Munis end with largest increase in yields in a week since COVID-induced turmoil

Municipals ended weaker Friday with triple-A benchmark curves rising the most in a week since COVID-19 disrupted all markets in March and April of last year.

Muni yields rose another five basis points on the 10- and 30-year Friday, bringing the total cuts to scales to 18 and 17 basis points, respectively, from Tuesday as the asset class moved closer to U.S. Treasury movements after lagging weakness in taxables since the start of the year. Treasury yields hit 1.35% in 10-years and 2.15% in 30 after news of stimulus out of Washington gaining ground.

“In the past several days, tax-exempts have finally started to react, and while it remains to be seen if the adjustment will be minor or a bigger move, an overall defensive portfolio stance is warranted,” said Mikhail Foux, municipal strategist at Barclays. “At the current extremely low ratios, one could consider whether to buy extremely rich high-quality tax-exempts or simply purchase Treasuries instead, which even accounting for the tax-exemption make more sense, especially for short and medium-dated bonds.”

“We believe that tax-exempts cannot remain this rich forever,” Mikhail wrote. “Technicals will likely change down the line, even if supply does not dramatically pick up; or we could simply see tax-exempts reacting to higher rates, as it makes less and less sense for investors to hold them at current ratios.”

Municipal to U.S. Treasuries — while still historically low — rose again, two basis points to 66% in 10 years (12 basis points higher than Tuesday) and steady at 71% in 30 years (six basis points higher), according to Refinitiv MMD. ICE Data Services showed ratios rose two basis points to 64% in 10 years and steady 72% in 30. BVAL showed 10-year ratios rose three basis points to 62% and were two basis points higher at 74% in 30 years.

Another muni alternative would be buying taxables, which could also provide shelter from local taxes (i.e. from state taxes), Barclays noted.

“Consequently, we see strong demand for high-quality taxables, which are quite cheap compared with tax-exempts, although AAA spreads have tightened to the tightest levels ever,” Mikhail wrote.

Taxables have been enjoying several months of very strong performance, but if ratios remain low, there could be increased demand for this product from traditional taxable, as well as from some tax-exempt, investors. This would help taxables outperform corporates, as they did in the past two months, the report noted.

Supply picks up the week of Feb. 22 with large issues out of California and high-grade competitive deals from Maryland and gilt-edged Mecklenburg County, North Carolina.

Municipal volume is estimated at $9.97 billion, up from total sales of $3.81 billion this week. There are $8.404 billion of negotiated deals versus a revised $2.41 billion that were sold this week. Bonds scheduled for competitive sale next week total $1.56 billion compared with $1.41 billion this week. Full new-issue list below.

It remains to be seen how the weakness will impact the pricing of the large new deals slated to arrive next week — including the mammoth California higher education deal expected to be priced next Thursday. The Regents of the University of California is coming to market with a two part deal — the larger of which is a $1.6 billion revenue bond offering, as well as a $1.4 billion certificates of participation portion.

Among the other large deals expected to arrive is a $523 million New York City Municipal Water Finance Authority GO offering slated for Tuesday.

Large deals have been oversubscribed for months amid investors’ insatiable appetite for tax-exempt paper.

“The municipal market has been in a good place for several weeks,” Jim Colby, portfolio manager and strategist at Van Eck said Friday.

Colby said current market technicals continue to aid overall market tone and activity.

“With a continuation of inflows — some $2 billion per week for 15 weeks — and supply limited by normal seasonal issues and holiday interruptions, prices have risen, new issues have sold out, and normal valuation metrics, such as muni to Treasury ratios, have been set aside to accommodate the interest in exempt coupons,” Colby said.

In addition, he noted the rising Treasury market could influence more municipal demand.

“Currently, we are seeing a rate adjustment which, perhaps a response to the bear steepening of the Treasury curve, will make re-entry points more palatable for all investors,” Colby said. “With a heavy dose of taxable municipal issuance undercutting overall exempt issuance, I don’t see that demand will do anything but strongly underpin the supply-needy muni market for a while to come.”

Secondary market
Trades showed the moves to higher yields.

New York City general obligation bonds, 5s of 2024, traded at 0.40%. San Francisco BART green bonds, 5s of 2025 at 0.35%. Anne Arundel County, Maryland 5s of 2027 at 0.63%. Henrico County, Virginia 5s of 2028 traded at 0.63%.

Fairfax County, Virginia, 5s of 2030 traded at 0.92%-0.90% versus 0.67% on Feb. 9. New York City Transitional Finance Authority future tax-secured 5s of 2031 at 1.14%-1.13%. Fairfax County, Virginia 5s of 2031 at 0.95%, Arlington County, Virginia 4s of 2032 at 1.04%-1.03%.

Austin, Texas ISD 4s of 2033 traded at 1.13%. Washington GOs, 5s of 2034 at 1.14%. LA DWP 5s of 2034 at 1.10%-1.09%. Metro Nashville and Davidson Counties, Tennessee 5s of 2035 at 1.25% versus 1.09%-1.07% on Jan. 28. LA DWP 5s of 2037 at 1.23%-1.22%.

New York City TFAs, 4s of 2041 at 2.00% versus 1.82%-1.74% and 1.69%-1.68% on Feb. 11. New York City water, 5s of 2041 traded at 1.60% versus 1.54% on Thursday.

Washington GOs, 5s of 2043, traded at 1.60%. They were trading at 1.45%-1.40% in late January.

New York City TFA 4s of 2046 at 2.17%-2.16%.

High-grade municipals were weaker across the scale, according to final readings on Refinitiv MMD’s AAA benchmark scale. Short yields were at 0.06% in 2022 and rose two basis points to 0.12% in 2023. The 10-year rose to 0.82% and the 30-year to 1.48%.

The ICE AAA municipal yield curve showed short maturities at 0.08% in 2022 and 0.14% in 2023. The 10-year rose five basis points to 0.85% while the 30-year yield rose five to 1.53%.

The IHS Markit municipal analytics AAA curve showed yields at 0.10% in 2022 and at 0.11% in 2023 while the 10-year rose four basis points to 0.80% and to 30-year rose five to 1.49%.

The Bloomberg BVAL AAA curve showed yields at 0.08% in 2022 and up one basis point to 0.12% in 2023, while the 10-year rose five basis points to 0.84%, and the 30-year yield rose three basis points to 1.52%.

The three-month Treasury note was yielding 0.09%, the 10-year Treasury was yielding 1.35% and the 30-year Treasury was yielding 2.15% near the close. Equities ended the day mixed with the Dow up 53 points, the S&P 500 off 0.03% and the Nasdaq up 0.15%.

Existing home sales rise
Existing home sales rose 0.6% in January to a seasonally adjusted pace of 6.69 million from December’s 6.65 million unit rate.

Economists polled by IFR Markets expected a 6.60 million rate.

The median price of a home slipped to $303,900 in January from $309,200 in December and the average price declined to $337,700 from $342,000.

The number of houses on the market also fell, to 1.040 million from 1.060 million.

“Overall, low housing supply and rising prices continue to be a constraint on an even higher sales pace,” said Mortgage Bankers Association VP of Economic and Industry Forecasting Joel Kan. “The number of homes for sale declined yet again, falling to a record low of 1.04 million units — a 1.9-months’ worth of supply. The median sales price has come down from a record high in October, but at $303,900, it was still 14% higher than a year ago. Tight inventory levels continue to create a competitive market for buyers and are pushing prices higher.”

Separately, Federal Reserve Bank of Boston President Eric Rosengren expects “a robust economic recovery” in the second half as long as a sufficient number of Americans are inoculated by mid-summer.

The economy needs to be rebuilt “in a more inclusive way,” he said, as the “uneven nature of this downturn” suggests.

Since monetary policy hit the zero lower bound, Rosengren said, “fiscal policy is the most effective option” for economic support. “From my perspective, both the monetary and fiscal policy responses have been quite appropriate, given the severity of the public-health-induced economic crisis.”

The Fed released the semi-annual report to Congress ahead of Chair Jerome Powell’s testimony next week.

“Monetary policy will continue to deliver powerful support to the economy until the recovery is complete,” according to the report.

The Fed’s latest Summary of Economic Projections shows the fed funds rate target remaining in a range of zero
to 0.25% until 2023 and it will continue buying $120 billion of securities a month until it sees “substantial” progress toward reaching its dual mandate of stable prices and maximum employment.

Primary market

NYC to sell $1.8B of bonds in March
New York City is planning to sell around $1.8 billion of general obligation bonds in March.

The deals will be made up of about $1.25 billion of tax-exempt fixed-rate bonds, $200 million of taxable fixed-rate bonds, $85 million of tax-exempt stepped-coupon bonds and $260 million of adjustable-rate remarketed securities.

About $1.1 billion of the proceeds will be used to fund capital projects while about $695 million will be used to convert existing bonds to other interest-rate modes.

On Wednesday, March 3, the tax-exempt deal will be priced after a two-day retail order period starting on Monday, March 1. Book-running lead manager is BofA Securities with Citigroup, JPMorgan Securities, Jefferies, Loop Capital Markets, Ramirez & Co., RBC Capital Markets, Siebert Williams Shank and Wells Fargo Securities serving as co-senior managers.

Also on March 3, the city will competitively sell $200 million of taxable fixed-rate bonds.

On March 4, an underwriting syndicate led by Jefferies is expected to price the city’s $85 million of tax-exempt stepped-coupon bonds.

During the week of March 22, Barclays and BofA are expected to remarket the city’s $260 million of ARRS

Primary week of Feb. 22
The Regents of the University of California (Aa2/AA/AA/) has several large deals with Jefferies LLC running the books on all of them.

It is set to price $1.09 billion taxable general revenue bonds in two series. The first, $615.6 million, serials 2022-2041, term 2051. The second series, $475 million, serials in 2051.

The Regents of the University of California will also price $892.9 million of limited project revenue bonds 2021 Series Q (Aa3/AA-/AA-/), serials 2022, 2024, 2032-2041, terms 2046, 2051 and 2056.

The Regents of the University of California will price $448.9 million of taxable limited project revenue bonds 2021 Series R (Aa3/AA-/AA-/), serials 2022-2041, term 2051.

The Regents of the University of California is set to price $397.4 million of limited project forward delivery revenue bonds 2022 Series S (Aa3/AA-/AA-/, serials 2023-2042.

The Regents of the University of California (Aa2/AA/AA/) is set to price $289.8 million of general revenue bonds 2021 Series BH, serials 2022-2041, terms 2046, 2051.

The San Diego County Regional Transportation Commission (//AA/) is set to price $537.4 million of subordinate sales tax revenue short-term notes (limited tax bonds) 2021 Series A, serials 2022. Citigroup Global Markets Inc.

The New York City Municipal Water Finance Authority (Aa1/AA+/AA+/) is set to price $523 million of water and sewer system second general resolution revenue bonds, Fiscal 2021 Series CC, $221 million of Series CC-1, terms 2051, $150 million of Series CC-2, serials 2027-2028 and $152 million of Series CC-3, terms 2032. Barclays Capital Inc. is head underwriter and the deal is set for Tuesday.

The Indianapolis Local Public Improvement Bond Bank (A2//A+) is set to price $390.1 million of revenue bonds on Tuesday. BofA Securities is lead underwriter.

The Bucks County Industrial Development Authority, Pennsylvania (/BB+//) is set to price $261.6 million of Grand View Hospital Project hospital revenue bonds, Series 2021 on Tuesday. BofA Securities is bookrunner on the deal.

The Sacramento County Sanitation Districts Financing Authority, California (Aa2/AA/AA-/) is set to price $258.2 million of refunding revenue bonds Wednesday. BofA Securities is head underwriter.

The Municipal Improvement Corporation of Los Angeles (/AA-//AA) is set to price $256 million of taxable capital equipment and real property lease revenue refunding Series 2021-A bonds on Wednesday. Goldman Sachs & Co. LLC is bookrunner.

The New York City Housing Development Corp. (Aa2/AA+//) is set to price $212 million of taxable multifamily housing revenue bonds on Wednesday. Serials 2024-2032, terms 2036, 2041, 2046. Citigroup Global Markets Inc. is head underwriter.

The New York City Housing Development Corp. will also price $181.3 million of exempt multifamily housing revenue bonds, $167.5 million Series A-1, serials 2026-2033, terms 2036, 2041, 2044, and Series A-2, $13.7 million, serials 2025-2026. Barclays Capital Inc. is bookrunner.

The San Mateo-Foster School District, San Mateo County, California (Aaa/AA+//) is set to price $145 million of Election of 2020 general obligation bonds, Series A and election of 2015 general obligation bonds, Series B on Wednesday. RBC Capital Markets will run the books.

The Nebraska Public Power District (A1/A+/A+/) is set to price $139 million of general revenue forward delivery bonds, Series 2021 A, serials 2023, 2025, 2027, 2030-2040, Series 2021 B, serials 2023, 2029-2041, terms 2044, on Tuesday. BofA Securities is head underwriter.

The Upper Merion Area School District, Montgomery County, Pennsylvania is set to price $129.5 million of general obligation bonds and school revenue bonds in two series on Tuesday. The first series, $99.76 million of Series 2021A (Aa1///) serials 2022-2026, 2039-2051, terms 2032, 2038.

The second series, $29.76 million of Series 2021B (Aa3///), serials 2022-2051. RBC Capital Markets is bookrunner.

The California Public Finance Authority (/BBB-//) is set to price $118.6 million of Henry Mayo Newhall Hospital refunding revenue bonds on Tuesday. Insured by Assured Guaranty Municipal Corp. Ziegler is head underwriter.

The Clear Creek Independent School District (Aaa//AAA/) is set to price $108.7 million of unlimited tax school building bonds, PSF guaranteed, on Wednesday. Piper Sandler & Co. is head underwriter.

The Northeast Ohio Regional Sewer District (Aa1/AA+//) is set to price $107 million of taxable wastewater improvement refunding revenue bonds on Tuesday. BofA Securities will run the books.

The City of Worcester, Massachusetts (Aa3/AA-//) is set to price $101.7 million of taxable general obligation ballpark project bonds in two series on Wednesday. THe first series, $88 million of taxable ballpark bonds, serials 2022-2036, terms 2039. The second series, $13.6 million of taxable general obligation refunding bonds, serials 2023-2036, terms 2042, 2050. UBS Financial Services Inc. is head underwriter.

The San Francisco Unified School District is set to price $100 million of tax and revenue anticipation notes, serial 2021, on Tuesday. Stifel, Nicolaus & Company Inc. is head underwriter.

Competitive market
Mecklenburg County, North Carolina (Aaa/AAA/AAA/) is set to sell $225 million of general obligation school bonds at 11 a.m. Tuesday.

Brookline, Massachusetts (Aaa/AAA//) is set to sell $167.9 million of general obligation municipal purpose Loan of 2021 bonds at 11 a.m. Wednesday.

Maryland (//AAA/) is set to sell three competitive loans Wednesday. The first, $207.4 million of GOs, at 10 a.m. The second, $217.5 million of GOs, at 10:30 a.m. The last, $50 million of taxable general obligation bonds at 11 a.m.

Gary Siegel contributed to this report.

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