Munis weaker; two billion-dollar deals take retail orders

Municipals were weaker in secondary trading, but the primary market took focus with billion-dollar retail pricings on deals from California and the Port Authority of New York and New Jersey. U.S. Treasury yields rose 10 years in, while equities ended the session in the red.

In the primary market, Citigroup Global Markets held a one-day retail order period for California’s (Aa2/AA-/AA/) $2.647 billion of various purpose GOs. The first tranche, $1.043 billion of new money bonds, saw 5s of 9/2026 at 3.03%, 5s of 2033 at 3.07%, 5s of 2048 at 3.57% and 5.25s of 2053 at 4.08%, callable 9/1/2033.

The second tranche, $1.604 billion of refunding bonds, saw 5s of 9/2024 at 3.23%, 5s of 2029 at 2.98%, 5s of 2032 at 3.03%, 4s of 2043 at 4.15% and 5s of 2043 at 3.85%, callable 9/1/2033.

BofA Securities held a one-day retail order for the Port Authority of New York and New Jersey’s (Aa3/AA-/AA-/) $1.086 billion of consolidated bonds. The first tranche, $535.055 million of AMT bonds, Series 242, saw 5s of 12/2024 at 3.93%, 5s of 2028 at 3.73%, 5s of 2033 at 3.77%, 5s of 2038 at 4.27%, 5s of 2043 at 4.50%, 5s of 2048 at 4.62% and 5s of 2053 at 4.68%, callable 12/1/2033.

The second tranche, $551.150 million of non-AMT bonds, Series 243, saw 5s of 12/2024 at 3.30%, 5s of 2028 at 3.12%, 5s of 2033 at 3.25%, 5s of 2038 at 3.80% and 5s of 2043 at 4.10%, callable 12/1/2033.

Elsewhere, Citigroup Global Markets priced for the South Dakota Housing Development Authority (Aaa/AAA//) $99 million of non-AMT homeownership mortgage bonds, 2023 Series D, saw bonds priced at par — 3.35s of 5/2024, 3.7s of 5/2028, 3.75s of 11/2028, 4.2s of 5/2033, 4.2s of 11/2033, 4.4s of 11/2038, 4.7s of 11/2043 and 4.8s of 11/2048 — except for 6s of 11/2054 at 4.33%, callable 5/1/2032.

Currently, the market appears to be “directionally neutral” despite the pre-holiday decline in the new-issue calendar last week to $2.8 billion and the total traded par to $56.2 billion, said Matt Fabian, a partner at Municipal Market Analytics.

“Trudging neutrality follows rich but stable relative value measures, minimal net flows of cash into the mutual funds, seasonally slow reinvestment demand, tight supply, and steady credit trends (away from hospitals and senior living),” he said.

“Not to mention the unnerving effects of longer-term uncertainty related to a potential (i.e., not unlikely) government shutdown this month or next, the real possibility of Fed overreach and/or economic recession in the U.S. over the next year, and massive implications for tax policy carried by the next national elections,” he added.

In this light, Fabian said, municipal fund flows netting to just around negative $200 million in the second half of 2023 is “reasonable,” despite the solid availability of income.

The Investment Company Institute reported investors pulled $738 million from municipal bond mutual funds in the week ending Aug. 30, after $636 million of outflows the previous week. ETFs saw inflows of $975 million after $21 million of inflows the week prior.

And given this summer’s rate volatility, AllianceBernstein strategists said in a weekly report, “the muni technical environment was not as supportive as anticipated.”

While the Bloomberg Municipal Index was up “a combined 1.4% in June and July, outperforming the UST Index by 2.5% … August muni performance was negative 1.44%, giving back all of the summer’s positive performance,” they noted.

Despite the month ending in the red, some strengths appeared within the muni market.

Exchange-traded fund net creation in August was “strong” throughout most of the month, “perhaps on the longer-term appeal of safety and an even tighter focus on costs/fees post-pandemic,” Fabian said.

And while scarcity still predominates, tax-exempt issuance had a solid August, up 17% year-over-year but still down 6% year-to-date, he said.

For this year to catch up to 2022, September through December would need to match August’s +17% pace, he said.

September could even prove to be a better month for munis, AllianceBernstein strategists said.

Over the past five years, munis entered September “as cheap as they have been at this point in the year relative to USTs,” they said.

However, the muni market could have a better September than expected due to “a relatively cheap muni market and the likelihood that September net cashflow is expected to be more supportive than usual.”

For the past three years, AllianceBernstein strategists said, September has had an average net issuance of $9.8 billion, meaning bonds exceeded reinvestment cash by $9.8 billion.  This year, the figure is at $1.8 billion, they said.

“With the table set for positive performance, let’s see if muni buyers show up,” they said.

Now may be the time, as summer winds down, for investors to analyze their investments and look for upcoming opportunities, agreed investment strategists Matthew Gastall and Daryl Helsing from Morgan Stanley Wealth Management.

“Summer seasonals are often constructive, and pockets of stability may soon afford investors with opportunities to complete midyear portfolio reviews,” they wrote in an August report.

“We believe it’s strategic that investors look to prudently lock-in some duration/yield,” they continued. 

For instance, they said, adding modest allocations to 11- to 16-year A-rated paper and/or one- to two-year, triple-B-rated paper could lead to earning tax-exempt yields of over 7% for more risk-averse investors subject to high tax brackets.

“These positions may also help to hedge each other,” they said, adding short triple-B-rated paper may provide reinvestment proceeds if interest rates rise.

In addition, they said, higher-duration, A-rated paper may help participants to lock in yields for longer and may experience price appreciation if investors redirect assets toward perceived “safe-haven” instruments, such as municipal bonds.

At the same time, current policy efforts may help to control inflation, while tighter financial conditions may moderate economic growth in the second half of this year, Gastall and Helsing said.

“These possibilities, coupled with the likelihood that the Fed is near the end of its rate-hiking cycle, have raised considerations that interest rates may decline,” they explained. “Currently high short-end yields and the continued possibility for higher rates support our advocacy that clients further maintain some dry powder in cash.”

“Though this summer has been eventful, seasonal dynamics are constructive, market demand is healthy, and pockets of stability may soon afford investors with opportunities to review positioning” and find potential value in municipals, Gastall and Helsing continued.

The two-year muni-to-Treasury ratio Wednesday was at 62%, the three-year at 63%, the five-year at 65%, the 10-year at 69% and the 30-year at 90%, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the two-year at 64%, the three-year at 65%, the five-year at 65%, the 10-year at 68% and the 30-year at 89% at 4 p.m.

Secondary trading
California 5s of 2024 at 3.06%. Florida 5s of 2024 at 3.20%-3.05%. NYC TFA 5s of 2025 at 3.23%-3.21%.

Delaware 5s of 2028 at 2.87% versus 2.89% Tuesday. Maryland 5s of 2029 at 2.94%-2.95% versus 2.93% on 8/29 and 2.98% on 8/24. NYC 5s of 2029 at 3.10% versus 3.12% Tuesday.

NYC TFA 5s of 2032 at 3.18% versus 3.21% Tuesday. Washington 5s of 2034 at 3.17%-3.16%. University of California 5s of 2035 at 2.91%-2.89% versus 2.96% on 8/30 and 3.00% on 8/29.

Michigan Truck Line 5s of 2046 at 4.10% versus 4.12% Tuesday and 4.29%-4.20% original on 8/23. Hillsborough County, Florida, 5s of 2053 at 4.17%-4.04%.

AAA scales
Refinitiv MMD’s scale was cut up to four basis points: The one-year was at 3.25% (unch) and 3.13% (unch) in two years. The five-year was at 2.88% (unch), the 10-year at 2.96% (+2) and the 30-year at 3.92% (+4) at 3 p.m.

The ICE AAA yield curve was cut up to two basis points: 3.26% (unch) in 2024 and 3.19% (+2) in 2025. The five-year was at 2.88% (unch), the 10-year was at 2.89% (+1) and the 30-year was at 3.88% (+1) at 4 p.m.

The S&P Global Market Intelligence (formerly IHS Markit) municipal curve was cut up to four basis points: 3.26% (unch) in 2024 and 3.14% (unch) in 2025. The five-year was at 2.89% (unch), the 10-year was at 2.96% (+2) and the 30-year yield was at 3.91% (+4), according to a 3 p.m. read.

Bloomberg BVAL was cut up one to two basis points: 3.24% (+1) in 2024 and 3.15% (+1) in 2025. The five-year at 2.87% (+1), the 10-year at 2.87% (+1) and the 30-year at 3.87% (+2) at 4 p.m.

Treasuries were weaker 10 years and in.

The two-year UST was yielding 5.021% (+7), the three-year was at 4.741% (+8), the five-year at 4.443% (+7), the 10-year at 4.299% (+4), the 20-year at 4.561% (flat) and the 30-year Treasury was yielding 4.368% (-1) at 4 p.m.

Primary on Tuesday
Citigroup Global Markets priced for Main Street Natural Gas (A3///) $675.470 million of gas supply revenue bonds, Series 2023D, with 5s of 12/2024 at 4.60%, 5s of 2028 at 4.49%, 5s of 2030 at 4.63% and 5s of 5/2054 with a mandatory tender date of 12/1/2030 at 4.68%, callable 9/1/2030.

Primary to come:
The Michigan State Housing Development Authority (Aa2/AA+//) is set to price Thursday $428.440 million of social single-family mortgage revenue bonds, consisting of $286.015 million of non-AMT bonds, Series 2023B; $107.425 million of taxable bonds, Series 2023C; and $35 million of taxable variable rate bonds, Series 2023D. Barclays Capital.

The Arizona Transportation Board (Aa1/AA+//) is set to price Thursday $273.96 million of highway revenue and refunding bonds, Series 2023. Wells Fargo Bank.

The Public Finance Authority is set to price Thursday $171.31 million of student housing revenue bonds (CHF-Manoa, LLC UH Residences for Graduate Students), Senior Series 2023A and Subordinate Series 2023B, consisting of $158.265 million of Series 2023A (/BBB-//), serials 2027-2033, terms 2038, 2043, 2053, 2063, and $13.045 Series 2023B (non-rated), term 2063. Raymond James & Associates.

The Pasadena Independent School District, Texas, is set to price Thursday $166.84 million of unlimited tax school building bonds, Series 2023. Piper Sandler & Co.

The Canadian County Educational Facilities Authority, Oklahoma, (/A+//), is set to price Thursday $125.235 million of educational facilities lease revenue bonds (Mustang Public Schools Project) Series 2023A & 2023B. D.A. Davidson & Co.

The Alaska Housing Finance Corp. (Aa2/AA+//) is set to price Thursday $99.995 million of  State Capital Project Bonds II, 2023 Series A, refunding, serials 2027-2036, term 2037, 2038, 2039, 2040, 2041. Jefferies.

Competitive:
Dane County, Wisconsin, is set to sell Thursday $255 million of GO debt in four deals consisting of $156.48 million of GO corporate purpose bonds, Series 2023B, at 11 a.m., eastern, $65.09 million of GO promissory notes, Series 2023A, at 11 a.m., $22.46 million of GO airport project promissory notes, Series 2023D, subject to AMT, at 11:30 a.m. and $10.55 million of taxable GO promissory notes, Series 2023C, at 11:30 a.m.  

Burlington, Vermont, (Aa3///), is set to sell $150 million of general obligation public improvement bonds, Series 2023A, at 11 a.m., eastern Thursday.