Investors push back on nominal yields

Bonds

Municipals saw some weakness and yield pressure on certain primary deals in repricings following an up and down U.S. Treasury market.

Triple-A benchmark yields rose on bonds 10-years and out with one to two basis point cuts to scales. New issues saw a mixture of bumps and cuts on Tuesday, reflecting a general spread widening occurring from the start of the month. Lower coupons persist on new issues outside 10 years.

The 10-year muni-to-UST ratio was at 66% while the 30-year was at 70%, according to Refinitiv MMD. ICE Data Services had the 10-year muni-to-Treasury ratio at 66% and the 30-year ratio at 71%.

Refinitiv MMD had the five-year at 58% and ICE pegged it at 54%. ICE’s one-year rose to 118% from 99% on Friday.

Despite the looming quarter end, “which would normally support stronger bidding, last week’s price trends may persist in the near term, in particular if accounts look to take gains or raise cash from high grades” for month/quarter end, said Matt Fabian, partner at Municipal Market Analytics, in a weekly Outlook report.

“This is not a market with well-identified secondary demand just behind current clearing levels,” he said. “Note how yields rose after Wednesday’s spike in net buying interest” — $8.7 billion, the highest year-to-date — “perhaps on weaker demand from trading-oriented primary syndicates versus going-away buyers.”

In the primary Tuesday, BofA Securities priced $1.858 billion of tax and revenue anticipation notes for Los Angeles, California, (MIG 1/SP-1+//) maturing 5/23/2022 with a 4% coupon to yield 0.12%, noncall.

Morgan Stanley & Co. LLC repriced with a mix of bumps and cuts $209.6 million of affordable housing revenue bonds for the New York State Housing Finance Agency (Aa2///). The first, $48.46 million of 2021 Series D-1 (Climate Bond Certified/sustainability bonds), saw bonds priced at par at 0.25% in 2023, 0.70% in 5/2026 and 0.75% in 11/2026, 1.75% in 5/2031 and 1.80% in 11/2031, 2.25% in 11/2036, 2.40% in 11/2041, 2.55% in 11/2046, 2.65% in 11/2051 and 2.75% in 11/2056. Callable in 5/1/2030.

The second, $87.75 million of 2021 Series D-2 (Climate Bond Certified/sustainability bonds), saw bonds in 11/2046 with a 5/1/2023 mandatory put in 5/1/2023 yield 0.25% (-5) and bonds in 11/2056 with a 5/1/2025 mandatory put yield 0.65%.

The third, $34.8 million of 2021 Series E-1 (sustainability bonds), saw bonds priced at par in 5/2024 at 0.35%, 11/2024 at 0.40%, 5/2026 at 0.70%, 11/2026 at 0.75%, 5/2031 at 1.75%, 11/2031 at 1.80%, 11/2036 at 2.25%, 11/2041 at 2.40%, 11/2046 at 2.55%, 11/2051 at 2.65% and 11/2056 at 2.75%. Callable in 5/1/2030.

The fourth, $32.96 million of 2021 Series E-2 (sustainability bonds), saw 11/2056 with a mandatory put on 11/1/2025 at 0.65% (-5), callable in 7/1/2023.

The last, a $5.65 million of 2021 Series F (federally taxable) (sustainability bonds), saw 11/2025 priced at par at 1.125%.

RBC Capital Markets priced $272.9 million of water system junior lien revenue and refunding bonds for San Antonio, Texas, (Aa2/AA/AA/), with 5s of 2022 at 0.19%, 5s of 2026 at 0.62%, 5s of 2031 at 1.18%, 5s of 2036 at 1.42%, 4s of 2041 at 1.72%, 5s of 2046 at 1.70%, and 4s of 2051 at 1.90%.

Citigroup Global Markets Inc. repriced with bumps of seven to 10 basis points $176.7 million of unlimited tax school building bonds for the Richardson Independent School District, Texas, (Aaa/AAA//) (PSF guarantee) bonds in 2022 with a 5% coupon yield 0.12% (-7), 5s of 2026 at 0.68% (-3), 4s of 2031 at 1.17%, 3s of 2036 at 1.65% (-10), 3s of 2041 at 1.78% (-12) and 4s of 2046 at 1.68% (-7).

BofA Securities priced $157.7 of taxable general revenue and refunding bonds for the Boston Water and Sewer Commission (Aa1/AAA//). The taxable series saw bonds priced at par in 2024 to yield 0.29%, 1.065% in 2026, 1.829% in 2031, 2.329% in 2036 and 2.379% in 2037. The exempt series, $40.2 million, saw 5s of 2022 at 0.13%, 5s of 2026 at 0.54%, 5s of 2031 at 1.03%, 5s of 2036 at 1.19%, 4s of 2041 at 1.47%, 3s of 2046 at 1.83%, 2.25s of 2046 at par and 2.25s of 2051 at 2.30%.

In the competitive market, Denton, Texas, (/AAA/AAA/) sold $97.5 million of certificates of obligation to R.W. Baird and $44.1 million of general obligation bonds to FHN Financial. The first saw 3s of 2022 at 0.15%, 3s of 2026 at 0.65%, 4s of 2031 at 1.20%, 2s of 2035 at 1.84%, 2.25s of 2041 at par, 2.375s of 2046 at 2.42% and 2.50s of 2051 at 2.52%. The second saw 4s of 2022 at 0.25%, 5s of 2026 at 0.72%, 5s of 2031 at 1.27%, 2s of 2036 at 1.92% and 2.125s of 2041 at 2.17%.

Price talk on $300 million of Yale University revenue bonds for the State of Connecticut Health and Educational Facilities Authority (Aaa/AAA//) saw bonds in 7/2035 with mandatory tender on 7/12/2024 yield 0.45%, noncall. Barclays Capital Inc. will run the books on the deal scheduled to price Wednesday.

Goldman Sachs & Co. released price talk on $106.7 million of revenue and refunding bonds, Assured Guaranty Municipal Corp. insured, for the Sacramento City Unified School District (/AA//). Bonds in 2022 with a 5% coupon yield 0.14%, 5s of 2026 at 0.53% and 5s of 2028 at 0.73%. The deal is expected to price Wednesday.

High-yield credit buyers keep high-yield on top
Municipal high-yield has shown “exceptional resilience” over the last year, and near-term prospects suggest more of the same, MMA’s Fabian wrote.

“As a municipal market subsector, HY has grown to 13% of the outstanding bond market (by par) presently, from 10% last year and, more or less, the last five years,” Fabian said. “That growth has been afforded, if not driven by, steadily positive mutual fund inflows and surprisingly low default rates after the first few months of the pandemic.”

High-yield inflows have hit records this year, with the highest reported on April 14 at $1.28 billion, with many weeks seeing $500 million-plus. A hunt for yield and an investor willingness to support that sector has been fueling its success.

Default rates have depended — and will likely continue to depend — “on a deep and strong lending interest that includes rescue financings for troubled projects. Because borrowers needing completion or working capital cash are, all else equal, less rate sensitive, this effective ‘credit strength’ in HY should outlast even a moderate rise in yields,” Fabian said.

Secondary trading and scales
Up front, trading showed steadiness. South Carolina 5s of 2023 at 0.17%. New York EDC 5s of 2023 at 0.17%. North Carolina 5s of 2024 at 0.22%. Anne Arundel County, Maryland, 5s of 2024 at 0.28%.

New York City 5s of 2026 at 0.60%. Denver City and County 5s of 2028 at 0.72%-0.71%. California 4s of 2030 at 0.87%. Arlington, Texas, water 5s of 2029 at 0.90%.

Out longer, New York City TFA 5s of 2037 at 1.41%-1.38%. NYC TFA 3s of 2046 at 2.15%-2.13%. Los Angeles DWP 5s of 2051 at 1.58%.

High-grade municipals were weaker out longer on all triple-A benchmarks on Tuesday. According to Refinitiv MMD’s AAA, short yields were steady at 0.12% and at 0.16% in 2021 and 2022. The yield on the 10-year was up two basis points to 0.98% while the yield on the 30-year rose to 1.47%.

The ICE AAA municipal yield curve showed bonds in 2022 at 0.11% and 0.16% in 2023. The 10-year maturity rose one basis point to 0.98% and the 30-year yield rose one to 1.48%.

The IHS Markit municipal analytics AAA curve showed short yields were up one basis point at 0.13% and 0.16% in 2021 and 2022, respectively, with the 10-year at 0.97%, up one, and the 30-year yield also up one to 1.47%.

Bloomberg BVAL AAA curve showed short yields steady at 0.11% and 0.14% in 2021 and 2022, with the 10-year one higher at 0.96% and the 30-year yield steady at 1.47%.

In late trading, the 10-year Treasury was yielding 1.47% and the 30-year Treasury was yielding 2.10% after an up-and-down day. Equities were up, with the Dow Jones gaining 135 points, or 0.40%, the S&P 500 up 0.65% while the Nasdaq gained 0.10%.

Economy
Regional manufacturing and services surveys suggest an economy recovering, while prices and employment issues suggest consumers may continue to see inflationary pressures in the near term.

Data released Tuesday showed prices stabilizing at elevated levels, while supply-chain issues continue to curtail business and companies can’t find the right employees.

“The Philadelphia and Richmond surveys generally showed positive improvements and all were optimistic that conditions would continue to improve but employment challenges remain,” said Lawrence Gillum, LPL Financial’s fixed income strategist.

The regional surveys are “consistent with what we are seeing and hearing at the national level,” he said. “General business activity has increased and continues to show an economic recovery well underway but employment challenges remain and higher input costs and order backlogs continue to point to higher costs for business and, potentially, consumers in the near term.”

The Philadelphia region’s non-manufacturing business activity index jumped to 59.6 in June from 36.9 in May, while at the firm level, the index soared to 56.7 from 22.1 in May — the highest reading since March 2012.

IFR Markets expected a 24.0 read on the firm level and a 37.5 read regionally.

The full time-employment index plunged to 4.3 from 24.0. The price paid index dipped to 49.0 from 49.1 in May. The prices received index rose to 28.9 from 16.6.

In a special question, respondents said labor issues were hampering business, while others cited supply-chain issues and a large number blamed “COVID-19 mitigation measures.”

Also released Tuesday, Richmond Federal Reserve manufacturing index increased to 22 in June from 18 the prior month.

IFR estimated a reading of 20.

The prices paid index dipped to 9.42 from 9.82 and the prices received index dropped to 5.00 from 5.41.

The number of employees index fell to 19 from 25.

“Manufacturers continued to report shrinking inventories, growing order backlogs, and lengthening vendor lead times,” the report noted.

Activity in the Richmond Fed region’s service sector “saw growth” in June, even though the revenues index decreased to 25 from 29 in May.

IFR anticipated a reading of 32.

The demand index slipped to 41 in June from 43 in May.

The prices paid index gained to 5.67 from 5.34 and the prices received index rose to 3.83 from 3.37.

“Growth of prices paid outpaced that of prices received, but contacts expected the gap between them to narrow in the near future,” said the report.

The number of employees index grew to 13 from 10, but respondents reported struggling to hire skilled workers.

Separately, existing home sales slipped 0.9% to a seasonally adjusted annual rate of 5.80 million, from an unrevised rate of 5.85 million in April.

Sales have fallen four straight months.

Economists polled by IFR Markets estimated 5.72 million sales.

“Lack of inventory continues to be the overwhelming factor holding back home sales,” said NAR chief economist Lawrence Yun. “But falling affordability is simply squeezing some first-time buyers out of the market.”

Expected new supply, Yun added, “will give buyers more options and help tamp down record-high asking prices.”

Lack of inventory threw the housing market into chaos, and while supply remains historically low, it’s getting better, said Ralph McLaughlin, chief economic advisor at Kukun.

At the end of May, 1.23 million units were for sale, up from 1.15 million a month earlier but off 20.6% from a year ago.

“The housing market has a long way to go but is now on the right trajectory,” McLaughlin said. “I wouldn’t expect a big shift either way next month, if it is down again, I don’t think it will be more of a decline than we saw in May and if it turns positive for the first time in five months, it won’t be more than a 2% gain.”

Primary market to come
The Michigan Strategic Fund (Aa2//AA-/) is set to price $604 million of taxable limited obligation revenue bonds (Flint Water Advocacy Fund Project), serials 2022-2039, term 2051. Citigroup Global Markets Inc. is head underwriter.

The Gulf States Gas District (A2///) is set to price $556.6 million of gas supply revenue bonds. Goldman Sachs & Co. LLC is lead underwriter.

Tennessee (Aaa/AAA/AAA/) is set to price $492.7 million of taxable general obligation refunding bonds, serials 2021-2035. Jefferies LLC will run the books.

Tennessee is also set to price $164.9 million of tax-exempt general obligation refunding bonds on Wednesday. FHN Financial Capital Markets is lead underwriter.

The Indiana University Health, Inc. Obligated Group through the Indiana Finance Authority (Aa2/AA/AA/) is set to price on Thursday $407.8 million of taxable hospital revenue bonds, $300 million of which are corporate CUSIP. J.P. Morgan Securities LLC is lead underwriter.

Philadelphia (A1/A+/A+/) is set to price on Wednesday $359.5 million of taxable water and wastewater revenue refunding bonds, serials 2022-2036, terms 2041, 2045. Citigroup Global Markets Inc. is head underwriter.

The Town of West Hartford, Connecticut, (Aaa/AAA//) is set to price on Thursday $324.4 million of taxable general obligation bonds, serials 2022-2036, terms 2041, 2046. Raymond James & Associates, Inc. is bookrunner.

The Northern Tobacco Securitization Corp., Alaska, is set to price $284.8 million of tobacco settlement asset-backed refunding bonds, Series 2021 senior bonds, with $152.8 Series A, serials 2022-2041, term 2050, and $35 million of Series B1, terms 2031, 2050, and $97 million of Series B2, terms 2066. Jefferies LLC will run the books.

The Massachusetts Educational Financing Authority (/AA//) is set to price on Thursday $269.8 million of taxable education loan revenue bonds, serials 2024-2031, term 2037. RBC Capital Markets is head underwriter.

Glendale, Arizona, (/A+/AA-/) is set to price on Wednesday $252.8 million of taxable certificates of participation, serials 2024-2037. RBC Capital Markets is bookrunner.

Miami-Dade County, Florida, (A1/A+//) is set to price on Wednesday $244.5 million of subordinate water and sewer system revenue refunding bonds, serials 2027-2028, 2034-2044, terms 2046, 2048, 2051. RBC Capital Markets is head underwriter.

The Fort Worth Independent School District, Texas, (Aaa/AAA//) (PSF guarantee) is set to price on Thursday $242.5 million of unlimited tax school building bonds. Piper Sandler & Co is head underwriter.

The Northwest Independent School District, Texas, (Aaa//AAA/) (PSF guarantee) is set to price on Thursday $181.5 million of unlimited tax school building bonds, serials 2022-2046. RBC Capital Markets is head underwriter.

The Liberty Hill Independent School District, Texas, (Aaa///) (PSF guarantee) is set to price on Wednesday $180 million of unlimited tax school building bonds, serials 2022-2041, terms 2046, 2056. RBC Capital Markets will run the books.

The Lone Star College System, Texas, (/AAA//) is set to price on Wednesday $176.5 million of $161.5 million of limited tax general obligation bonds, Series 2021A, and $15 million of limited tax general obligation refunding bonds, Series 2021B. Morgan Stanley & Co. LLC will run the books.

The Waco Education Finance Corporation, Texas, (/A+/A+/) is set to price on Thursday $124.5 million of Baylor University revenue bonds. Morgan Stanley & Co. LLC is lead underwriter.

The Massachusetts Educational Financing Authority is set to price on Thursday $111.8 million of education loan revenue bonds, $71.8 million of Series B (/AA//) AMT, serials 2024-2031, term 2037, and $40 million of subordinate Series C (/BBB//), serial 2051. RBC Capital Markets will run the books.

The Metropolitan Water District of Southern California (Aa1/AAA//) is set to price on Wednesday $96.7 million of water revenue refunding bonds. Siebert Williams Shank & Co., LLC will run the books.

In the competitive market on Wednesday, the Georgia Road and Tollway Authority (Aaa/AAA//) is set to sell $210.5 million of managed lane system guaranteed revenue bonds at 10:15 a.m., $115.3 million of managed lane system guaranteed revenue bonds at 10:45 a.m. and $36.6 million of managed lane system guaranteed taxable revenue bonds at 11:15 a.m.

Hempstead, New York, is set to sell $140 million of public improvement bonds at 11 a.m.

Texas is set to sell $144.25 million of college student loan general obligation AMT bonds at 11 a.m. and $72.5 million of college student loan guarantee general obligation refunding AMT bonds at noon.

Quincy, Massachusetts, is set to sell $121 million of general obligation bond anticipation notes at 10 a.m.

On Thursday, Bryan Independent School District, Texas, (/AAA/AAA/) (PSF guarantee) is set to sell $120 million of unlimited tax school bonds at 10 a.m.

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