Municipal bonds were little changed Monday as the market opened the first day of the 2021 on a subdued note. Yields on top-rated munis were unchanged on AAA scales while muni to Treasury ratios remained low.
The muni to Treasury ratio stood at 77.8% in 10 years and 84.1% in 30 years, according to Refinitiv MMD while ICE Data Services said the 10-year was at 75% and the 30-year was at 85%. Ratios on the 10-year have been below 80% since the beginning of December.
This week’s volume is estimated at $2.4 billion in a calendar composed of $1.6 billion of negotiated deals and $768 million of competitive sales.
Where do we go from here?
The muni market ended 2020 with an all-time issuance record, which saw $474 billion of new deals hit the screens last year.
“I never imagined we’d see municipal issuance climb as high as it has. But let’s be clear, the only reason we’re seeing higher volume this past year is due to a dramatic increase in taxable municipal debt,” said Robert Wimmel, head of municipal fixed income at BMO Capital Markets.
“Why the increase in taxable muni bonds? The 2017 Tax Cuts and Jobs Act prohibited the use of tax-exempt bonds for advance refunding deals. Fortunately for issuers and taxpayers, the current historically low interest rate environment makes it possible for issuers to sell taxable bonds to advance refund outstanding tax-exempt debt and still save on interest costs,” he said. “Good news for municipalities, not so good for investors losing older, higher-yielding bonds. We did see this trend start in the last few months of 2019 as longer-term interest rates fell by about 100 basis points from the beginning of that year, but the taxable refunding deals really took off with record-low yields in 2020.”
Looking ahead, he thinks that while 2021 will be a high issuance year, it will not be a record-breaker; that may be reserved for 2022.
“I do think we will break this year’s record, but I don’t think it will be in 2021,” Wimmel said. “Yes, we have been seeing large issuance over the past few years, but today’s dollars don’t pay for as much as they used to even with the low inflation we’ve been seen over the past few years.”
For example, in 2016, total municipal issuance was about $450 billion.
“That can pave a lot of roads and build a lot of schools,” he said, but noted that in 2021 dollars, “you would need to issue about $485 billion to work as hard… So, we are naturally going to see issuance inflated as we move forward.”
Wimmel said if interest rates remain low in 2021, which most expect, taxable refunding deals should continue at a good clip.
He noted that new-money issuance was relatively flat in 2020 and he thinks issuers will remain cautious with new money issuance “until we fully recover from the pandemic, which is still years away.”
“If we see federal support for infrastructure in 2022 and if interest rates remain low, that could be another record year for muni issuance,” Wimmel said. “Pent-up issuance from pandemic-delayed projects could also start to see light in 2022.”
He sees a quiet start to 2021 with a slower-than-usual first quarter. He said first quarter slowness could be “unfortunate as we are expecting considerably more bonds to be maturing in Q1 2021 relative to Q1 2020.”
Demand with low supply could keep munis at the richer ratios that have been seen over the past several weeks.
“Many issuers likely accelerated deals due to record low interest rates as well as the uncertainties surrounding the November Presidential election,” pointing to the $70 billion the market digested October.
“I don’t think we’ll see a month like October until we see another passionately contested Presidential election — and honestly, I don’t want to go through that again anytime soon,” Wimmel said.
“We also saw a large number of taxable refunding deals pulled into October to find savings to offset some of the COVID-related expenses incurred by state and local issuers — over $22 billion of October issuance was taxable muni debt,” Wimmel said.
He added that while the need was great for infrastructure spending, he didn’t see it happening in 2021.
“I also don’t expect to see much progress on infrastructure in 2021 as there are too many other more pressing concerns and the level of coordination for infrastructure improvements between the various federal and state agencies with take many months to map out. So, I don’t expect infrastructure to drive muni volume in 2021,” Wimmel said.
“By now, everyone should be well aware of the dire state of infrastructure in the U.S. and the hundreds-of-billions of dollars needed to make necessary repairs and improvements. This can easily move the issuance needle higher quite dramatically,” he said. “I think President-elect Biden’s philosophy leans toward leveraging federal dollars to attract state and private funds; there’s no doubt that public-private partnerships will be a portion of rebuilding infrastructure in the states. It’s hard to estimate how much will come from municipal debt versus various forms of private equity.”
Rates will stay low
Monetary policy will need to remain “accommodative for quite a while,” since inflation won’t hit a 2% average for “a long time,” Federal Reserve Bank of Chicago President Charles Evans said in a virtual speech Monday.
“The bottom line is that it will take a long time for average inflation to reach 2%,” he said. “To meet our objectives and manage risks, the Fed’s policy stance will have to be accommodative for quite a while. Economic agents should be prepared for a period of very low interest rates and an expansion of our balance sheet as we work to achieve both our dual mandate objectives.”
With the Fed consistently undershooting its 2% target since it was set, “we can’t spend the next five years underrunning our target and just offer up explanations for why bringing inflation up to 2% is so hard,” Evans added. “Instead, we have to avoid such poor outcomes by using policy strategies that offset this downward bias.”
And the Fed did change its strategy last year. “To me, the biggest impetus for updating our monetary policy strategy came from an undeniable realization: The effective lower bound on the federal funds rate was not just an anomaly we stumbled into during the Great Financial Crisis, but a persistent threat to the achievement of our dual mandate goals.”
With the long-run equilibrium real fed funds rate lower than in the past, even an “average” shock could send rates to near zero, he warned.
Refinitiv Lipper reports $1.8B inflow
Weekly reporting tax-exempt mutual funds saw $1.767 billion of inflows in the week ended Dec. 30, Refinitiv Lipper reported last week. It followed an inflow of $1.288 billion in the previous week.
Exchange-traded muni funds reported inflows of $288.913 million, after inflows of $412.971 million in the previous week. Ex-ETFs, muni funds saw inflows of $1.478 billion after inflows of $874.670 million in the prior week.
The four-week moving average remained positive at $1.240 billion, after being in the green at $849.028 billion in the previous week.
Long-term muni bond funds had inflows of $704.328 million in the latest week after inflows of $821.870 million in the previous week. Intermediate-term funds had inflows of $140.243 million after inflows of $107.211 million in the prior week.
National funds had inflows of $1.684 billion after inflows of $1.141 billion while high-yield muni funds reported inflows of $228.475 million in the latest week, after inflows of $332.087 million the previous week.
Most of this week’s large negotiated deals will be coming to market on Thursday.
In the competitive arena on Tuesday, Nassau County, N.Y., (A2/A+/A/) will be selling $370 million of notes in four offerings. The sales consist of $110 million of Series 2021A revenue anticipation notes, $110 million of Series 2021A tax anticipation notes, $110 million of Series 2021B TANs and $40 million of Series 2021B RANs.
RBC Capital Markets is set to price the City and County of Denver School District No. 1, Colo.’s (Aa1/AA+/AA+/) $450 million of general obligation refunding bonds on Thursday. The deal is backed by the Colorado State Intercept Program.
Loop Capital Markets is expected to price the New Jersey Economic Development Authority’s (Baa1/BBB/BBB+/NR) $350 million of Series 2021 QQQ school facilities construction social bonds on Thursday.
Wells Fargo Securities is ready to price the California Infrastructure and Economic Development Bank’s $271.5 million of Series 2021A, B and C refunding revenue bonds for the Los Angeles County Museum of Art project.
Stifel is set to price the San Jose Unified School District, Santa Clara County, Calif.’s (/AA+//) $146 million of taxable GO refunding bonds on Thursday.
Bond Buyer indexes little changed
The weekly average yield to maturity of the Bond Buyer Municipal Bond Index, which is based on 40 long-term bond prices, was unchanged at 3.46% from the previous week.
The Bond Buyer’s 20-bond GO Index of 20-year general obligation yields was unchanged at 2.12% from the prior week. The 11-bond GO Index of higher-grade 11-year GOs was steady at 1.65% from the week before. The Bond Buyer’s Revenue Bond Index fell four basis points to 2.53% from 2.57% in the prior week.
High-grade municipals were unchanged Monday, according to final readings on Refinitiv MMD’s AAA benchmark scale. Short yields were steady at 0.13% in 2022 and 0.14% in 2023. Out longer, the yield on the 10-year muni (2031) was at 0.71% while the yield on the 30-year muni (2051) was at 1.40%.
The ICE AAA municipal yield curve showed short maturities flat at 0.13% in 2022 and at 0.15% in 2023. The 10-year maturity was at 0.68% while the 30-year yield was at 1.41%.
The IHS Markit municipal analytics AAA curve showed yields at 0.11% in 2022 and 0.12% in 2023 while the 10-year was at 0.64% and the 30-year yield was at 1.34%.
Treasuries were mixed as stock prices traded lower.
The three-month Treasury note was yielding 0.08%, the 10-year Treasury was yielding 0.91% and the 30-year Treasury was yielding 1.65%. The Dow fell 1.55%, the S&P 500 decreased 1.70% and the Nasdaq lost 1.65%.
President Trump re-nominated Judy Shelton for a seat on the Federal Reserve Board, since her nomination expired at the conclusion of the last Congress.
The controversial candidate was included in a list of 30 nominations made on Sunday, including others that had been previously nominated.
It is unlikely the Senate GOP leadership will be able to muster enough votes to put Shelton on the Board. Republican Sens. Mitt Romney and Susan Collins opposed the nomination in a November vote, plus Republicans will not have the tie-breaking vote the next four years with a Democrat in the White House.
In economic data, construction spending grew 0.9% in November, after an upwardly revised 1.6% gain in October, first reported as a 1.3% increase. The November change was in line with economists’ expectations.