Bouncing back: Short-term rates entice issuers as primary revs up with $9B slate

Bonds

Municipal bond issuers are lining up to tap the recovering primary as the upcoming week is set to see almost $9 billion of new supply hit the market.

There are nearly 20 deals on the negotiated calendar over $100 million, with the largest a $3.5 billion revenue anticipation note offering from the Dormitory Authority of the State of New York.

Citigroup is set to price DASNY’s general purpose subordinate personal income tax RANs on Thursday.

Short-term rates have been near record lows and issuers and underwriters have been increasingly interested in tapping this sector for extra savings.

Ventura County, Calif., (MIG1/SP1+/NR/NR) will be competitively selling $125 million of tax and revenue anticipation notes on Tuesday.

KNN Public Finance is the financial advisor on the TRANs while Norton Rose is the bond counsel.

Fresno County, Calif., is selling $100 million of TRANs on Wednesday.

KNN Public Finance is the financial advisor; Hawkins Delafield is the bond counsel.

“This time of year we always have a rush of seasonal borrowings,” according John Hallacy, president of John Hallacy Consulting LLC. “What is different this year is that the greatest projected monthly cash flow deficit is probably greater and that permits more borrowing under the guidelines. Low rates provide another positive.”

The taxable sector is also well represented on the upcoming slate.

BofA Securities is set to price the University of Michigan’s (Aaa/AAA//) $850 million of taxable general revenue bonds on Tuesday.

JPMorgan Securities is expected to price Dallas’ (NR/AAA/AA+/NR) $660 million of taxable waterworks and sewer system revenue refunding bonds on Tuesday.

Goldman Sachs will price Memorial Sloan Kettering Cancer Center’s (Aa3/AA-/AA/NR) $500 million of taxable corporate CUSIP bonds on Wednesday.

JPMorgan is expected to price Princeton University’s (Aaa/AAA//) $500 million of taxable corporate CUSIP refunding bonds on Monday and the Smithsonian Institution’s (Aaa/AAA/NR/NR) $300 million of taxable corporate CUSIP GOs on Thursday.

“There is no fear about issuing taxable bonds now. Corporate issuance is on fire with more than $1 trillion year-to-date. It is easy to consider a high-grade taxable muni in a supply-hungry environment,” Hallacy said.

In the competitive bond arena, the Lone Star State dominates the calendar.

Fort Worth, Texas, is selling $152.515 million of general obligation bonds on Tuesday and hits the market again on Wednesday to sell $169.18 million of revenue bonds.

The state of Texas is selling $162.205 million of general obligation bonds in two offerings on Tuesday.

IHS Ipreo estimates volume to total $8.5 billion in the upcoming week, with $6.9 billion of negotiateds and $1.6 billion of competitives on tap.

Secondary market
Municipals closed out the week on the weaker side, as yields rose after a stronger-than-expected employment report.

Non-farm payrolls rose 2.5 million in May as the unemployment rate fell to 13.3%, the Labor Department reported.

“These improvements in the labor market reflected a limited resumption of economic activity that had been curtailed in March and April due to the coronavirus (COVID-19) pandemic and efforts to contain it,” Labor said.

Economists had expected payrolls to have fallen by 8.25 million last month with the jobless rate rising to 19.7%.

Stock prices soared as Treasuries swooned on the news.

On MMD’s AAA benchmark scale, the yields on the 2021-2023 maturities were flat at 0.16%, 0.19% and 0.23%, respectively. The yield on the 10-year GO rose five basis points to 0.89% while the 30-year moved five basis points higher to 1.70%.

The 10-year muni-to-Treasury ratio was calculated at 98.5% while the 30-year muni-to-Treasury ratio stood at 101.4%, according to MMD.

The ICE AAA municipal yield curve also showed yields rising two basis points in the 2021-2023 maturities, which yielded 0.170%, 0.196% and 0.250%, respectively. Out longer yields on the 10- and 30-year maturities rose by five basis points to 0.869% and 1.694%, respectively.

ICE reported the 10-year muni-to-Treasury ratio stood at 100% while the 30-year ratio was at 99%.

Investment-grade municipal bonds have significantly outperformed Treasuries, as shown in the steep decline of muni to Treasury ratios, according to ICE Data Services.

“However, the big story this week, and continuing today, is the outperformance of high-yield munis versus the asset class as a whole,” ICE said in a Friday market comment. “High-yield has come in dramatically as states expand their reopening and risk assets in general are viewed more favorably.”

The IHS Markit municipal analytics AAA curve showed yields rising with the 2021 maturity at 0.19%, the 2022 maturity at 0.24% and the 2023 maturity at 0.27% while the 10-year muni was at 0.89% and the 30-year stood at 1.68%.

Munis were little changed on the MBIS benchmark scale.

The three-month Treasury note was yielding 0.170%, the 10-year Treasury was yielding 0.909% and the 30-year Treasury was yielding 1.685%.

The Dow rose 3.22%, the S&P 500 increased 2.67% and the Nasdaq gained 2.12%.

Inertia in the muni curve is setting up for a break out — with direction unknown, says Kim Olsan, senior vice president at FHN Financial.

“Bulls would say solid fund flows and a heavy scheduled redemption season (by some estimates it could reach $120 billion) are supportive for prodding lower yields (although most likely past 10 years). This is reinforced by a steady stream of deals — small and large — coming and going without much resistance,” Olsan said.

“Bears would argue the muni rally from May overshot and needs some correction, especially on the shorter end where ratios are now below 100%,” Olsan said. “Secondary flows with widening bid/offer spreads, sell situations going unfilled and bid results in larger blocks taking multiple days to find distribution all signal some hesitancy.”

According to BofA Global Research, the recovery trade in the macro market is now in full force as volatilities collapse in both the equity and rates markets.

“Treasury curve bear steepening continues and corporate credit spreads have moved much tighter off the crisis peaks. As an example, the OAS for the ICE BofA Corporate BBB index is now 260 basis points off the crisis peak.”

Analysts see some positive relative value in the market now.

“Despite our overall cautious muni credit outlook, we have still been looking for some credit spread compression there, as well as some positive relative value performance against corporates since early May,” BofA said. “Our optimism then was based on continued support from the Federal Reserve, a likely new stimulus package from Congress and large principal and coupon redemptions from May-August.”

Lipper reports $1.2B inflow
Investors remained bullish on municipal bonds and continued to put cash into bond funds in the latest reporting week. It was the fourth straight week funds saw inflows and the third week in a row that those inflows topped $1 billion.

In the week ended June 3, weekly reporting tax-exempt mutual funds saw $1.206 billion of inflows, after inflows of $1.092 billion in the previous week, according to data released by Refinitiv Lipper Thursday.

Exchange-traded muni funds reported inflows of $517.983 million, after inflows of $220.758 million in the previous week. Ex-ETFs, muni funds saw inflows of $688.360 million after inflows of $870.959 million in the prior week.

The four-week moving average remained positive at $1.180 billion, after being in the green at $776.244 million in the previous week.

Long-term muni bond funds had inflows of $349.431 million in the latest week after inflows of $740.931 million in the previous week. Intermediate-term funds had inflows of $124.738 million after outflows of $102.658 million in the prior week.

National funds had inflows of $1.653 billion after inflows of $996.906 million while high-yield muni funds reported inflows of $195.145 million in the latest week, after inflows of $106.727 million the previous week.

Bond Buyer indexes little changed
The weekly average yield to maturity of the Bond Buyer Municipal Bond Index, which is based on 40 long-term bond prices, fell three basis points to 3.71% from 3.74% the week before.

The Bond Buyer’s 20-bond GO Index of 20-year general obligation yields was steady at 2.16% from the previous week.

The 11-bond GO Index of higher-grade 11-year GOs was flat at 1.69%.

The Bond Buyer’s Revenue Bond Index was unchanged at to 2.58% from the previous week.

The yield on the U.S. Treasury’s 10-year note rose to 0.82% from 0.70% the week before, while the yield on the 30-year Treasury increased to 1.61% from 1.47%.

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