Munis strengthen as primary kicks into gear

Bonds

Municipal primary deals repriced to lower yields, competitive deals saw lower coupon structures and strong demand, and both helped push yields lower on triple-A benchmarks as U.S. Treasuries made gains on Tuesday.

Gilt-edged Forsyth, North Carolina, general obligation bonds came competitively with 4% coupons through triple-A 5% levels in some maturities, and 2s in 2041 yield sub-2%.

The theme of low supply, positive inflows and the anticipation of higher tax rates led triple-A benchmarks firmer by one to two basis points.

In the primary, Wells Fargo Securities LLC repriced $547 million of senior lien refunding revenue bonds for the Central Florida Expressway Authority (/AA//), AGM insured, with bumps of one to eight basis points. Bonds in 2022 with a 5% coupon yield 0.12% (-3), 5s of 2026 yield 0.67% (-7), 5s of 2031 at 1.38% (-8), 2.125s of 2036 at 2.24% (-1) and 2.5s of 2040 at 2.47% (-3).

Morgan Stanley & Co. repriced $273.8 million of dedicated tax revenue bonds for the City and County of Denver, Colorado, (Aa3/AA-/AA-/) three to 11 basis points lower. Bonds in 2027 with a 5% coupon yield 0.83% (-5), 5s of 2031 at 1.32% (-11), 4s of 2036 at 1.72% (-11), 4s of 2041 at 1.95% (-8), 4s of 2043 at 2.03% (-8) and 4s of 2041 at 2.22% (-3).

In the competitive market, Forsyth County, North Carolina, (Aaa/AAA/AAA/) sold $110 million of general obligation public improvement bonds to Morgan Stanley & Co. Bonds in 2022-2024, 2033, and 2034-2041 were all away. Bonds in 2022 with a 4% coupon yield 0.07%, 4s of 2026 at 0.52%, 4s of 2031 at 1.12%, 1.75s of 2036 at 1.81% and 2s of 2041 at 1.97%. A $12.8 million tranche bought by Citigroup Global Markets Inc., saw bonds in 2022 with a 5% coupon yield 0.09%, 5s of 2026 at 0.49%, 5s of 2031 at 1.10%, 2s of 2036 at 1.73% and 2s of 2041 at 1.95%.

The Elk Grove, California, Unified School District (Aa2/ /AAA) sold $140 million of general obligation bonds to BofA Securities. Bonds in 2022 with a 5% coupon yield 0.09%, 5s of 2028 yield 0.87%, 4s of 2031 at 1.21%, 2s of 2036 at 1.95%, 2s of 2041 at 2.18% and 2.25s of 2045 at 2.35%.

Nassau County, N.Y. (A2/A+/A) sold $146.9 million of general improvement bonds to Jefferies. Bonds in 2022 with a 5% coupon yield 0.20%, 5s of 2026 at 0.68%, 5s of 2031 at 1.40%, 4s of 2036 at 1.81%, 4s of 2041 at 2.05%, 4s of 2046 at 2.20% and 4s of 2051 at 2.25%.

The general lack of supply relative to demand and potential for higher taxes are the biggest factors driving the municipal market right now, according to Jason Ware, managing director and head trader at 280 Capital Markets in San Francisco.

“Tax-exempt municipals are outperforming Treasuries as quarter two starts,” he said on Tuesday.

Municipal to UST ratios were at 66% in 10 years and 74% in 30 on Tuesday, according to Refinitiv MMD, while ICE Data Services showed ratios at 65% in 10 years and 75% in 30.

Many large institutional investors are on the sidelines awaiting significant new issuance to enter the market, according to Ware.

“Funds have been sitting on cash and have not been deploying it in the secondary market — waiting for new issues — but the new-issue consistency is not enough to put pressure on higher yields,” he said. “Some money is being put to work, but there is a lot of money out there to buy tax-exempt product right now.”

As a result of the supply constraints in new and secondary volume, new deals are met with strong demand and are largely oversubscribed, he said.

At the same time, the potential for higher taxes is both creating uncertainty and opportunity, Ware noted.

“In the second quarter, people are going to be hypersensitive to the news and government hashing out a deal and what that means for taxes is going to be important for tax-exempt munis,” he said.

“It’s in people’s minds that taxes are going to have to go up,” in large states, such as California and New York, according to Ware.

The potential for higher taxes is creating enhanced demand for tax-exempt munis, he noted, and contributing to why yields are strongly outperforming Treasuries.

“Tax-exempt spreads are a little wider than the first quarter, and yields are higher, but taxable munis have had a lot more pain in this higher rate environment than tax exempts,” 280 CapMarkets’ Jason Ware said.<br/>

This trend was evident in the first quarter, when the market saw “pockets of weakness” that created selling pressure and caused the market to sell off, he noted.

Ware said a lot of that was driven by the swiftness by which interest rates rose.

“People didn’t want to catch a falling knife, so they were sitting on the sidelines,” he said.

“There were many days in quarter one where munis tremendously outperformed Treasuries,” he said. “The beginning of this quarter has also seen some Treasury weakness, with the MMD scale unchanged, or cut a little,” he added.

Ware expects higher yields to continue in the second quarter.

“Tax-exempt spreads are a little wider than the first quarter, and yields are higher, but taxable munis have had a lot more pain in this higher rate environment than tax exempts,” Ware said.

Taxable muni spreads have been declining, though the degree of spread tightening depends on underlying ratings, said Eric Kazatsky, senior municipal strategist at Bloomberg Intelligence.

Looking at the rating breakdown of taxable municipals within the larger Bloomberg Barclays U.S. Aggregate Index (LBUSSTAT Index), i.e., municipals sold with corporate CUSIPs, the bonds with BBB ratings have had the greatest spread tightening, with compression of 80 basis points over the past six months, equal to 1.4 standard deviations, Kazatsky said.

The single-A credit bucket, into which the San Francisco International Airport falls (set to price $224 million of taxables Wednesday), has had the second-highest spread compression, with bonds tightening by 34 basis points, or 1.2 standard deviations over the past six months, Kazatsky wrote.

“Much of the movement in taxable muni bonds has come from consistent demand from domestic and overseas buyers,” he said.

Secondary market
Trading showed firmer prints. Washington GO 5s of 2022 traded at 0.09%. Georgia GO 5s of 2026 at 0.55%-0.54%. Henrico County, Virginia, 5s of 2027 at 0.71%. Maryland 5s of 2027 at 0.70%. Knoxville, Tennessee, 5s of 2028 at 0.82%. Maryland 5s of 2028 at 0.84%. California 5s of 2028 at 0.92%.

Ohio 5s of 2030 at 1.09%. Maryland 5s of 2030 at 1.10%. Montgomery County, Maryland, 3s of 2032 at 1.29%. University of Washington 5s of 2033 at 1.30%.

Georgia 5s of 2035 traded at 1.32%-1.22%.

NY Dorm PIT 5s of 2049 at 2.12%. NYC GO 5s of 2050 at 2.19%. Los Angeles DWP 5s of 2050 at 1.78%.

The supply-demand imbalance is still impacting the market, trading volume hit record-setting levels in March, according to MarketAxess.

The international financial technology company that operates an electronic trading platform has reported March trading volumes of $689.6 billion, consisting of $293 billion in credit volume and $397 billion in rates volume.

The total trading volume for municipal bonds in March was $2.1 billion, according to the firm, which also provides market data and post-trade services.

Overall, total credit average daily trading volume was $12.7 billion and total credit trading volume was $292.6 billion for the month, the firm reported.

In addition, the firm reported open trading total credit trading volume of $94.4 billion; U.S. high-grade total trading volume of $145.7 billion.

U.S. high-yield average daily trading volume of $1.9 billion, and total trading volume of $43.9 billion, including emerging markets total trading volume of $64.2 billion and Eurobonds total trading volume of $36.5 billion.

High-grade municipals were little changed to a basis point firmer outside 10 years on Tuesday, according to final readings on Refinitiv MMD’s AAA benchmark scale. Short yields were steady at 0.09% in 2022 and 0.15% in 2023. The yield on the 10-year fell one basis point to 1.10% as did the yield on the 30-year to 1.72%.

The ICE AAA municipal yield curve showed short maturities fall one basis point to 0.09% in 2022 and to 0.14% in 2023. The 10-year maturity was at 1.08% while the 30-year fell one basis point to 1.73%.

The IHS Markit municipal analytics AAA curve showed yields at 0.09% in 2022 and 0.14% in 2023, the 10-year at 1.05%, and the 30-year at 1.69%.

The Bloomberg BVAL AAA curve showed yields at 0.07% in 2022 and 0.12% in 2023, while the 10-year fell two basis points to 1.04%, and the 30-year yield fell two to 1.72%.

Treasuries were stronger as stock prices traded higher Tuesday. The three-month Treasury note was yielding 0.03%, the 10-year Treasury was yielding 1.65% and the 30-year Treasury was yielding 2.32%. The Dow was up 382 points, the S&P 500 rose 1.43% and the Nasdaq gained 1.70%.

Primary market
Novant Health Inc. is set to sell $1.5 billion of corporate CUSIP taxable bonds on Thursday on behalf of Novant Health Obligated Group. JPMorgan is the lead underwriter.

The Tobacco Settlement Authority is scheduled to offer $673.8 million of tobacco settlement asset-backed senior refunding bonds in three series. The serials and terms range from 2027 to as far as 2065. Jefferies LLC is the lead. The deal is rated A by Standard & Poor’s on the serials from 2027 to 2030; A-minus from 2031 to 2040; BBB-plus in 2049; BBB in 2049; while the 2065 term is not rated.

Miami-Dade County, Florida, is set to price $622.2 million of water and sewer system revenue bonds on Thursday. Banc of America Securities is the lead.

The Massachusetts Bay Transportation Authority is set to price $598.2 million of subordinated sales tax refunding bonds as $559.1 million of Series A-1 and $39 million of Series A-2 sustainability bonds. Goldman, Sachs & Co. will be bookrunner.

San Francisco Airport Commission is set to price $560.1 million of second series revenue refunding bonds on behalf of the San Francisco International Airport on Wednesday. Series 2021A is subject to the alternative minimum tax, while 2021B is non-AMT. Series 2021C is taxable. Goldman Sachs is the bookrunner.

The University of Southern California will sell $400 million of taxable bonds (Aa1/AA// ) on Wednesday. The taxable bullet structure is 2051 subject to a make-whole call. Barclays Capital is the bookrunner.

The Board of Regents of the University of Texas System is set to sell $400 million of refunding revenue financing system bonds, maturing as serials from 2027 to 2051. Wells Fargo Securities is the lead.

The CSCDA Community Improvement Authority is set to price $326.5 million of essential housing revenue bonds on behalf of the Altana-Glendale project. Goldman Sachs is the bookrunner.

The California Health Facilities Financing Authority is set to price $217 million of refunding revenue bonds on behalf of the Lucile Salter Packard Children’s Hospital at Stanford on Thursday. Morgan Stanley is the lead.

Northern Kentucky University is set to price $205.2 million of general receipts bonds. Morgan Stanley is the lead.

The East Side Union, California, High School District is set to sell $127.3 million of general obligation bonds on Wednesday.

The Los Angeles County, California, Metropolitan Transportation Authority is set to sell $325 million of senior sales tax revenue bonds on Wednesday.

Louisiana is set to sell $227 million of general obligation bonds on Wednesday.

California will sell two series of various purpose general obligation and general obligation refunding bonds (Aa2/AA-/AA) on Thursday totaling $634.2 million. Both the $241 series of various purpose GO and GO refunding bonds and the $392 million of various purpose GO bonds are federally-taxable.

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