The rally in municipal bonds intensified Thursday, with yields dropping by as much as four basis points on the long end of the AAA scales.
Even as yields moved lower, investors kept putting cash into municipal bond funds. Refinitiv Lipper reported $1.6 billion of inflows into muni mutual funds in the week ended Aug. 5, the 13th week in a row of positive results.
Trading was up on the day and high-grades led in sizeable blocks. Yields are so low and buyers keep reaching for yield, but because taxables are freeing up the exempt space, exempt yields are falling to near-record lows. Traders said the short end is overbought and that is why the long end keeps firming as investors look for duration.
In the primary, buyers saw an upsized Hawaii taxable offering come to market as the last of the week’s larger deals made their appearance.
“An increasing correlation with U.S. Treasuries has improved the outlook for taxable municipal bonds, as the sector increasingly homes in on the direction of rates while still offering risk-adjusted spreads,” said Eric Kazatsky, senior municipal strategist at Bloomberg Intelligence in a report. “It’s hard to point to any subset of fixed income that has performed as well in 2020 as taxable munis, aided by a duration close to 10 years.”
He said that the Bloomberg Barclays Taxable Municipal Bond Index has returned 10.13% so far this year.
“This figure is outpacing tax-exempt muni returns by almost 600 basis points and has also beaten corporate credit for AA through BBB rating buckets,” Kazatsky said. “ETFs also reflect the year-to-date moves in taxable munis. Invesco’s Taxable Municipal Bond ETF leads all muni funds with a year-to-date return of 8.8%.”
He said that looking at the duration components of the index, long taxable muni bonds (with a duration of 11.5 years) have led 2020 returns at 11.78%, followed by the five- to 10-year bucket at 7.79%.
“The relative cheapness vs. corporates and the still highly elevated ratios vs. exempts will likely continue to draw in buyers and may contribute to further positive returns,” he said.
Kazatsky said that even with the recent sharp tightening for taxable munis, spreads for taxable revenue bonds in the 10-year category continue to appear inexpensive compared to AA and A corporate debt of the same type.
“Since March, the directions for spreads of taxable muni bonds and corporate debt have been somewhat divergent, with corporates tightening to a much larger degree with Federal Reserve involvement,” he said.
“Spreads for taxable muni bonds had increased to a high of 187 basis points at the end of March from a low of 61 basis points at the end of February,” Kazatsky said. “While taxables have since tightened about 18 bps over the past month, corporate debt has continued to tighten by a greater degree.”
BofA Securities priced Hawaii’s (Aa2/AA+/AA+/NR) $995 million of Series 2020FZ taxable general obligation bonds.
The deal was priced to yield from 0.67% at par in 2025 (45 basis points over comparable U.S. Treasury) to 2.293% at par in 2040 (108 basis points over comparable U.S. Treasury).
The size of the deal was raised from the original amount of $900 million.
Looking at exempt trading, Georgia GOs, 5s of 2021 traded at 0.09%-0.10%. Massachusetts waters, 5s of 2022, traded at 0.10%-0.11%. Houston Texas ISD 5s of 2024 at 0.25%-0.16%. Columbus, Ohio 5s of 2024 at 0.14%-0.13%. San Francisco City and County GOs, 5s of 2025 at 0.11%-0.10%.
Gilt-edged Maryland GOs, 5s of 2026 at 0.27%-0.26% and 5s of 2028 at 0.48% (original 0.59%). Marylands out a little longer, 5s of 2032, at 0.78%-0.76%.
Texas paper was once again trading in large blocks across the board. Travis County COBs, 5s of 2029, traded at 0.64%-0.65%. Texas waters 4s of 2037 traded in a range of 1.90%-1.84%. Out long, Humble Texas ISD 3s of 2050 traded at 1.72%-1.71%.
New York City TFAs, 4s of 2045 traded at 1.84%-1.83%.
Washington GOs also showed some movement to lower yields with GOs, 5s of 2040 at 1.26%-1.25%.
Primary market
BofA priced and repriced the Arizona Industrial Development Authority’s (A1/A/A+/NR) $248.695 million of Series 2020A hospital revenue bonds for the Phoenix Children’s Hospital.
The deal was repriced to yield from 0.40% with a 5% coupon in 2024 to 1.74% with a 5% coupon in 2040; a 2045 maturity was repriced to yield 2.37% with a 3% coupon and a 2050 maturity was priced to yield 2.12% with a 4% coupon.
The deal had been tentatively priced to yield from 0.60% with a 5% coupon in 2024 to 1.92% with a 5% coupon in 2040; a 2045 maturity was priced to yield 2.57% with a 3% coupon and a 2050 maturity was priced to yield 2.32% with a 4% coupon.
HilltopSecurities priced Bexar County, Texas’ (Aaa/AAA/AAA/NR) $287.765 million of Series 2020B taxable limited tax refunding bonds and Series 2020 taxable limited flood control tax refunding bonds.
The Series 2020B bonds were priced to yield from 0.193% with a 5% coupon in 2021 to 2.156% at par in 2040; a 2043 maturity was priced at par to yield 2.236%.
The Series 2020 bonds were priced to yield 0.193% with a 5% coupon in 2021 to 2.118% at par in 2038.
JPMorgan Securities priced the Indiana Housing and Community Development Authority’s (Aaa/NR/AAA/NR) $113.365 million of single-family mortgage revenue bonds.
The Series 2020 B-1 fixed-rate new issue bonds not subject to the alternative minimum tax were priced to yield from 0.63% with a 5% coupon in 2025 to 1.70% and 1.75% at par in a split 2032 maturity; a 2035 maturity was priced at par to yield 1.95%, a 2039 maturity was priced at par to yield 2.05% in 2039 and a 2049 PAC bond was priced to yield 1% with a 3.25% coupon with a four-year average life.
The Series 2020 B-2 fixed-rate new issue bonds subject to the AMT were priced with 5% coupons to yield from 0.26% in 2021 to 0.88% in 2025.
Money market muni funds rise $301M
Tax-exempt municipal money market fund assets rose $300.9 million, bringing total net assets to $122.28 billion in the week ended Aug. 3, according to the Money Fund Report, a publication of Informa Financial Intelligence.
The average seven-day simple yield for the 187 tax-free and municipal money-market funds slipped to 0.3% from 0.4% in the previous week.
Taxable money-fund assets increased $3.70 billion in the week ended Aug. 4, bringing total net assets to $4.388 trillion.
The average, seven-day simple yield for the 788 taxable reporting funds was unchanged at 0.04% from the prior week.
Overall, the combined total net assets of the 975 reporting money funds rose $4.09 billion in the week ended Aug. 4.
Secondary market
On Thursday, municipals were stronger all along the curve, according to the final readings on Refinitiv MMD’s AAA benchmark scale.
Yields fell two basis points to 0.09% in the 2021 GO muni and dropped three basis points to 0.10% in 2023. The yield on the 10-year muni fell three basis points to 0.59% while the 30-year yield dropped four basis points to 1.28%.
The 10-year muni-to-Treasury ratio was calculated at 110.1% while the 30-year muni-to-Treasury ratio stood at 105.8%, according to MMD.
The ICE AAA municipal yield curve showed short yields down two basis pouint, to 0.070% in 2021 and 0.086% in 2022. The 10-year maturity was down two basis point to 0.580% and the 30-year dropped three basis points to 1.323%.
ICE reported the 10-year muni-to-Treasury ratio stood at 117% while the 30-year ratio was at 107%.
The IHS Markit municipal analytics AAA curve showed the 2021 maturity yielding 0.09% and the 2022 maturity at 0.11% while the 10-year muni was at 0.60% and the 30-year stood at 1.29%.
The BVAL AAA curve showed the 2021 maturity yielding 0.07% and the 2022 maturity at 0.08%, both down one basis point while the 10-year muni was at 0.55%, down three and the 30-year stood at 1.29%, richer by four basis points.
Munis were little changed on the MBIS benchmark and AAA scales.
Treasuries were stronger as stock prices traded higher.
The three-month Treasury note was yielding 0.094%, the 10-year Treasury was yielding 0.537% and the 30-year Treasury was yielding 1.202%.
The Dow rose 0.56%, the S&P 500 increased 0.54% and the Nasdaq gained 0.91%.