Municipals were little changed, but saw slight weakness in the short- to intermediate-range for a second day in a row Tuesday, as Treasuries were also weaker on the first of the two-day Federal Open Market Committee meeting while more positive economic data came in stirring inflation concerns.
Only the short- to intermediate-slope of benchmark high-grade scales were cut by one basis point with signs of pushback on high-grade levels.
The secondary market is seeing less demand now that the two- to seven-year slope of the yield curve is only offering 40% of U.S. Treasuries, traders said.
“The high-grade market is at a standstill on the high-grade stuff because the percentages are not attractive,” he said. “They are desperate for income and yield, but away from that, the belly of the high-grade curve is not attractive.”
The 2022 high-grade maturity on triple-A benchmark scales is yielding 82% of the comparable Treasury yield, but falls to 40.1% starting in three years. Ratios on bonds from three- to seven years are below 50%.
Municipal to UST ratios fell, closing at 58% in 10 years and 68% in 30 years on Tuesday, according to Refinitiv and ICE Data Services.
In the primary Tuesday, few new deals priced, but Vermont came competitively won by Citigroup Global Markets Inc. at on-point levels for its rating and Lamar, Texas ISD re-priced to lower yields while Northern Illinois University (Ba2/AA//) with a Build America Mutual wrap came with just less than $100 million and a 5% in 2031 to yield 1.76%.
The largest deal of the week is expected tomorrow from the New Jersey Transportation Trust Fund, $1.5 billion, which traders expect it to see ample demand as yield is in high demand.
“That deal has yield in it and there is a ton of money coming into the yield market right now,” the trader said.
Even with a light calendar this week, high-yield deals, like the New Jersey deal, should do extremely well and have no trouble finding homes.
“When are we going to have a deal that’s not going to do well?” the trader asked. He said Tuesday was a “wait and see” attitude among traders like himself who are “not being overly aggressive, and not paying up for deals.”
The 30-day visible supply of municipal bonds totaled a mere $8.48 billion, which is up $33.91 million from the previous session, according to The Bond Buyer data, with $3.475 billion of competitive deals, up $4.5 million, and $5.007 billion of negotiated bonds, which is up $29.4 million.
The quest for supply is as intense as ever, especially for high-yield paper during a month that is typically subjected to a seasonal slump, the trader said.
“April is tax season and is not always a robust month for municipals,” he said.
In the primary market, Raymond James & Associates repriced $233.8 million of unlimited tax schoolhouse bonds for the Lamar Consolidated Independent School District, Texas, (Aaa/AAA//), Texas Permanent School Fund Guarantee Program. Bonds in 2023 with a 3% coupon yield 0.07%, three basis points lower than initial pricing wires, 2s of 2026 at 0.43%, 5s of 2031 at 1.06%, 3s of 2036 at 1.42%, four basis points lower, 3s of 2041 at 1.63%, three basis points lower, 3s of 2046 at 1.78%, two basis point lower, 3s of 2051 at 1.98%, two lower, 3s of 2056 at 2.20% and 2.5s of 2061 at 2.50%.
Vermont (Aa1/AA+/AA+/) sold $112 million of unlimited tax general obligation bonds in two series to Citigroup Global Markets Inc. Bonds in 2021 with a 5% coupon yield 0.05%, 5s of 2022 at 0.06%, 5s of 2026 at 0.39%, 5s of 2031 at 0.97%, 4s of 2036 at 1.31% and 2s of 2040 at 1.82%.
Piper Sandler priced $99 million of auxiliary facilities system revenue refunding bonds for the Board of the Trustees of Northern Illinois University (Ba2/AA//). The bonds are insured by Build America Mutual Assurance Co. Bonds in 2025 with a 5% coupon yield 0.85%, 5s of 2026 at 1.00%, 5s of 2031 at 1.76%, 4s of 2036 at 2.11%, 4s of 2041 at 2.31% and 4s of 2043 at 2.38%.
Secondary market trading was mostly stable but a few prints pushed benchmarks cheaper by a basis point or half on bonds in 2022-2032. All of the triple-A benchmarks cut the 10-year by a basis point.
Cambridge, Massachusetts, 5s of 2022 traded at 0.10%. Huntsville, Alabama 5s of 2022 at 0.11%. Texas 5s of 2023 at 0.14%-0.13%.
Delaware 5s of 2025 yielded 0.26%-0.25%, around original levels of 0.25%. Delaware 5s of 2026 at 0.37%-0.36% versus 0.38% original. California 5s of 2026 at 0.44%-0.36% versus 0.45% Friday. New York City waters 5s of 2026 at 0.40%. Hennepin County, Minnesota 5s of 2026 at 0.42% (priced at 0.41% in September 2020). New York City 5s of 2027 at 0.72%. Georgia 5s of 2028 at 0.73%. District of Columbia 5s of 2027 at 0.49%-0.48%. Delaware 5s of 2029 at 0.76% versus 0.77% original. Fairfax County, Virginia 4s of 2030 at 0.96%. Maryland 5s of 2030 at 0.92%. New York City TFA 5s of 2032 at 1.29%.
Out a little longer, California 5s of 2036 at 1.27%-1.26%. Los Angeles DWP 5s of 2040 at 1.41%.
Out long, Metro Water District of Southern California 5s of 2041 at 1.53%. Triborough Bridge and Tunnel Authority 5s of 2051 at 1.79% and 5s of 2056 at 1.94%.
On Refinitiv MMD’s AAA benchmark scale, yields sat at 0.05% in 2022 and 0.08% in 2023. The yield on the 10-year rose one basis point to 0.94% and the 30-year at 1.56%.
The ICE AAA municipal yield curve showed yields at 0.06% in 2022 and 0.09% in 2023. The 10-year maturity at 0.95%, up one basis point, while the 30-year sat at 1.55%.
The IHS Markit municipal analytics AAA curve showed yields steady at 0.06% in 2022 and 0.09% in 2023, the 10-year at 0.92% and the 30-year at 1.56%.
The Bloomberg BVAL AAA curve showed yields at 0.04% in 2022 and 0.06% in 2023, with the 10-year at 0.91%, and the 30-year yield at 1.55%, a basis point lower.
The three-month Treasury note was yielding 0.02%, the 10-year Treasury was yielding 1.62% and the 30-year Treasury was yielding 2.29% near the close. Equities were mixed with the Dow gaining 35 points, the S&P 500 rose 0.06% and the Nasdaq lost 0.29% near the close.
Economic improvement
Data released Tuesday show an improving economy, which continues to stoke fears of impending inflation.
The consumer confidence index jumped to 121.7, its highest reading since February 2020, from a downwardly revised reading of 109.0 a month earlier, originally reported as 109.7, the Conference Board reported.
Economists polled by IFR Markets expected a 112.1 read.
The present situation index gained to 139.6 from a revised 110.1, first reported as 110.0, and the expectations index grew to 109.8 from a revised 108.3, initially reported as 109.6.
“Undoubtedly, vaccinations “and the continued move toward resumed normalization of business activities” propped up the index, said Robert Johnson, CEO and chair at Economic Index Associates and professor of finance, Heider College of Business at Creighton University.
The big gain in April’s present situation index suggests “the economic recovery strengthened further” early in the second quarter, said Lynn Franco, senior director of economic indicators at The Conference Board.
Wells Fargo Investment Institute expects “continued strong economic growth, driven by consumption, which will feed into corporate earnings/appreciating financial markets,” said Sameer Samana, senior global market strategist at Wells Fargo Investment Institute.
Meanwhile, the service sector in Dallas “increased at its fastest pace since late 2014” in April, according to the Federal Reserve Bank of Dallas’ manufacturing survey.
The general business activity index rose to 34.9 in April from 28.9 in March, while the company outlook index grew to 29.2 from 26.1.
The six-months ahead future outlook index for business activity climbed to 45.6 from 42.4 and the future company outlook index gained to 41.1 from 40.6.
The outlook uncertainty index dropped to negative 10.4 from negative 10.0, suggesting uncertainty about the outlook declined.
Wages and benefits increased to 21.5 from 19.9, the employment index rose to 16.8 from 13.1, while the hours worked index grew to 13.4 from 8.3.
The input prices index rose to 34.3 from 26.5, while selling prices increased to 18.6 from 12.1.
“The latest manufacturing reports from the New York, Kansas City, and Dallas Federal Reserve banks indicate record high index price levels, signaling some higher inflationary concerns,” said Johnson. “While the Federal Reserve is highly likely to remain on hold for the rest of the year, potential rate hikes could be initiated as early as 2022.”
Manufacturing activity “improved” in the Richmond district in April, with the manufacturing index holding at 17, the Federal Reserve Bank of Richmond’s business activity survey showed.
“All three component indexes — shipments, new orders, and employment — remained positive,” the survey said.
Respondents reported difficulty finding skilled workers and expect that trends to continue.
The prices paid index climbed to 7.11 from 6.15 and the prices received index gained to 4.83 from 3.52, but the survey says respondents expect price gains to slow in the months ahead.
Activity in the Richmond district’s service sector “expanded” in April.
“Firms also reported improving local business conditions and increased capital spending,” the survey said. “Survey participants were optimistic that conditions would continue to improve in the next six months.”
Similar to the manufacturing survey, service sector participants said despite wage increases it was still tough to find skilled workers.
The prices paid index gained to 4.79 from 4.73 and the prices received index rose to 2.78 from 2.61.
The survey noted the “growth of prices paid continued to outpace that of prices received. Firms expected the gap between the growth rates to narrow in the near future.”
Home prices grew 12.0% across the country on an annual basis in February, and rose 1.1% from January, the S&P CoreLogic Case-Shiller index showed. In January, prices jumped 11.2%.
Economists anticipated annual growth of 11.6% and a monthly gain of 1.1%.
“This is the largest gain in home prices since 2006,” said Wells Fargo’s Samana, and it “reflects the impact of lower mortgage rates, a flight away from cities (swapping condos/apartments for single family homes), and millennials coming of age and forming households.”
Housing sectors surveys have repeatedly pointed to supply issues, but Samana noted, “demographics are creating a surge in demand.”
Low mortgage rates and an improving labor market have helped fuel that demand. “This has positive implications for economic growth as it relates to residential construction, home furnishings, etc., and employment of and for construction workers.”
The 10-city composite grew 11.7% year-over-year in February after rising 10.9% the month before, while the 20-city composite jumped 11.9% year-over-year after 11.1% growth reported a month earlier.
The 10-city composite increased 1.1% in the month and the 20-city grew 1.2%.
“This data remains consistent with the hypothesis that COVID has encouraged potential buyers to move from urban apartments to suburban homes,” said Craig J. Lazzara, managing director and global head of index investment strategy at S&P DJI.
Primary market
The New Jersey Transportation Trust Fund Authority is set to sell $1.57 billion of bonds in four deals with Citigroup Global Markets Inc. running the books.
The $589.7 million of Series A refunding bonds (Baa1/BBB/BBB+/NR) consists of serial bonds from 2025-2036. Another $584.2 million consists of forward delivery transportation program bonds (Baa1/BBB/BBB+/A-) in Series AA, which is a refunding structured from 2023 to 2038, while Series 2022 A is also a forward delivery that consists of $281.7 million of Transportation system refunding bonds (Baa1/BBB/BBB+/NR) that mature from 2038 to 2042.
The authority will also sell $116.2 million of fixed-rate program notes (Baa1/BBB/BBB+/A-) in a 2014 Series BB-2 remarketing structure from 2030 to 2040.
The Massachusetts Clean Water Trust is set to offer $354.7 million on Thursday in two series — $142.8 million of state revolving fund bonds in Series 23 A green bonds and $211.8 million of Series 23B sustainability bonds (Aaa/AAA/AAA/NR). Morgan Stanley is the lead manager.
Oregon is set to issue $234.2 million of taxable general obligation bonds (Aa1/AA+/AA+/NR) for higher education on Thursday. Series 2021 G is $129.9 million, while Series 2021 I is $104.3 million — both to be priced by BofA Securities.
The Northside Independent School District, Texas, is planning to sell $128.2 million of unlimited tax refunding bonds (Aaa/ /AAA/ ) in taxable series 2021 on Tuesday. Insured by the Texas PSF, the deal is structured serially from 2022 to 2041 and is being senior managed by Ramirez & Co.
Lynne Funk contributed to this report.