Bonds

Fresh off stimulus passage, many signs point to strong municipals

The municipal market was steady to firmer in spots on light activity Monday, with U.S. Treasuries calmer after Friday’s sell-off and muni market participants awaiting the larger new-issue calendar

Triple-A benchmarks were mostly unchanged across the yield curve and municipal to UST ratios within a tight range of Friday’s, with Monday’s 10-year at 64% and the 30-year at 70%, according to Refinitiv MMD. ICE Data Services showed ratios at 63% in 10-years and 73% in 30.

A reversal of fund flows and the planned arrival of the economic stimulus for states and local governments helped boosted the market’s morale ahead of more than $10 billion in new supply this week.

“We have a lot of good news in the market right now and the secondary market is firm,”a New York trader said Monday. “It’s a heavy week and the demand component is pretty good. We have had certain states snap back in the widening of spreads,” on the approval of the $1.9 trillion economic stimulus plan.

“From a credit perspective that alleviates some of the concerns for the muni sector,” he said. “We saw return to inflows last week where we saw the previous week’s outflows correct itself. There’s definitely money coming back into the market.”

Municipal valuations, though, should remain “horrendous” as long as municipal supply continues to be relatively muted, according to Peter Block, managing director of credit strategy at Ramirez & Co.

Tax-exempt supply this week represents about $8 billion, or 78.8% of the gross supply of $10 billion led by a $2.2 billion Dormitory Authority of the State of New York personal income tax revenue offering, Block noted in a weekly municipal report. He predicted that March new-issue volume should be $33 billion, down 2% month over month, with net negative supply of $1 billion.

Price talk for the state of Illinois’ $1.25 billion of general obligation notes saw yields on bonds in 2022 with a 5% coupon at 0.86%, 5s of 2026 at 1.68%, 5s of 2031 at 2.37%, 5s of 2036 at 2.65%, 4s of 2041 at 3.05%, 5s of 2046 at 3.00%. The second two series, $150 million and $259 million, are not callable, the latter priced with 4% coupons in 2022 to yield 0.86%, 1.47% in 2025 and 2.37% in 2031.

While the Dormitory Authority of the State of New York’s $2.2 billion of exempt and taxable personal income tax bonds will test the market this week, another New York issuer announced plans for a $1.2 billion deal for next.

The New York City Transitional Finance Authority said late Friday that it will issue about $1.2 billion of future tax secured subordinate bonds next week. The deals are made up of around $1 billion of tax-exempt fixed-rate bonds and about $234 million of taxable fixed-rate bonds. Proceeds from the sale will be used to refund certain outstanding bonds for savings.

The tax-exempt fixed-rates are scheduled to be priced on Wednesday, March 24, after a two-day retail order period by book-running lead manager Ramirez & Co. with BofA Securities and Citigroup serving as co-senior managers.

The TFA also intends to competitively sell about $234 million of taxable fixed-rate on Wednesday, March 24.

Reports of possible higher taxes proposed by the Biden administration is fueling the municipal demand.

“Any time we get that kind of news, munis tend to do better, so all these things are looking in our favor,” the New York trader said.

Secondary market
Trading showed a steady to firmer tone in spots. Delaware 5s of 2023 traded at 0.16%-0.13%. Florida GOs, 5s of 2024 at 0.24%. Georgia GOs, 5s of 2027 at 0.55%. Ohio waters, 5s of 2028 at 0.81%-0.80%. California GOs, 5s of 2030 at 1.10%. North Carolina GOs, 5s of 2031 at 1.15%. New York City waters, 5s of 2031 at 1.19%-1.18% versus 1.22% Wednesday.

Anne Arundel, Maryland 5s of 2032 at 1.15%. Anne Arundel 5s of 2035 at 1.29%. Ohio waters 5s of 2038 at 1.44%. Los Angeles DWP 5s of 2039 at 1.50%, same level as Friday.

Washington GOs, 5s of 2046 at 1.67% versus 1.74% Friday. Honolulu Hawaii 5s of 2050 at 1.75% versus 1.86% Wednesday.

High-grade municipals unchanged, according to Refinitiv MMD. Short yields were flat at 0.06% in 2022 and to 0.07% in 2023. The 10-year at 1.02% and the 30-year at 1.65%.

The ICE AAA municipal yield curve showed short maturities at 0.07% in 2022 and 0.10% in 2023. The 10-year was flat at 1.00% while the 30-year yield stayed at 1.71%.

The IHS Markit municipal analytics’ AAA curve showed yields steady at 0.06% in 2022 and 0.11% in 2023 with the 10-year at 0.98%, and the 30-year at 1.66%.

The Bloomberg BVAL AAA curve showed yields at 0.05% in 2022 and at 0.09% in 2023, while the 10-year stayed at 1.00%, and the 30-year yield at 1.69%, one basis point lower.

The 10-year Treasury ended at 1.61% and the 30-year Treasury was yielding 2.37% near the close. The Dow was up 23 points while the S&P 500 rose 0.14% and the Nasdaq gained 0.51%.

No inflation worries, yet
The economic data calendar was light, with just one regional manufacturing sector survey, and despite its suggestion that price pressures are rising, analysts are not yet worried about inflation, but if numbers keep climbing through the summer, their opinions may change.

New York manufacturing sector activity “grew at a solid clip,” as the Empire State Manufacturing Survey’s general business conditions index climbed to 17.4 in March from 12.1 last month, according to the Federal Reserve Bank of New York.

Economists polled by IFR Markets expected a gain to 14.5.

Prices paid jumped to 64.4 from 57.8 and prices received crept to 24.2 from 23.4 in the previous month.

Looking six-months ahead, future general business bumped up to 36.4 from 34.9, while the forward-looking prices paid index climbed to 64.4 from 55.8, and the future prices received rose to 38.3 from 32.5.

The prices paid level, a 10-year high, reflects “the recent surge” in commodity prices, and is likely to “dissipate” once supply chain disruptions end, said Matthew Miskin, co-chief investment strategist at John Hancock Investment Management.

“The Fed changed their inflation framework to average inflation targeting so as to not overreact to short-term inflationary pressures such as these,” he said. “In our view, this reading does little to change the Fed’s view on policy, but if it persists into the summer, they may be well behind the curve.”

The report, like other regional surveys, suggests “a significant rebound in manufacturing activity,” noted Scott Ruesterholz, portfolio manager at Insight Investment. The shipments and backlogs indexes, he said, suggest manufacturers’ “robust plans to add employees and invest in cap-ex.”

The price indexes grew because commodity prices, especially oil and metals, rose, Ruesterholz said.

“The prices received index has also been increasing, though just to levels seen in 2018. This suggests that while prices are going up, manufacturers are absorbing some of the commodity price increase in the form of tighter profit margins,” he said. “We do expect to see inflation rise over the next quarter as commodity prices feed through, favorable base effects take hold, and strong consumer demand for travel and goods allows producers to raise prices.”

While short-term inflation should be “stronger” after reopening is complete, especially compared to last year’s depressed numbers, LendingTree chief economist Tendayi Kapfidze said, “In the near-term, there will be upward pressure on rates. Some rate sensitive sectors, like housing for example, might come under pressure.”

But Kapfidze doesn’t see long-term issues.

“Overall, the economy should power through the short-term headline inflation pressures and I think we will start to see the economy accelerate and by the summer,” he said, “it is going to be humming.”

Ruesterholz said these pressures will prove to be transitory, as the Federal Reserve has suggested, in which case it will disregard near-term inflation spikes.

“In order for inflation to move sustainably above target, shelter prices will likely need to rebound, as it accounts for over 30% of CPI,” he said. “While there are tentative signs that urban rents are bottoming, the rebound may be prolonged, which can keep inflation capped after its initial bounce in coming months.”

Primary market
The Dormitory Authority of the State of New York (/AA+/AA+/) is set to price $2.2 billion of tax-exempt and taxable personal income tax bonds with Morgan Stanley & Co. running the books on Thursday. DASNY is also set to price $210.2 million federally taxable PITs.

Illinois is set to price $1.25 billion of general obligation notes structures in three series, $850 million in 2021A, $150 million Series B, and $259.9 million in refunding Series C. Morgan Stanley will price the bonds, which are rated Baa3 by Moody’s Investors Service.

An $805 million offering of Missouri Health and Educational Facilities Authority health facilities revenue bonds on behalf of BJC Health System will be priced by RBC Capital Markets on Thursday consisting of three series of bonds which are rated Aa2 by Moody’s and AA by Standard & Poor’s.

The deal is structured as $315.4 million of Series 2021A bonds maturing serially from 2025 to 2041 with terms in 2046 and 2051; $250.4 million of Series 2021 B bonds maturity as one term maturity in 2051 and $240.1 million in Series 2021 C maturing as a 2052 term.

On Tuesday, the California Housing Finance Agency is slated to sell $522.6 million of Series 2021-1 Class X certificates, which are variable-rate, partially tax-exempt, and not subject to the alternative minimum tax.

The bonds, which are structured to mature as a bullet maturity in 2035, are rated BBB-plus by Standard & Poor’s and are slated to be priced by Citigroup Global Markets Inc.

Elsewhere in the region, the state of Oregon will issue $453.5 million of general obligation bonds in three tax-exempt series priced by Morgan Stanley & Co.

The structure consists of Series A, $307.96 million, Series D, $49.84 million, and Series E, $95.78 million. The bonds are rated Aa1 by Moody’s and AA-plus by S&P and Fitch.

Oregon will also sell $173.54 million of federally taxable GOs on Tuesday in a Morgan Stanley-priced offering.

The structure of the taxable deal consists of $20.9 million of Series B serials maturing from 2022 through 2036, and $152.6 million of Series C serials, maturing serially from 2022 through 2036 with a 2041 term.

The city of Huntington Beach, California, meanwhile, will sell $363.62 million of taxable pension obligation bonds in Series 2021. The deal, which will be priced by Stifel, Nicolaus & Co., is rated AA-plus by Standard & Poor’s and Fitch.

Back in the Northeast, the University of Massachusetts Building Authority will sell $317.32 million of refunding revenue bonds in Senior Series 2021-1 on Wednesday. The bonds will be priced by Citigroup with a serial structure maturing from 2021 to 2037 and rated Aa2 by Moody’s, AA-minus by S&P and AA by Fitch.

The New York Transportation Development Corp. will sell $269.33 million of exempt facility revenue bonds in Series 2021, which is tax-exempt and subject to the alternative minimum tax.

Being sold for the New York State Thruway Service Areas Project, the deal is rated BBB-minus by Fitch and will be priced by Citigroup with a term bond structure maturing in 2031, 2034, 2041, 2046, and 2053.

The California School Cash Reserve Program Authority is on tap to sell $234.43 million in a two-pronged deal on Tuesday with Piper Sandler & Co. as bookrunner. Series L 2020-2021 totals $104.75 million, while Series M totals $129.68 million.

The Louisville/Jefferson County, Kentucky, Metropolitan Government is on tap to sell $198 million of pollution control revenue bonds in 2003 Series A and 2001 Series B bonds, both for the Louisville Gas & Electric Company Project. The bonds are rated A1 by Moody’s and A by Standard & Poor’s.

Trimble County, Kentucky, meanwhile, will sell pollution control revenue bonds in 2001 Series B for the Louisville Gas and Electric Company Project in a remarketing of $128 million of Series 1 and $35 million in Series 2 and 3. Morgan Stanley is the book-runner.

A $193.2 million refunding from Wake County, North Carolina, is on tap for pricing on Wednesday in a negotiated sale underwritten by Wells Fargo Securities.

The gilt-edged offering consists of GO public improvement bonds structured as serial bonds maturing from 2022 to 2038.

The Memphis-Shelby County, Tennessee, Airport Authority is expected to land $172.5 million of airport revenue bonds in a four-pronged deal, the largest of which is Series 2021A, subject to the alternative minimum tax and structured as serials maturing from 2025 to 2026 and 2030 to 2040, and terms in 2045 and 2049.

Series 2021 B, subject to the AMT, is $2.61 million of refunding bonds and structured to mature serially in 2022, while Series 2021 C is $15.73 million of AMT refunding bonds maturing serially from 2022 to 2025. Series 2021 C totals $33.5 million and is non-AMT refunding bonds maturing serially from 2022 to 2026.

The bonds, which are rated A2 by Moody’s, A by Fitch, and A-plus by Kroll Bond Ratings, is being priced by Raymond James & Associates.

The Riverside County Office of Education will sell $171.7 million of pooled cross fiscal year 2020-2021 tax and revenue anticipation notes in Series A and B on Tuesday with UBS Securities as the bookrunner.

Series A consists of $82.1 million of notes and Series B $89.5 million of notes.

The North Carolina Housing Finance Agency, meanwhile, will sell $168.3 million of home ownership revenue bonds on Thursday in a structure that includes $150 million of Series 46-A, which is not subject to the AMT, while $18.3 million of Series 46-B revenue refunding bonds is federally taxable interest bonds.

BofA Securities is the underwriter.

Back in the Northeast, the Philadelphia Industrial Development Authority will sell $163.5 million of taxable industrial development city service agreement revenue refunding bonds in Series 2021.

The bonds, which are rated A3 by Moody’s, A by S&P and A-minus by Fitch, are being priced by BofA Securities.

The Orlando Utilities Commission, meanwhile, is bringing $154.8 million of utility system revenue bonds to market on Wednesday in a deal priced by Wells Fargo Securities.

Series 2021A consists of revenue bonds structured as serials from 2028 to 2034 and 2036 to 2040 with a term bond in 2046.

Series 2021 B revenue bonds totals $150 million.

Both series are rated Aa2 by Moody’s and AA by S&P and Fitch.

Lynne Funk contributed to this report.

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