates higher and ratios into a range that investors say are a more satisfactory level to engage in the asset class following months of stagnant rates.
Triple-A benchmarks were little changed Friday while U.S. Treasuries ended the week at lower yields — sub 1.5% on the 10-year — than the highs reached on Tuesday and Wednesday.
“When Treasury yields move higher, tax-exempts follow,” Barclays strategists wrote in a Friday market comment. The yields of both investment-grade and high-yield indexes “have meaningfully increased (high grade tax-exempts have underperformed a bit more thus far) with their yields getting close to their early spring highs, while dropping their total returns for the year to sub-1%,” Barclays strategists said.
BofA Securities noted over the course of the previous five trading sessions, 10- to 30-year Treasury yields rose 27 to 30 basis points “in a quick bear steepening,” while 10- to 30-year muni AAA yields rose 13 to 19 basis points in a bear flattening.
“These moves support our view that the talk of tapering would drive rates up while the actual tapering should trigger a prolonged market rally,” BofA said. “At this point, although Treasury rates are still quite far from their late-March 2021 peaks, muni rates are closing in on their March peaks due to relatively higher muni/Treasury ratios this round.”
Ratios have moved into a higher, more favorable range, especially in the belly of the curve. The 10-year municipal-to-UST ratio is at 77% and the 30-year at 82%, according to Refinitiv MMD and ICE Data Services. The five-year ratio sits at 60% after hovering around 50% or less for months.
“For the muni market in the near-term, keep an eye on 10-plus year muni/Treasury ratios,” BofA said. “If these ratios cease to rise and start to decline while Treasury rates rise further, that would suggest the spike of muni AAA rates is not far from completion.”
The municipal calendar is building, led by taxables and refundings after they dropped significantly in September. Without the certainty of Washington reinstating exempt advance refundings and the still historically low rates, issuers that may have been sidelined are adding to supply with taxable offerings.
The total potential volume the week of Oct. 4 is $9.141 billion. There are $8.204 billion of deals scheduled on the negotiated calendar and $936.7 billion on the competitive slate. Taxables make up $3.1 billion. The 30-day visible supply sits at $13.13 billion.
“Not surprisingly for this time of the year, supply has been steadily inching higher, and visible supply is at the highest point since last December, mainly driven by taxable issuance which is at its highest point in nearly a year,” Barclays noted. “We are not worried about a spike in taxable issuance, as there is always enough global demand to absorb additional supply, especially at higher yields, but tax-exempt issuance has also been increasing, and in conjunction with other factors, some pressure on munis has started to build.”
BofA Securities noted fourth quarter principal redemption volumes are scheduled to total roughly $89 billion, with $29.9 billion in October, $26.8 billion in November and $32.6 billion in December.
Actual volumes should be “significantly higher than these” when 4Q is finished, as 4Q21 coupon payments total $32 billion.
“If mutual funds continue to receive inflows at the $10 billion per month pace so far this year, 4Q21 total demand would be approximately $147 billion, roughly in balance with our issuance expectations,” BofA said.
Yet, with the relatively high cash levels for many institutional and retail portfolios, BofA expects munis to outperform Treasuries in 4Q21.
“Moreover, we must note that a much higher percentage of principal redemptions are from tax-exempt bonds, while in the new-issuance market, taxable bonds now account for more than 20% constantly,” they said. “So, demand for tax-exempt bonds in 4Q21 should exceed tax-exempt new issuance by a large margin.”
As for taxable bonds, they said, “foreign buyers and some other corporate bond buyers represent new additional demand.”
“Higher issuance is in general a good factor in the muni market. In contrast, lackluster issuance paces, such as in July and August, actually did nothing to bulls or bears, as price discovery became less efficient,” the strategists said. “The muni market simply did not move much at all for those two months.”
BofA believes that 10-year AAA rates around 1.20% “represent a good entry point to the high-grade market.”
“Now that credit spreads have been so tight, the whole market across the credit spectrum appears to be set up for a rates trade for much of 4Q21,” they said.
NYS, NYC, authorities may sell $5.05B in Q4
New York State, New York City and major public authorities are planning to sell $5.05 billion of municipal bonds in the fourth quarter, state Comptroller Thomas DiNapoli said Friday.
The calendar includes $3.06 billion of new money and $1.99 billion of refundings and reofferings in a mix of exempt, taxable, AMT and a private placement.
The sales are broken down into $4.08 billion for October, of which $2.26 billion is new money and $1.82 billion which is either refundings or reofferings and $967 million for November, with $796 million of new-money bonds and $171 million of refunding bonds. No issuance has been scheduled for December.
The anticipated sales in the fourth quarter compare to past planned sales of $6.75 billion in the third quarter and $6.28 billion during the fourth quarter of 2020.
Sales are expected from the Dormitory Authority of the State of New York, the Environmental Facilities Corp, Empire State Development, the Hudson Yards Infrastructure Corp., the New York City Housing Development Corp., the New York City Municipal Water Finance Authority, New York Liberty Development Corp., the State of New York Mortgage Agency and the Triborough Bridge and Tunnel Authority.
Secondary trading
Oregon DOT 5s of 2022 traded at 0.11% versus 0.12% a week ago. California 5s of 2023 at 0.23%. New York City 5s of 2023 at 0.23% versus 0.24% Thursday. New York City TFA 5s of 2023 at 0.23%.
California 5s of 2026 at 0.56%. Charlotte, North Carolina, water 5s of 2026 at 0.53%-0.52%. Ohio 5s of 2026 at 0.56%. Wisconsin 5s of 2027 at 0.68% versus 0.73%-0.71% Wednesday.
Washington Suburban Sanitation District 5s of 2027 at 0.69% versus 0.71% original and 5s of 2028 at 0.84% versus 0.87% original.
Prince George’s County, Maryland, 5s of 2029 at 1.02% versus 1.07%-1.04% Thursday. Maryland 5s of 2030 at 1.15% versus 1.16% Thursday. Delaware 5s of 2031 at 1.13%-1.12% versus 1.13%-1.11% Wednesday.
Maryland 5s of 2034 at 1.32% versus 1.34%-1.33% Wednesday. New York City TFA 5s of 2034 at 1.59%-1.58%.
Washington 5s of 2040 at 1.64%. Metro Water District of Southern California 5s of 2040 at 1.64%.
Massachusetts 5s of 2048 at 1.89%.
Los Angeles Department of Water and Power 5s of 2051 at 1.80%.
AAA scales
According to Refinitiv MMD, short yields were steady at 0.13% and at 0.20% in 2022 and 2023. The yield on the 10-year sat at 1.14% while the yield on the 30-year stayed at 1.67%.
The ICE municipal yield curve showed bonds steady in 2022 at 0.15% and at 0.19% in 2023. The 10-year maturity sat at 1.11% and the 30-year yield was steady at 1.68%.
The IHS Markit municipal analytics curve showed short yields steady at 0.13% and 0.18% in 2022 and 2023, respectively. The 10-year yield sat at 1.11% and the 30-year yield was steady at 1.66%.
The Bloomberg BVAL curve showed short yields at 0.15% and 0.16% in 2022 and 2023. The 10-year yield was steady at 1.12% and the 30-year yield sat at 1.67%.
In late trading, Treasuries yields fell as equities saw solid gains.
The 10-year Treasury was yielding 1.466% and the 30-year Treasury was yielding 2.034%. The Dow Jones Industrial Average gained 505 points, of 1.49%, the S&P 500 rose 1.16% while the Nasdaq was up 0.79%.
Will inflation stall growth?
Data showing inflation stable at a high level is likely to pull down gross domestic product growth in the third quarter, analysts said.
“Consumer spending went from being a driver to a drag on overall growth in the third quarter,” said Grant Thornton Chief Economist Diane Swonk. “Inflation has a price. Overall GDP growth looks like it slowed to about a 3% pace during the quarter, less than half the 6.7% pace we saw in the second quarter.”
After release of the personal income and spending report, Morgan Stanley lowered its GDP forecast for the third quarter to 4.5% from 5.7%.
“Consumers have been struggling to grow their spending in the face of nearly-bare dealer lots and retail shelves, rising prices, and fears of the Delta variant,” said Scott Anderson, chief economist at Bank of the West.
Noting drops in consumer confidence during the past few months, he said, “consumers could remain cautious in the spending over the holidays, despite record high household wealth and plenty of excess savings to sustain their spending should they choose to do so. Supply chain bottlenecks, and major delays at the ports could further dampen consumers’ ability to spend significantly more even if they wanted to.”
And incomes are likely to take a hit when the September numbers are released, as the $300 a week supplemental unemployment payment ended.
Personal income rose 0.2% in August after a 1.1% gain in July, while spending grew 0.8% after a 0.1% dip the month before.
Economists polled by IFR Markets expected income to gain 0.3% and a 0.6% increase in spending.
The core PCE index rose 0.3% after a 0.3% rise in July, while year-over-year the index rose 3.6% both months.
Economists expected a 0.2% gain in the monthly numbers and a 3.5% jump year-over-year.
Anderson called the numbers “mildly encouraging on the surface.”
Income was 6.1% higher than a year ago, he added. “However, because inflation is high and pandemic aid has boosted nominal income growth, inflation-adjusted personal income excluding government aid tells a very different story right now. A more sobering picture emerges with real personal income excluding transfer payments falling 0.3% in August.”
The rift between the growth in income and spending, Anderson said, indicates consumers are using savings or government aid to back their purchases.
“We are likely to see more normal rates of consumer spending growth going forward,” he said.
Also released Friday, the Institute for Supply Management’s manufacturing survey “reflects resilience,” said Berenberg chief economist for the U.S., Americas and Asia Mickey Levy, who is also a member of the Shadow Open Market Committee, although supply issues remain.
“There is evidence demand and supply pressures are contributing to cost and price pressures: the prices index rose to 81.2, with 70% of respondents reporting higher prices,” he said.
Wells Fargo Securities senior economist Tim Quinlan and Economist Shannon Seery said, “The message from today’s ISM is that supply chain issues have gone from a problem to a crisis.”
The manufacturing PMI rose to 61.1 in September from 59.9 in August.
Economists expected a 59.5 level.
“The top drivers” of the increase, they said, “were longer wait times for supplier deliveries and sharply higher prices paid.”
And while the index topped expectations, Quinlan and Seery said, “it is not all good news when you examine the underlying components” which show a rise in the supplier delivery index. “Ordinarily a modest wait is consistent with a fast-growing economy. However, today it says more about the supply chain crisis.”
To prove the point, respondents regularly “cited supply chain and sourcing problems.”
The prices index rose. The employment climbed back into expansion territory, “but it has hovered around the 50-breakeven point for much of the past year as businesses struggle to find the help they need,” they said. “The lack of labor and inputs is causing logistic problems and limiting the pace of production. It’s also leading to significantly higher costs.”
University of Michigan’s final September consumer sentiment index was 72.8, up from 71.0 at mid-month and 70.3 in August.
The current index was 80.1, up from 77.1 mid-month and 78.5 in August.
The expectations index was 68.1, up from mid-month and 65.1 in August.
Economists expected the headline index to hold at 71.0.
Separately, construction spending was flat in August after a 0.3% gain in July.
Primary market to come
The Alabama Federal Aid Highway Finance Authority (Aa2/AAA//) is set to price on Wednesday $1.49 billion of taxable special obligation revenue bonds, Series 2021B. BofA Securities.
The San Diego Unified School District is set to price on Wednesday $575 million, consisting of: $17.885 million, Series N-1 (Aa2///), $207.115 million, Series N-2 (Aa2//AAA/AAA), $18.54 million, Series E-1 (Aa2///) and $331.46 million, Series E-2 (Aa2//AAA/AAA). J.P. Morgan Securities LLC.
The San Diego Unified School District (Aa2//AAA/AAA/) is also set to price Wednesday $431.18 million of 2021 taxable general obligation refunding green bonds (dedicated unlimited ad valorem property tax bonds) (Election of 2012, Series ZR-1), serials 2022 and 2024-2036, term 2042. Citigroup Global Markets.
The Riverside County Transportation Commission, California, is set to price Tuesday $490.845 million of toll revenue senior lien refunding bonds (RCTC 91 Express Lanes), Series B-1 and Series C, consisting of $408.315 million, Series 21B-1 (/A/BBB+/) and $82.53 million, Series 2021C (/A-/BBB/). BofA Securities.
The Omaha Public Power District, Nebraska, (Aa2///) is set to price Wednesday $428.94 million of electric system revenue bonds, 2021 Series A and 2021 Series B, consisting of $373.12 million, Series 2021A and $55.82 million, Series 2021B. BofA Securities.
The Tri-County Metropolitan Transportation District of Oregon (Aaa/AAA//AAA/) is set to price Tuesday $396.7 million of taxable senior lien payroll tax revenue refunding sustainability bonds, Series 2021B and exempt senior lien payroll tax revenue sustainability bonds, Series 2021A. J.P. Morgan Securities.
The Metropolitan Government of Nashville and Davidson County, Tennessee, (Aa2/AA//) is set to price Tuesday $352.94 million of water and sewer revenue green bonds, Series 2021A, serials 2022-2041, terms 2046 and 2051. UBS Financial Services Inc.
The Metropolitan Government of Nashville and Davidson County (Aa2/AA///) is also set to price Tuesday $240.635 million of federally water and sewer revenue refunding green bonds, Series 2021B, serials 2022-2038, term 2043. UBS Financial Services.
The Central Texas Regional Mobility Authority (A3/A-//) is set to price Thursday $342.555 million of taxable senior lien revenue refunding bonds, Series 2021E, serials 2022-2036, terms 2041 and 2045. Jefferies LLC.
The Central Texas Regional Mobility Authority (A3/A-///) is also set to price Thursday $311.83 million of senior lien revenue refunding bonds, Series 2021D, serials 2022-2041, terms 2044 and 2046. Jefferies LLC.
The School District of Philadelphia (A2//A+/) is set to price Wednesday $312.94 million of general obligation green bonds, Series A of 2021 and Series B of 2021, consisting of $263.58 million of Series A, insured by Pennsylvania State Aid Intercept Program, serials 2022-2041, term 2046 and $49.36 million of Series B, serials 2022-2031. Siebert Williams Shank & Co.
The State Public Works Board of the state of California (Aa3/A+/AA-/) is set to price Wednesday $294.67 million of forward delivery lease revenue refunding bonds, 2022 Series C, serials 2023-2037. Barclays Capital Inc.
The Lower Colorado River Authority (/A/AA-/) is set to price Tuesday $246.825 million of refunding revenue bonds, Series 2022, serials 2023-2041. Barclays Capital.
Montgomery County, Ohio, (A1//AA-/) is set to price Wednesday $237.225 million of hospital facilities revenue bonds, Series 2021 (Dayton Children’s Hospital), serials 2025-2041, terms 2046 and 2051. RBC Capital Markets.
The Equitable School Revolving Fund is set to price Wednesday $234.58 million of national charter school revolving loan fund revenue bonds, consisting of $134.265 million of Series AZ (/A//), serials 2022-2041, terms 2046 and 2051; $25 million of Series SUB (non-rated), terms 2031 and 2051; $31.555 million of Series CA (/A//), serials 2022-2041, terms 2046, 2051 and 2055; $18.345 million, Series MA (/A//), serial 2041, terms 2046 and 2051; and $25.415 million of Series NY (/A//), serial 2041, terms 2046 and 2051. RBC Capital Markets.
Lee County, Florida, (A2//A/A+/) is set to price Thursday $207.515 million of airport revenue bonds, Series 2021B (AMT). BofA Securities.
Fairview Health Services (A3/A///) is set to price Wednesday $200 million of taxable bonds, Series 2021, serials 2031 and 2051. Citigroup Global Markets.
Indiana University Foundation (non-rated) is set to price Wednesday $150 million of taxable bonds, Series 2021. Wells Fargo Corporate & Investment Banking.
Riverside County Transportation Commission (/A/BBB+//) is set to price Tuesday $146.87 million of taxable toll revenue senior lien refunding bonds, 2021 Series A (RCTC 91 Express Lanes). BofA Securities.
The Chicago Park District (/AA-/AA-/AA/) is set to price Tuesday $143.57 million, consisting of: $49.495 million, Series B, serials 2042-2044; $29.92 million, Series C, serials 2030-2036; $21.5 million, Series D, serials 2023-2026 and 2028-2036; $33.535 million, Series E, serials 2023-2039 and $9.12 million, Series F, serials 2023-2024. Cabrera Capital Markets.
The California Infrastructure and Economic Development Bank (A3/A-//) is set to price Tuesday $139.355 million of sustainability revenue bonds (California Science Center Phase III Project), consisting of $41.455 million Series 1 and $97.9 million of Series 2. Morgan Stanley & Co.
The Bethlehem Area School District Authority, Pennsylvania, (A1///) is set to price Thursday $101.505 million of school revenue bonds (Bethlehem Area School District Project), Series 2021, SOFR index rate mode, consisting of $30.41 million, Series A, $40.795 million, Series B and $30.33 million, Series C. RBC Capital Markets.
Competitive:
Rhode Island (Aa2/AA/AA/) is set to sell $90.5 million of general obligation bonds consolidated capital development loan of 2021, Series E at 10:15 a.m. eastern Wednesday.
Rhode Island (Aa2/AA/AA) is set to sell $44.5 million of taxable general obligation bonds consolidated capital development loan of 2021, Series F at 10:45 a.m. Wednesday.
Jessica Lerner and Chip Barnett contributed to this report.
