Bonds

Munis firmer as larger primary prices, ignoring massive UST selloff

Municipals were firmer five years and out while an active primary led by two $700-plus million of revenue bonds from the Port of Seattle and the Georgia Ports Authority took the focus away from a massive U.S. Treasury selloff.

U.S. Treasuries saw yields rise 20-plus basis points on bonds seven years and in, while equities were mixed near the close.

As a result, muni-UST ratios fell Tuesday. They were at 62% in five years, 78% in 10 years and 95% in 30 years, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the five at 60%, the 10 at 82% and the 30 at 94% at a 3:30 p.m. read.

In the primary, Citigroup Global Markets priced for the Port of Seattle, Washington, (A1/AA-/AA-/) $792.160 million. The first tranche, $206.865 million of non-AMT intermediate lien revenue refunding bonds, Series 2022A, saw 5s of 8/2025 at 1.69%, 5s of 2027 at 1.84%, 5s of 2032 at 2.45% and 5s of 2033 at 2.59%, callable 8/1/2032.

The second tranche, $585.295 million of private activity AMT intermediate lien revenue and refunding bonds, Series 2022B, saw 5s of 8/2023 at 1.81%, 5s of 2027 at 2.44%, 5s of 2032 at 3.06%, 5s of 2037 at 3.50%, 5s of 2042 at 3.76%, 4s of 2047 at 4.14%, 5s of 2047 at 3.88% and 5.5s of 2047 at 3.77%, callable 8/1/2032.

“When Port of Seattle issued bonds in June 2021, the 10-year AMT bonds (non-callable 5% 8/1/31) were priced at +57. They are currently evaluated by BVAL at +84. The 10-year non-AMT bonds (non-callable 5% 6/1/31) were priced at +34 and are evaluated by BVAL at +53. The longest maturity in the taxable series was the 2.148% 8/1/31, which was priced at +56 and is quoted now at +151,” said CreditSights strategists Pat Luby and John Ceffalio.

Given last weekʼs negative GDP report for the second quarter, they “expect that airport bond spreads may weaken, and with Seattleʼs recovery lagging behind the national average, the new bonds may need to be priced wider to attract buyers.”

Generally, they believe “the airport sector to underperform the broader market in the near-term, but we also expect that non-AMT airport bonds will perform better than bonds that are subject to the AMT.”

BofA Securities priced for the Georgia Ports Authority (Aa2/AA//) $757.530 million of revenue bonds, Series 2022, with 5s of 7/2023 at 1.42%, 5s of 2027 at 1.76%, 5s of 2032 at 2.31%, 5s of 2037 at 2.86%, 5s of 2042 at 3.24%, 4s of 2047 at 3.89%, 5s of 2047 at 3.35%, 4s of 2052 at 3.92% and 5.25s of 2052 at 3.37%, callable 7/1/2032.

The authority’s inaugural sale in 2021 had no problem getting placed, Luby and Ceffalio said, noting the 10-year noncallable bonds (5s of 7/2031) were sold at +22 and the longest term bond (4s of 7/2051, callable 7/1/31 at par) were priced at +50.

“Those two bonds are now evaluated by BVAL at +25 and +109, respectively. Bonds from that issue have traded regularly, and there was a block trade reported July 28: a purchase from a customer” of $5 million for 3s of 7/2046 at +100, they said. “Those bonds were originally priced at+84 and were evaluated by BVAL at +117 as of July 27,” they added.

Bonds from the port’s first issue are held by more than 100 institutional investors, per Bloomberg data. Most of these investors hold less than $1 million each, so CreditSights expects”the new bonds will attract add-on demand from those investors. We expect that the short maturities (due in 10-years and less) will draw the strongest demand … and get priced aggressively.”

Morgan Stanley priced for the Michigan State Building Authority (A2//AA/) $146.460 million of tax-exempt facilities program revenue bonds, Series I, with 5s of 10/2022 at 1.40%, 5s of 2037 at 2.93%, 5s of 2042 at 3.32%, 5s of 2047 at 3.32%, 4s of 2052 at 3.95% and 5.25s of 2057 at 3.52%, callable 10/15/2032.

In the competitive, Miami-Dade County, Florida, (Aa3/AA//) sold $88.060 million of tax-exempt capital asset acquisition special obligation revenue bonds, Series A, to Morgan Stanley, with 5s of 4/2023 at 1.37%, 5s of 2027 at 1.85%, 5s of 2032 at 2.43%, 5s of 2037 at 2.90%, 5s of 2042 at 3.20%, 5s of 2046 at 3.3.% and 5s of 2052 at 3.37%, callable 4/1/2032.

Last week, munis and USTs rallied in the shadow of the Federal Reserve’s latest 75 basis point rate hike, said Matt Fabian, a partner at Municipal Market Analytics.

Tax-exempt benchmark triple-A curves improved on the offered side, “highlighting a much more confident tone as buying for the huge … August reinvestment began,” which is about $37 billion, he said.

Relative value ratios were mostly lower, “save at intermediate maturity where the very thin municipal primary calendar” of just $1.4 billion issues, “may have limited our market’s price discovery,” Fabian said.

Further suppressing supply was only minimal mutual fund flows. The Investment Company Institute and Refinitiv Lipper most recently reported $602 billion of outflows and $236 billion of inflows, respectively.

“So reinvestors wanting to get ahead of this week’s wave of principal maturities needed to source bonds from opportunistic trading accounts: this dynamic a meaningful driver of strong nominal and relative return and a likely spread tightener,” he said.

Fabian noted this dynamic improved trading prices for low-coupon tax-exempts, as 61% of long 2s and 12% of long 3s sold by customers totaled less than 85 cents.

He expects issuers and sellers to benefit again this week from tighter spreads and “at least temporarily” scare product.

No Fed pivot?
While the markets expect the Federal Reserve to need to begin cutting rates next year as economic growth slows, emerging voices suggest that won’t happen as soon as expected.

“We strongly push back against the idea that the Fed will be cutting rates in 2023,” said Ryan Swift a U.S. bond strategist at BCA Research. While he sees inflation waning, wage growth figures suggest stickiness that will keep it above the Fed’s 2% goal.

“Our sense is that it will be difficult to push the unemployment rate up significantly even as economic activity slows,” he said.

Also in contrast with the markets, Scott Ruesterholz, a portfolio manager at Insight Investment, said he sees “rate cuts as a long way off as we expect inflation to remain high, above 5% until at least Q2 2023.”

Fed officials, he said, have clearly stated their priority is taming inflation.

“The market appears to consider recession risks as a reason for future rate cuts,” Ruesterholz said. “However, the Fed’s aim is to slow growth and normalize frothy financial conditions, so achieving those goals (in and of themselves) is unlikely to be enough to spark rate cuts in our view.”

In a Bond Buyer podcast, John Luke Tyner, fixed income analyst at Aptus Capital Advisors, said, “I think it’s going to take longer than the market thinks or anticipates in order to slow inflation down to a reasonable level. And so I don’t really trust that we’ll get those quick cuts as early as Q1 of 2023.”

Payden & Rygel in a commentary said, “The current rosy scenario markets are anticipating is, in our view, the least likely outcome. Core inflation is uncomfortably high and rising, and the employment component of the Fed’s dual mandate appears to be holding up, at least for now, meaning we’re likely in for more hikes, not fewer.”

Secondary trading
Prince George’s County, Maryland, 5s of 2023 at 1.50%-1.42%. Nevada 5s of 2024 at 1.38%-1.50% versus 1.61% Monday. Washington 5s of 2025 at 1.66%.

Triborough Bridge and Tunnel Authority 5s of 2029 at 2.07%. California 5s of 2030 at 2.07% versus 2.15% Thursday. Georgia 5s of 2031 at 2.10%.

DC 5s of 2035 at 2.55% versus 2.67%-2.68% Thursday and 3.11% original (on 7/13). NYC TFA 5s of 2036 at 2.79%-2.78% versus 2.87%-2.90% Monday and 2.97% Thursday. Tarrant County College District, Texas, 5s of 2036 at 2.63% versus 2.67% Monday.

California 5s of 2041 at 2.77%-2.70% versus 2.85% Monday. DC 5s of 2042 at 2.92% versus 3.09% Monday and 3.33% original (on 7/13).

DC 5s of 2047 at 3.07%-3.09% versus 3.15% Friday and 3.21% Wednesday. Massachusetts 5s of 2048 at 3.15%. LA DWP 5s of 2052 at 3.02% versus 3.09%-3.07% Friday.

AAA scales
Refinitiv MMD’s scale was mixed at 3 p.m. read: the one-year at 1.44% (+3) and 1.61% (unch) in two years. The five-year at 1.76% (-3), the 10-year at 2.14% (-5) and the 30-year at 2.83% (-4).

The ICE AAA yield curve was bumped up to four basis points: 1.47% (flat) in 2023 and 1.57% (-1) in 2024. The five-year at 1.73% (-4), the 10-year was at 2.20% (-4) and the 30-year yield was at 2.38% (-4) at 3:30 p.m.

The IHS Markit municipal curve saw bumps five years and out: 1.41% (+3) in 2023 and 1.62% (unch) in 2024. The five-year was at 1.75% (-4), the 10-year was at 2.14% (-4) and the 30-year yield was at 2.82% (-4) at a 3 p.m. read.

Bloomberg BVAL was bumped up to six basis points: 1.32% (unch) in 2023 and 1.56% (unch) in 2024. The five-year at 1.75% (-3), the 10-year at 2.16% (-6) and the 30-year at 2.80% (-4) at 3:30 p.m.

Treasuries sold off.

The two-year UST was yielding 3.079% (+21), the three-year was at 3.032% (+23), the five-year at 2.863% (+24), the seven-year 2.831% (+21), the 10-year yielding 2.756% (+18), the 20-year at 3.226% (+11) and the 30-year Treasury was yielding 3.011% (+9) near the close.

Primary to come:
The Tarrant County Culture Education Facilities Finance Corporation, Texas, (A1//A+/) is set to price Thursday $323.615 million of Christus Health bonds, consisting of $300 million of revenue bonds, Series 2022A and $23.615 million of revenue refunding bonds, Series 2022B. RBC Capital Markets.

The Forney Independent School District, Texas, is set to price Wednesday $283.785 million of unlimited tax school building bonds (/AAA//), Series 2022B, serials 2033-2042, terms 2047 and 2052, insured by the Permanent School Fund Guarantee Program. Raymond James & Associates.

The Private Colleges and Universities Authority, Georgia, (Aa2/AA//) is set to price Wednesday $101.960 million of Emory University fixed rate revenue bonds, Series 2022A. Goldman Sachs & Co. 

Gary Siegel contributed to this story.

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