Munis sell off as larger primary weighs

Municipals sold off Tuesday with secondary trading showing weaker prints across the curve leading to up to 20 basis point cuts to scales with the largest losses up front.

Municipal outperformance to U.S. Treasuries ended Tuesday as the market began to digest a larger new-issue calendar on tax-filing deadline day.

Muni yields were cut 12 to 20 basis points, depending on the scale while Treasuries ended the session little changed. Municipal to UST ratios ticked up as a result.

The two-year muni-Treasury ratio was at 58%, the three-year at 60%, the five-year at 62%, the 10-year at 64% and the 30-year at 89%, according to Refinitiv MMD’s 3 p.m. ET read. ICE Data Services had the two-year at 61%, three-year at 61%, the five-year at 60%, the 10-year at 64% and the 30-year at 89% at 4 p.m.

Several new-issues got under way Tuesday that put pressure on the secondary.

In the primary market, BofA Securities priced for the Bay Area Toll Authority, California, (Aa3/AA/AA/NR/) $388.695 million of San Francisco Bay Area Toll Bridge fixed-rate revenue bonds, 2023 Series F-1, with 5s of 4/2024 at 2.50%,5s of 2028 at 2.28%, 5s of 2033 at 2.36%, 5s of 2054 at 3.78% and 5.25s of 2054 at 3.72%, callable 4/1/2033.

Citigroup Global Markets priced for the SSM Health Care Corp. (NR/A+/AA-/NR/) $300 million of taxable corporate CUSIP refunding bonds, Series 2023, with 4.894s of 6/2028 pricing at par, callable 3/1/2028.

Ramirez & Co. priced for the Northside Independent School District, Texas, (Aaa//AAA/) $200 million of PSF-insured variable rate unlimited tax school building bonds, Series 2023B, with 3s of 8/2053 pricing at par, noncall.

In the competitive market, Boulder Valley School District #RE-2, Colorado, (Aa1/AA+//) sold $187.335 million of GOs, Series 2023, with 5s of 12/2023 at 2.80%, 5.5s of 2028 at 2.38%, 5s of 2033 at 2.50%, 5s of 2038 at 3.25%, 4.125s of 2043 at 4.04%, 4.125s of 2046 at par and 4.25s of 2052 at par, callable 12/1/2033.

Pre-marketing for Illinois’ $2.45 billion general obligation deal distributed Tuesday offered the one-year at a spread of plus-95 basis points, the 10-year at 125 bps, and a 2047 maturity at 135 bps with the 2048 offered at a higher spread but with a lower coupon. That’s wide to where the state’s bonds have been trading in the secondary market on the short end, in-line with the 10-year and narrower on the long end.  

The state’s one-, 10-, and 25-year maturities are currently trading at 55/125/145 basis points, respectively, to the Municipal Market Data’s AAA benchmark. That shows a 20 bp narrowing from the 75/145/165 bp spreads of one month ago.

Spreads in mid-February began trending down — at 110/163/175 bps — after rising to 120/173/185 in mid-January. In mid-December spreads were at 100/163/175.

Secondary trading
Massachusetts 5s of 2024 at 2.69%. NYC TFA 5s of 2024 at 2.84%. Hawaii 5s of 2025 at 2.63%. University of California 5s of 2025 at 2.25%-2.27% versus 2.26%-2.24% Monday and 2.20% on 4/13.

Washington 5s of 2027 at 2.45%. North Carolina 5s of 2027 at 2.21%. Triborough Bridge and Tunnel Authority 5s of 2028 at 2.45%-2.44%.

California 5s of 2031 at 2.34% versus 2.09%-2.10% on 4/12 and 2.26% original on 4/6. Anne Arundel County, Maryland, 5s of 2032 at 2.27%. New Mexico 5s of 2032 at 2.39%-2.38%.

Huntsville, Alabama, 5s of 2043 at 3.48% versus 3.15%-3.11% on 4/6. Anne Arundel County, Maryland, 5s of 2043 at 3.21%. Charleston waters, South Carolina, 5s of 2047 at 3.48% versus 3.28% on 4/5 and 3.52% on 3/23.

AAA scales
Refinitiv MMD’s scale was cut 15 to 18 basis points: The one-year was at 2.62% (+18) and 2.43% (+15) in two years. The five-year was at 2.28% (+15), the 10-year at 2.30% (+15) and the 30-year at 3.38% (+15) at 3 p.m.

The ICE AAA yield curve was cut 12 to 20 basis points: 2.71% (+20) in 2024 and 2.55% (+17) in 2025. The five-year was at 2.24% (+13), the 10-year was at 2.26% (+12) and the 30-year was at 3.40% (+12) at 4 p.m.

The IHS Markit municipal curve was cut 14 to 17 basis points: 2.60% (+17) in 2024 and 2.41% (+14) in 2025. The five-year was at 2.27% (+14), the 10-year was at 2.27% (+14) and the 30-year yield was at 3.36% (+14), according to a 4 p.m. read.

Bloomberg BVAL was cut 14 to 17 basis points: 2.56% (+17) in 2024 and 2.47% (+16) in 2025. The five-year at 2.23% (+14), the 10-year at 2.28% (+15) and the 30-year at 3.37% (+15) at 4 p.m.

Treasuries were little changed.

Tax-exempt demand
As “taxpayers are interested in how they can minimize the taxes they owe,” Joseph Kalish, chief global macro strategist for Ned Davis Research, said some may turn to tax-exempt munis.

Unlike last year when munis were relatively attractive, he said this year munis are “uncompelling,” even for investors in the top tax bracket.

However, he noted, “investors in high tax states, such as California and New York, will find munis more compelling if they buy their own debt.”

Munis have outperformed “most other fixed income sectors over the past 12 months due to better valuations and reduced supply,” according to Kalish, which has made them less compelling this year.

“For maturities less than 10 years, munis are expensive relative to comparable maturity Treasuries for investors in the top tax bracket,” he said.

For “many retirees, who don’t want the interest rate risk,” he said they should focus on shorter maturities.

Meanwhile, “corporate investors, such as insurance companies, who can stomach longer-dated securities, have a lower 21% tax rate,” will only find munis attractive going out 30 years,” Kalish said.

Similarly, he said “munis are expensive relative to most corporates of similar quality across the term structure.”

Kalish said that munis are “still attractive relative to utility dividends.”

As rates rose in 2022, issuance of new munis decreased.

“The amount of municipal debt outstanding contracted at a 5% annual rate in Q4,” resulting in “the existing stock of munis became more valuable and more expensive,” according to Kalish.

That has “created a favorable technical picture, with munis outperforming its taxable counterpart,” he said.

If investors are not the top 37% tax bracket, he said munis don’t make sense. 

Primary market
Illinois (A3/A-/BBB+/) is set to price $2.45 billion of taxable and tax-exempt general obligation bonds in four series maturing from 2024 to 2037. Wells Fargo Bank.

Energy Southeast (A1//A+/) is set to price $846.8 million of energy supply revenue bonds in a two-pronged deal consisting of both fixed-rated and index-rate bonds. Morgan Stanley & Co.

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 Bay Area Toll Authority is set to price $500 million of toll bridge revenue bonds (A3/AA-/AA-/) and fixed-rated subordinate bonds (A1/AA-/AA-/) Wednesday. BofA Securities.

Austin, Texas, (Aa3/AA-/AA-/) is set to price $428.1 million of electric utility system revenue refunding and improvement bonds, serials 2025 to 2034, terms in 2048 and 2053, Wednesday. Barclays Capital.

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 Massachusetts Water Resources Authority (Aa1/AA+/AA+/) is set to price $325 million of general revenue and refunding green bonds Wednesday. BofA Securities.

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.

Texas (Aaa//) is set to price $250 million of bonds for the Texas Veterans Land Board Wednesday. Jefferies LLC.

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 Northside Independent School District is set to price $200 million of variable rate unlimited tax school building bonds, PSF insured. Term 2053. Ramirez & Co.

The Arizona Board of Regents (Aa2/AA//) is set to price $190.33 million of taxable and tax-exempt system revenue bonds on behalf of Arizona State University Wednesday. Tax-exempt Series 2023 A consists of green bonds, and Series 2023 C is taxable. JPMorgan Securities 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.

Wake County, North Carolina, (Aa1/AA+/AA+/) is set to price $115.9 million of limited obligation bonds Wednesday. Serials 2024 to 2041. BofA Securities.

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 Monmouth County, N.J., Improvement Authority is set to price $104.2 million of government pool loan project notes Wednesday. Mature in 2024. Raymond James & Associates.

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.

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

Williamson County, Texas, (Aaa//AAA/) is set to sell $150 million of GOs Wednesday.

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