Municipal bonds were little changed while the primary took the front seat with deals being bumped in repricings, and JFK Airport bonds re-priced by 15 to 30 basis points lower than initial wires.
Secondary trading was elevated, but selling pressure was not and triple-A benchmarks held steady Wednesday, even with another round of U.S. Treasury weakness. Ratios rose slightly but municipals still outperform Treasuries as they have for the past few weeks.
Technicals are holding strong with inflows increasing again. ICI reported $1.327 billion for the week ending Dec. 2.
With the end of 2020 approaching, the municipal market remains stable with heavy demand for tax-exempt income, despite overall supply constraints and low yields.
Anthony Valeri, director of investment management at Zions Wealth Management in San Diego said measures of supply, both new issuance and bid-wanteds, have crept higher over the past week, even if modest, and municipal bond strength relative to Treasuries has largely run its course after a six-week stretch.
“The strength of municipal bonds in the face of rising Treasury yields and the 10-year Treasury yield approaching 1.0% has been impressive, but I don’t see another catalyst in the very near-term,” he said.
Stability this week and next may be the best investors can hope for given the now higher municipal valuations relative to Treasuries, according to Valeri, who said that muni to Treasury yield ratios have returned to pre-pandemic levels.
“That situation may persist for some time, but on a longer-term basis, investors need to know that translates into a much lower return environment,” he added.
Looking into 2021, Valeri said the Georgia Senate runoff races could eventually impact the municipal market.
“Both races are very close and in the event Democrats win both, and thus gain control of the Senate, it makes it easier to facilitate tax increases, which may be a longer-term tailwind for municipal bonds,” he said. “It’s far too early to say and the degree of any tax increases even in that scenario remain questionable due to the narrow margin in Congress.”
Meanwhile, municipals are “arguably” performing stronger than Treasuries, and will continue to do so over the short term, according to a North Carolina trader.
“Even with low yields and tight ratios, there is an ample amount of demand for municipal bonds,” the trader said. “At some point, muni yields might get too cumbersome, but today, the market feels bulletproof,” he said.
Overall, healthy inflows have been met with a lack of supply.
“The coupon money has been very large and unless there is major selling pressure from people or outflows or a huge amount of supply before year end, which we don’t expect, over the short term even though munis are rich historically, they still feel pretty safe,” the trader said.
As a result of the strong demand, new issues are doing “extremely well” and coming to market with very little to no concessions, he noted.
“If they do [come with any concession] they trade back to normal credit spreads fast,” he said.
Most of the deals so far this week have been on the “yieldy side,” as well as some taxable new issues, but all have been well subscribed for on the buyside.
Yield conscious and conservative investors are both actively participating in the market ahead of year end, he said.
“Incremental yield paper is performing better than true high-grade bonds,” so investors are flocking to those deals, he said. In addition “there is a cross current from those who don’t like the market, but are willing to pay for triple-A paper just to stay safe,” he said.
The trader said there is some selective selling by dealers or investors who are interested in profit-taking and don’t need tax-free income, but “any selling pressure is met with buying.”
Primary market
J.P. Morgan priced $628 million of non-AMT Terminal 4 John F. Kennedy International Airport Project special facility revenue refunding bonds for the New York Transportation Development Corp. (BAa1/NR/BBB/NR). Bonds in 2021 with a 5% coupon yielded 0.43%, 5s of 2025 yielded 1.03%, 5s of 2030 at 1.69%, 5s of 2035 at 1.94%, 4s of 2040 at 2.06% (30 basis points lower than initially) and 4s of 2041 at 2.11%.
The Georgia State Road and Tollway Authority priced $491 million of grant anticipation revenue bonds (A2/AA/A+) and reimbursement revenue bonds (A1/AA/A+) in two series. The first, $393 million of GARBs, are serials 2021-2032, bonds in 2021 yielded 0.15% with a 5% coupon, 0.43% in 2025, 0.99% in 2030 and 1.14% in 2032. Citigroup Global Markets Inc. led the deal.
The City of Boston, Massachusetts, (Aaa/AAA//) priced $163 million of GO and GO refunding bonds. BofA Securities lead the deal. Yields ranged from 0.12% in 2021 with a 5% coupon to 1.18% in 2040. It priced $23 million of green bonds with yields of 0.20% in 2025, 0.68% in 2030 and 1.15% in 2040, a couple basis points lower than its non-green bonds.
Boston also sold $106 million of taxable general obligation and GO refunding bonds.
In the competitive market, the Florida Department of Transportation (Aa2/AA/AA) sold $183 million of turnpike revenue bonds to BofA Securities. Bonds in 2021 with a 5% coupon yielded 0.15%, 5s of 2025 at 0.28%, 5s of 2030 at 0.80%, 2s of 2035 at 1.57%, 2s of 2040 at 1.91% and 2s of 2050 at 2.14%.
Secondary market
High-grade municipals were unchanged, according to final readings on Refinitiv MMD’s AAA benchmark scale. Short yields were at 0.13% in 2021 and 0.14% in 2022. The yield on the 10-year at 0.71% while the yield on the 30-year was at 1.41%.
The 10-year muni-to-Treasury ratio was calculated at 80% while the 30-year muni-to-Treasury ratio stood at 83%, according to MMD.
The ICE AAA municipal yield curve showed short maturities a little weaker at 0.16% in 2021 and 0.18% in 2022. The 10-year maturity was at 0.70% while the 30-year yield was little changed 1.43%.
The 10-year muni-to-Treasury ratio was calculated at 75% while the 30-year muni-to-Treasury ratio stood at 85%, according to ICE. The five-year ratio was at 50%.
The IHS Markit municipal analytics AAA curve showed short yields at 0.11% and 0.12% in 2021 and 2022, respectively, and the 10-year steady at 0.69% as the 30-year yield was at 1.41%.
Treasuries fell and equities rose on vaccination and stimulus news. The 10-year Treasury was yielding 0.91% and the 30-year Treasury was yielding 1.6%. The Dow lost 57 points, the S&P 500 fell 0.67%, while the Nasdaq rose 1.77%.