Short-end correction continues, $2B-plus Illinois deal prices

Municipals continued to be hit hard on the front end of the curve in secondary trading as a $2 billion-plus deal from Illinois took focus in the primary. U.S. Treasuries were weaker, while equities ended mixed.

Triple-A benchmark yields were cut 11 to 15 basis points, depending on the curve at one-year and nine to 12 basis points at two-years. U.S. Treasury yields rose up to six basis points.

The two-year muni-Treasury ratio was at 59%, the three-year at 61%, the five-year at 63%, the 10-year at 65% and the 30-year at 90%, according to Refinitiv MMD’s 3 p.m. ET read. ICE Data Services had the two-year at 63%, three-year at 64%, the five-year at 62%, the 10-year at 66% and the 30-year at 91% at 4 p.m.

The Investment Company Institute reported investors added $229 million to mutual funds in the week ending April 12, after $83 million of outflows the previous week. Exchange-traded funds saw inflows of $173 million after $854 million of inflows the week prior, per ICI data.

“Intermediate and long-term municipal prices had not posted a loss for 26 consecutive sessions until low ratios and heavy supply finally got in the way,” said Kim Olsan, senior vice president of municipal bond trading at FHN Financial.

Issuance this week is one of the largest of the year, with $11.5 billion of bonds expected to price.

Olsan said the surge in issuance “is having an effect on technical direction and fundamental bias.”

The largest deal of the week, Illinois’ $2.311 billion of GOs, was repriced to lower yields in the afternoon from a preliminary wire in the morning.

Wells Fargo Bank priced and repriced for Illinois (A3/A-/BBB+/) $2.311 billion of GOs. The first tranche, $1 billion of Series of May 2023B, saw 5s of 5/2028 at 3.40% (-3), 5s of 2033 at 3.60% (+4), 5.25s of 2038 at 4.16% (-8), 5.25s of 2043 at 4.43% (-8) and 4.5s of 2048 at 4.73% (-15), callable 5/1/2032.

The second tranche, $150 million of Series of May 2023C, saw 5s of 5/2024 at 3.52% (-5), 5s of 2028 at 3.40% (-3) and 5s of 2033 at 3.60% (+4), callable 5/1/2032.

The third tranche, $1.161 billion of Series of May 2023D, saw 5s of 7/2023 at 3.49% (unch), 5s of 2028 at 3.40% (-3), 5s of 2033 at 3.60% (+4) and 4s of 2037 at 4.25% (-3), callable 7/1/2032.

Barclays Capital priced for Austin, Texas, (Aa3/AA-/AA-/) $420.610 million of electric utility system revenue refunding and improvement bonds, Series 2023, with 5s of 11/2024 at 2.83%, 5s of 2028 at 2.55%, 5s of 2033 at 2.71%, 5s of 2038 at 3.33%, 5s of 2043 at 3.71%, 5s of 2048 at 3.91% and 5.25s of 2053 at 3.94%, callable 11/15/2033.

Wells Fargo Bank priced for the Southern California Public Power Authority (Aa2//AA-/) $252.540 million of Southern Transmission System Renewal Project revenue bonds, Series 2023-1, with 5s of 7/2025 at 2.43%, 5s of 2028 at 2.29%, 5s of 2033 at 2.36%, 5s of 2038 at 3.11% , 5s of 2043 at 3.49%, 5s of 2048 at 3.71% and 5.25s of 2053 at 3.76%.

BofA Securities priced for the Massachusetts Water Resources Authority (Aa1/AA+/AA+/) $234.605 million of green general revenue bonds. The first tranche, $134.265 million of new bonds, 2023 Series B, saw 5s 8/2024 at 2.67%, 5s of 2028 at 2.39%, 5s of 2033 at 2.53%, 5s of 2038 at 3.20%, 5s of 2043 at 3.51% and 5.25s of 2048 at 3.68%, callable 8/1/2033.

The second tranche, $100.340 million of refunding bonds, 2023 Series C, saw 5s of 8/2026 at 2.40%, 5s of 2027 at 2.39% and 5s of 2033 at 2.53%, noncall.

BofA Securities priced for the Oklahoma Water Resources Board (/AAA/AAA/) $175 million of Drinking Water Program revolving fund revenue bonds, Series 2023A, with 5s of 4/2027 at 2.31%, 5s of 2028 at 2.33%, 5s of 2033 at 2.43%, 5s of 2038 at 3.14%, 4s of 2041 at par, 4s of 2048 at 4.20% and 4.125s of 2053 at 4.28%, callable 4/1/2033.

BofA Securities priced for Wake County, North Carolina (Aa1/AA+/AA+/) $116.525 million of limited obligation bonds. The first tranche, $57.905 million of Series 2023A, saw 5s of 4/2024 at 2.72%, 5s of 2028 at 2.42%, 5s of 2033 at 2.51%, 5s of 2038 at 3.21% and 5s of 2041 at 3.39%, callable 4/1/2033.

The second tranche, $58.620 million of Series 2023B, saw 5s of 4/2024 at 2.72%, 5s of 2028 at 2.42%, 5s of 2033 at 2.51%, 5s of 2038 at 3.21% and 5s of 2041 at 3.39%, callable 4/1/2033.

In the competitive, Williamson County, Texas, (/AAA/AAA/) sold $137.155 million of limited tax notes to J.P. Morgan, with 5s of 2/2024 at 3.00%, 5s of 2028 at 2.51% and 5s of 2030 at 2.47%, noncall.

The increase in Texas-based issuance “has widened in-state spreads among various new issues, having a knock-on effect across other high-grade general market names,” Olsan said.

Among the larger of the issues priced, PSF-insured Cypress-Fairbanks Independent School District, Texas (Aa1/AA underlying), “came to market with a 2024-2048 maturity structure,” she said.

Olsan said “spreads inside 10 years were finalized +31-+46/AAA and longer-term 5s priced with spreads above +50/AAA.”

Similar spread results were seen in a comparable Frisco Independent School District, Texas, pricing. “Texas volume is up 11% over last year’s pace — offering quality local credits at more generous levels, particularly with an increase in capacity via the PSF program,” according to Olsan.

Elsewhere, she said, Boulder Valley, Colorado, sold Aa2/AA school bonds and Aaa/AAA Winston-Salem, North Carolina, sold GOs, “each with wider than usual spreads for infrequent issuers.”

“More of a balance between buyers and sellers” has happened due to “additional volume across a variety of credits,” she said.

“The persistent inversion offers better value options for ultra-short bonds and those due past 10 years,” Olsan said.

Due to “mismatched supply (heavy bid list volume) and demand (tax-season effects) in ultra-short maturities yields in 2023 trading above 3% and those in 2024 easily behind 2.75% away from AAA names,” she said.

Starting in the 12-year range, 3% yields are seen in 4s and 5s.

Together, Olsan said, “the two ranges present interesting barbell-type alternatives.”

Within the active two to 12-year range “there is a larger focus from traditional [separately managed account] programs where laddered structures are often the mandate,” she said.

The current pullback has resulted in “a normalization of the two- to 10-year curve with a slope of negative 13 basis points,” she said.

“A more exaggerated shift up in yields on the short end places the one-year BVAL yield above that of the five- and 10-year rates but to a lesser degree than was the case in March and against what was an upwardly sloping curve a year ago,” according to Olsan.

The 1-year BVAL yield is up 100 basis points year-over-year, while five- and 10-year yields “have settled near their ranges from that same period,” she said.

Greater absolute value “has emerged in the 20-year range with a current implied AAA BVAL yield of 3.09%, or an adjustment of nearly 75 basis points from April 2022,” she said.

The repricing “offers new inquiry better value opportunities, albeit not as advantageous as existed last October,” Olsan noted.

Secondary trading
Washington 5s of 2024 at 2.76% versus 2.38% original on Friday. NYC TFA 5s of 2024 at 2.83% versus 2.84% Tuesday. Ohio 5s of 2025 at 2.69%.

Florida BOE 5s of 2028 at 2.44%. California 5s of 2029 at 2.38% versus 2.22%-2.17% on 3/30. Connecticut 4s of 2030 at 2.64%.

Florida 5s of 2033 at 2.46%. NYC TFA 5s of 2033 at 2.72%-2.70%. California 5s of 2035 at 2.76% versus 2.41% on 4/12 and 2.58%-2.46% original on 4/6.

San Jose Financing Authority, California, 5s of 2052 at 3.69% versus 3.54% on 3/30 and 3.60%-3.55% on 3/29.

AAA scales

Refinitiv MMD’s scale was cut two to 12 basis points: The one-year was at 2.74% (+12) and 2.53% (+10) in two years. The five-year was at 2.36% (+8), the 10-year at 2.36% (+6) and the 30-year at 3.40% (+2) at 3 p.m.

The ICE AAA yield curve was cut four to 15 basis points: 2.86% (+15) in 2024 and 2.66% (+11) in 2025. The five-year was at 2.33% (+9), the 10-year was at 2.34% (+7) and the 30-year was at 3.44% (+4) at 4 p.m.

The IHS Markit municipal curve was cut four to 12 basis points: 2.72% (+12) in 2024 and 2.53% (+12) in 2025. The five-year was at 2.33% (+6), the 10-year was at 2.35% (+8) and the 30-year yield was at 3.40% (+4), according to a 4 p.m. read.

Bloomberg BVAL was cut three to 11 basis points: 2.65% (+11) in 2024 and 2.55% (+9) in 2025. The five-year at 2.30% (+7), the 10-year at 2.33% (+5) and the 30-year at 3.40% (+3) at 4 p.m.

Treasuries were weaker.

The two-year UST was yielding 4.262% (+6), the three-year was at 3.967% (+6), the five-year at 3.716% (+4), the seven-year at 3.658% (+3), the 10-year at 3.598% (+2), the 20-year at 3.911% (+1) and the 30-year Treasury was yielding 3.791% (flat) at 4 p.m.

March market overview redux
Munis “posted strong total returns in March amid heightened market volatility and a flight to quality,” said BlackRock strategists Peter Hayes, James Schwartz and Sean Carney.

Banking sector woes, which started with the collapse of Silicon Valley Bank, “spurred expectations for tighter credit conditions, slower economic growth, and an imminent end to monetary policy tightening by the Federal Reserve,” they said.

The S&P Municipal Bond Index “returned 2.08%, bringing the year-to-date total return to 2.51%,” they noted.

Modest underperformance “versus the sharp rally in comparable Treasuries resulted from waning supply-and-demand technical and rich valuations,” BlackRock strategists said.

Longer-duration and triple-B-rated bonds performed best.

“Issuance trended back in line with seasonal expectations to $33 billion, 1% below the five-year average, bringing the year-to-date total to $74 billion,” they noted.

The market “failed to benefit from net negative supply” for the first time since September, “as issuance slightly outpaced reinvestment income from maturities, calls, and coupons,” according to BlackRock strategists.

Simultaneously, they said “uncertainty kept investors on the sidelines, and fund flows were consistently negative throughout the month.” Luckily, they noted “fears of widespread, forced bank selling proved unwarranted, and bid-wanted activity fell 11% month-over-month to $1 billion per day on average.”

BlackRock strategists remain “cautious until volatility begins to subside.

“While supply is expected to remain manageable in April,” they noted that “outflows will likely persist through tax season, and valuations remain rich.”

“Forced deleveraging or a pickup in bank sales could stress the market should they materialize, but we anticipate that near-term performance will more likely be driven by the direction of interest rates,” BlackRock strategists said.

Primary market to come
The New Jersey Economic Development Authority is set to price $801.5 million of school facilities construction refunding bonds on Thursday, serials, 2024 to 2028, term 2035. Barclays.

The New Jersey Economic Development Authority (A2/A-/A-/) is set to price $348 million of school facilities construction refunding forward delivery bonds Thursday. Serials 2024 to 2027 with terms from 2033 to 2039. Barclays Capital.

The Missouri Health & Educational Facilities Authority (Aa2/AA//) is set to price Thursday $275 million of health facilities revenue bonds. Bullet maturing 2033. RBC Capital Markets.

The Rockwell, Texas, Independent School District is set to price Thursday $234.1 million of unlimited tax school building bonds and unlimited tax refunding bonds, PSF insured. Jefferies LLC.

The Jersey City Municipal Utilities Authority is set to price $130 million of project notes on behalf of Hudson County Thursday. Stifel, Nicolaus & Co.

Ohio is set to price on behalf of the Ohio Higher Educational Facility Commission (Aa3/AA-//) $108.9 million of climate bond-certified higher educational facility green revenue bonds. Morgan Stanley & Co.

The Maine State Housing Authority (Aa1/AA+//) is set to price $100 million of mortgage purchase, social bonds. Serials 2026 to 2028, terms, 2043, 2048, and 2053. Barclays Capital.

Competitive:
Boston (Aaa/AAA//) is set to sell $350 million general obligation bonds Thursday.