Bonds

Munis ignore higher UST yields; Investors await Washington GOs

Municipals were little changed Monday as investors awaited a larger new-issue calendar that kicks off with $800 million-plus Washington general obligation bonds in the competitive market Tuesday. Munis ignored the moves to higher yields in U.S. Treasuries while equities were down.

Triple-A yields were steady while USTs moved three to eight basis points higher.

Muni to UST ratios fell slightly as a result, sitting at 65% in five years, 82% in 10 years and 95% in 30 years, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the five at 64%, the 10 at 84% and the 30 at 96% at a 3:30 p.m. read.

“The market finds itself at mid-month registering a best-in-asset class gain of 1.4% — outperforming USTs and credit indices,” noted Kim Olsan, senior vice president at FHN Financial.

A stronger front-end curve this month has created a steeper slope of nearly 160 basis points, “creating some extension opportunity but with caveats attached,” she said.

The first 15 years of the scale, offering 80% of the full slope’s value, comes up against richer ratios in this range, Olsan said, “while more indicative value has developed on the back end of the curve with lessened demand.”

Positive second-half municipal returns won’t be enough to offset the major losses of the first half, noted Vikram Rai, head of Citi’s municipal strategy group. The deeply negative returns mostly have been due to “absolute yield increases and fund outflows,” he said.

Rai noted that while fund outflows have moderated and a return to inflows was seen last week, it is difficult to say for certain whether these developments can be sustained.

With a heightened recession risk hanging overhead now, investors tend to be more reactive to those concerns.

Past recessions — including the three experienced since 2001 — corresponded to or overlapped with municipal bond mutual fund outflows. “I’d be surprised if we run into a recession that we don’t see outflows,” Rai said.

But while outflows have been fairly persistent this year, “one of the brighter spots was the pool of non-traditional buyers,” said Eric Kazatsky head of municipal strategy at Bloomberg Intelligence.

Banks and insurance companies returned to “municipal bond waters” as levels looked more attractive than corporates.

“Yet one concern would be that any improved liquidity provided by these buyers could dissipate if ratios continue to track lower (richer),” he said.

Kazatsky said ratios of double-A- and single-A-rated tax-backed and revenue-backed munis to their corporate equivalents “show these, while off their recent highs from May, are actually hanging close to their multiyear averages.”

And compared with those averages, the ratio of double-A revenue munis to double-A corporates seem to hold the best relative value. “The current ratio of 70% is three percentage points above average, compared with almost 20 below during the summer of 2021,” he said.

Rai sees positive momentum for the next six months. Overall municipal should see better performance led by non-triple-A paper, with yields falling and spreads tightening there.

All else being equal, Rai said, high-yield should see spread-tightening and better returns, leading overall better performance for the asset class.

High-grade Washington on its way
Investors have been favoring high grades of late and this should bode well for the state of Washington’s $848 million of general obligation bonds in four deals ($140 million of which are taxable) coming in the competitive market Tuesday.

Washington’s 10-year GO benchmark has widened by 7 basis points since the end of 2017, but is only 2 basis points wider than where it was at the end of 2019, noted CreditSights’ Pat Luby and John Ceffalio.

The 10-year has been trading in a range of +8 to +15 in recent sessions, they said.

“Without natural in-state buyers, Washington’s bonds should be expected to be more volatile than bonds from similarly rated states,” Luby and Ceffalio said. “For national buyers, the wider spreads and higher yields of this sub-sovereign GO bond could help them to outperform their peers when market conditions stabilize.”

In terms of supply by issue type, GO volume is down 14% this year and state GO sales have declined as well, noted FHN’s Olsan. Budget surpluses are the main reason for reduced market issuance in tax-exempts, she said.

“Much like other states foregoing debt issuance or reducing needs on solid tax collections, Washington realized a 3.4% gain in personal income taxes in 2021 from 2020,” she said, noting the national average was 3.1% per Pew Trusts.

Part of the dearth of that supply is showing that state returns are well outpacing the broad market this year. An ICE BofA State index is down 5.7% this year vs. a main index loss of 7.7%, Olsan noted. 

“That outperformance can be partially tracked to larger demand among mainstay credits in a risk-aversion theme,” she said.

State GOs “should be a core holding of most muni bond portfolios but should be expected to underperform local GOs and the broad market in more stable market environments when investors are more comfortable pursuing credit risk,” Luby and Ceffalio said. “In the near term, we expect the state GOs will hold in better than the broad market and will outperform the muni index.”

Secondary trading
NYC TFA 5s of 2024 at 1.78% versus 1.80% Friday. Washington 5s of 2025 at 1.73%-1.77%. Prince George’s County, Maryland, 5s of 2025 at 1.81%. California 5s of 2025 at 1.89%-1.85%.

Connecticut 5s of 2028 at 2.26% versus 2.29% Wednesday. Triborough Bridge and Tunnel Authority 5s of 2028 at 2.22%-2.20% versus 2.24% Tuesday. Triborough Bridge and Tunnel Authority 5s of 2029 at 2.41% versus 2.44% Friday.

Florida 5s of 2032 at 2.54%-2.51%. North Carolina 5s of 2033 at 2.74%-2.75%. Maryland 5s of 2033 at 2.63%. District of Columbia 5s of 2033 at 2.68% versus 2.74% Wednesday. NYC 5s of 2034 at 3.19%.

LA DWP 5s of 2051 at 3.29% versus 3.31% Friday.

AAA scales
Refinitiv MMD’s scale was unchanged at the 3 p.m. read: the one-year at 1.40% and 1.70% in two years. The five-year at 2.00%, the 10-year at 2.44% and the 30-year at 2.98%.

The ICE municipal yield curve was cut a basis point in spots: 1.44% (flat) in 2023 and 1.74% (flat) in 2024. The five-year at 1.99% (flat), the 10-year was at 2.47% (+1) and the 30-year yield was at 3.02% (+1) near the close.

The IHS Markit municipal curve was unchanged: 1.40% in 2023 and 1.72% in 2024. The five-year was at 2.00%, the 10-year was at 2.44% and the 30-year yield was at 2.98% at a 4 p.m. read.

Bloomberg BVAL was unchanged: 1.45% in 2023 and 1.73% in 2024. The five-year at 2.02%, the 10-year at 2.49% and the 30-year at 2.99% at 3:20 p.m.

Treasuries were weaker.

The two-year UST was yielding 3.164% (+4), the three-year was at 3.161% (+3), the five-year at 3.077% (+4), the seven-year 3.061% (+5), the 10-year yielding 2.965% (+5), the 20-year at 3.405% (+8) and the 30-year Treasury was yielding 3.140% (+6) at 3:25 p.m.

Primary to come
The Main Street Natural Gas, Inc, Georgia, (A3///) is set to price Tuesday $709.785 million of gas supply revenue bonds, Series 2022B, serials 2024-2029, term 2052. Citigroup Global Markets.

The New York City Transitional Finance Authority (Aa2/AA/AA/) is set to price Wednesday $557.285 million of tax-exempt building aid revenue bonds, Fiscal 2023 Series S-1, Subseries S-1A, serials 2023-2042. RBC Capital Markets.

The Metropolitan Water District of Southern California (Aa1/AAA//) is set to price Wednesday $251.780 million of water revenue refunding bonds, 2022 Series B, serials 2026-2040. Siebert Williams Shank & Co.

The district (/AAA/AA+/) also is set to price Wednesday $135.420 million of taxable special variable rate water revenue refunding bonds, 2022 Series C. Goldman Sachs & Co.

The Humble Independent School District, Texas, is set to price Thursday $181.700 million of unlimited tax school building bonds, Series 2022, insured by the Permanent School Fund Guarantee Program. Jefferies.

The New York City Housing Development Corporation (Aa2/AA+//) is set to price Thursday $181.670 million of sustainable development multi-family housing revenue bonds, 2022 Series E. Barclays Capital.

The Cypress-Fairbanks Independent School District, Texas, (Aaa//AAA/) is set to price Tuesday $127.890 million of unlimited tax refunding series, Series 2022, insured by the Permanent School Fund Guarantee Program. Piper Sandler & Co.

The McKinney Independent School District, Texas, (Aaa/AAA//) is set to price Thursday $108.030 million of unlimited tax school building and refunding bonds, Series 2022,  insured by the Permanent School Fund Guarantee Program. Piper Sandler & Co.

The Indiana Finance Authority (/A-/A/) is set to price Wednesday $100 million of Reid Health hospital revenue bonds, Series 2022. Morgan Stanley & Co.

Competitive:
Washington (Aaa/AA+/AA+/) is set to sell $140.130 million of taxable general obligation bonds, Series 2023T, at 11:45 a.m. eastern Tuesday. 

Washington (Aaa/AA+/AA+/) is set to sell $213.825 million of various purpose general obligation bonds, Series 2023A, Bidding Group 3, at 11:15 a.m. Tuesday.

Washington (Aaa/AA+/AA+/) is set to sell $243.375 million of various purpose general obligation bonds, Series 2023A, Bidding Group 1, at 10:15 a.m. Tuesday.

Washington (Aaa/AA+/AA+/) is set to sell $250.300 million of various purpose general obligation bonds, Series 2023A, Bidding Group 2, at 10:45 a.m. Tuesday.

The Metropolitan Government of Nashville, Tennessee, (Aa2/AA/) is set to sell $286.325 million of general obligation improvement bonds, Series 2022B, at 11:30 a.m. eastern Wednesday.

The Metropolitan Government of Nashville, Tennessee, (Aa2/AA/) is set to sell $334.045 million of general obligation improvement bonds, Series 2022A, at 11 a.m. Wednesday.

The New York State Thruway Authority is set to sell $436.450 million of tax-exempt climate bond certified state personal income tax revenue green bonds Series 2022C, Bidding Group 1, at 10:30 a.m. eastern Thursday.

The New York State Thruway Authority is set to sell $296.495 million of tax-exempt climate bond certified state personal income tax revenue green bonds Series 2022C, Bidding Group 2, at 11 a.m. Thursday.

Miami-Dade County Public Schools is set to sell $400 million of tax anticipation notes, Series 2022, at 11 a.m. Thursday.

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