Municipal secondary trading was quiet but a firmer tone emerged on Monday as both the holiday-shortened week and the approaching end of the first quarter made for a steady market.
“It’s a very light calendar this week because of the holiday,” a New York trader said on Monday looking ahead at the upcoming Good Friday and Easter holiday.
Just a little over $3 billion is on tap, led by the $995 million Golden State Tobacco Securitization Corporation taxable offering, before the market takes its holiday hiatus.
Municipals were steady Monday from 2022 to 2025, and were bumped as much as one basis point between 2026 and 2051 near the close of trading, after being unchanged across the board between 2022 and 2051 on Friday, according to triple-A benchmark data providers.
Municipal to UST ratios fell Monday to 64% in 10 years and 71% in 30, according to Refinitiv MMD, while ICE Data Services showed ratios at 63% in 10 years and 72% in 30.
“Although the muni to Treasury percentages aren’t great, it’s an improving situation with credit quality because of the stimulus package giving more money to state and local governments and schools,” the trader said.
Rating agencies continue to recognize the beginning of the end of the pandemic on economic growth and fiscal stimulus by changing outlooks on select individual credits and entire sectors, Peter Block, managing director of credit strategy at Ramirez & Co. said in a weekly report Monday.
“Notable rating actions this past week included S&P following Moody’s by changing sector outlooks to stable from negative on states, local governments, school districts, charter schools, airports, mass transit, and toll roads,” Block wrote. “This follows S&P’s outlook revision to stable from negative on NY MTA transportation revenue bonds and the State of Illinois GO.”
The market will take a pause from the significantly sized, billion-dollar deals it’s seen of late.
The total potential volume for the week is estimated at $3.3 billion, , which is down from total sales of $8.5 billion million last week.. Total 30-day visible supply sits at $10.18 billion with $4.420 billion of competitive deals and $5.763 billion of negotiated on the calendar.
“We are stronger for the day and in good shape,” the trader said, noting that any new issues will be smaller, local deals and will begin pricing on Tuesday and wrap up Thursday as the market is closed for Good Friday.
“We have gone through a lot of deals and all new issues have done well,” he said.
He pointed to last week’s New York Transitional Finance Authority and Triborough Bridge and Tunnel Authority deals, which were both hallmark names with good track records that were attractively priced.
“The Trib deal was a blowout,” he said. “There may be a test with new credits that are a little shaky, but if it’s a large new-issue, they want it and they all do well,” the trader said.
The TFA’s $1.2 billion sale of future tax secured subordinate bonds also stole the spotlight last week.
The issue was made up of $1 billion of tax-exempt, fixed-rate bonds priced by Ramirez & Co. and $228 million of taxable fixed-rates sold competitively.
While the new-issue market remains strong overall, demand in the secondary market is imbalanced, according to the New York trader.
The front end of the secondary market remains extremely rich, which is psychologically challenging for investors, he noted.
While they are eager to earn the maximum yields on the long end of the curve, the short end remains tough to swallow, he said.
“If it’s 0.18% or 0.20% and it’s not a new issue it struggles on the front end in the secondary market,” he said.
Quarter end and rate refusal
As the end of the first quarter arrives on Wednesday, the market will look for two key announcements this week, one being an announcement from President Biden on an infrastructure plan, Block of Ramirez pointed out.
The market also anticipates the economic data release on Friday for both March non-farm payrolls, which is expected at more than 635,000 jobs and a 6% unemployment rate.
Nonfarm payroll is expected to be significantly up from February’s 465,000, while the unemployment rate is expected to be down from 6.2% last month, according to analysts.
The economy is positioned to improve quickly, as vaccinations increase, so to willthe reopening of servicesand demand for goods, according to the latest results of the Dallas Fed regional survey. The progress seen regionally should translate to positive impacts for the economy as a whole, according to analysts.
Texas factory activity, as measured by the production index, “expanded at a markedly faster pace in March,” according to the monthly Texas Manufacturing Outlook Survey conducted by the Federal Reserve Bank of Dallas, released on Monday.
“The survey shed light on many of the drivers of economic activity such as the labor market, as factories are hiring and increasing hours worked,” said KC Mathews, executive vice president and chief investment officer at UMB Bank. “This should dovetail into lower unemployment, more disposable income and more consumption.”
The general business activity index rose to 28.9 in March from 17.2 in February, while the company outlook index grew to 25.8 from 10.7.
The six-months ahead future outlook index for business activity slipped to 33.7 from 33.9 and the future company outlook index fell to 26.2 from 32.3.
“The Texas factory sector appears poised to accelerate further as more and more Texans are vaccinated and demand for goods rises with widespread reopening of services,” according to Scott McIntyre, senior portfolio manager and managing director at Hilltop Securities Asset Management.
The production index leaped to 48.0 from 19.9 last month.
“The production index jumped to the highest level in the 17-year history of the series,” McIntyre said.
The outlook uncertainty index dropped to 5.5 from 8.5.
The capacity utilization index spiked to 46.1 from 16.5.
“The survey shows a very strong recovery as some of their indicators are hitting all-time highs,” said Aleksandar Tomic, associate dean and program director of MS in applied economics at Boston College.
“The capacity utilization index is particularly interesting as it is one of those indicators that are showing an all-time maximum and points to the continued strain on the supply chain that has been mentioned in recent stories surrounding the Suez Canal situation,” he said “In short, capacity is being used up all along the supply chain, and strong demand is putting a stress on it.”
Prices paid for raw materials gained to 66.0 from 57.4, while prices received for finished goods climbed to 32.2 from 23.0. Wages and benefits soared to 28.0 from 16.1, while the employment index surged to 18.8 from 12.7, and the hours worked index jumped to 23.4 from 11.3.
“On the inflation front, supply chain disruptions continued to put upward pressure on prices as the raw materials index jumped, while the finished goods index climbed from to a three-year high,” McIntyre said. “Employment conditions [also] brightened considerably in March more than doubling and the outlook index is also the highest in three years.”
According to Robert Johnson, CEO and chair at Economic Index Associates as well as a professor of finance, at the Heider College of Business at Creighton University, the survey indicates that “the economy is rapidly improving,” as the economy recovers from Covid-19 related shutdowns and slowdowns.
He noted the report makes a “strong case” that the U.S. could be seeing the “start of the highly anticipated Roaring Twenties.”
“In fact, the production index and capacity utilization indexes both reached all-time highs,” Johnson said. “While the numbers all point to a rapidly improving economy, price and wage pressures are both rising, furthering inflationary concerns.”
Mathews thinks short-term inflation concerns are “transitory,” and being caused by supply disruptions and increases in raw material prices.
“As the global economy reopens, supply chains and inventories should normalize keeping short-term inflation in check,” he said.
The six-month ahead in the future prices paid for raw materials index rose to 55.0 from 52.9, while prices received for finished goods dipped to 43.9 from 44.9. Wages and benefits decreased to 42.4 from 52.1, the employment index rose to 38.4 from 30.8, while the hours worked index dropped to 5.4 from 11.0.
“Data supporting the conclusion that inflation concerns are transitory, is in the Dallas Fed Manufacturing ‘six month ahead’ outlook survey,” Mathews said. “In March, fewer business owners think prices for finished goods, six months from now, will be on the rise. In addition, the outlook for increasing wages and benefits, a key sustainable driver of inflation, may have plateaued.”
2021 could be a ‘buy the dips’ year
With the recent COVID relief bill, and the Fed’s foot still firmly planted on the monetary stimulus gas, inflation fears and rising bond yields have become the hot topic.
This has been compounded by ever-more encouraging data on the effectiveness of the vaccines that have already been distributed worldwide, making investors increasingly confident that much more “normal” consumer spending patterns could resume as early as the summer.
While some transitory inflation feels inevitable, it has spurred investors to overreact, mistaking transitory inflation for a persistent sea change in inflation trends, according to Gautam Khanna, senior portfolio manager at Insight Investment. Khanna said 2021 could be a “buy the dips year,” as he believes that persistent inflation is “unlikely.”
“It is unlikely for a few reasons, first, the rise in money supply is not as overwhelming as it might first appear,” Khanna said. “And employment trends mean the output gap will probably take around two years to close.”
He added that many of the long-term disinflationary trends the economy has been facing for years have only been exacerbated by the pandemic.
“So, even if inflation pressures were to build, the Fed has been effective at keeping inflation low (even if it has struggled, lately, to stimulate inflation when it has been too low),” he said. “Bond yields could potentially sell off intermittently, but with plenty of cash waiting on the sidelines and U.S. rates looking attractive to international buyers, it could be the year of the opportunists.”
High-grade municipals firmer on bonds five years and out the curve on Refinitiv MMD’s scale. Short yields were at 0.09% in 2022 and 0.12% in 2023. The 10-year fell one basis point to 1.10% and the 30-year fell one to 1.75%.
The ICE AAA municipal yield curve showed short maturities at 0.10% in 2022 and 0.15% in 2023. The 10-year fell one basis point to 1.08% and the 30-year yield fell one basis point to 1.74%.
The IHS Markit municipal analytics AAA curve showed yields at 0.09% in 2022 and 0.14% in 2023, the 10-year at 1.05%, and the 30-year at 1.70%.
The Bloomberg BVAL AAA curve showed yields at 0.08% in 2022 and 0.12% in 2023, while the 10-year fell one basis point to 1.05%, and the 30-year yield steady at 1.75%.
The 10-year Treasury was at 1.723% and the 30-year Treasury was yielding 2.43% near the close, while the Dow gained 108 points, the S&P 500 fell 0.04% and the Nasdaq lost 0.57%.
The Golden State Tobacco Securitization Corporation is set to price $995.6 million of taxable enhanced tobacco settlement asset-backed bonds, Series 2021A, serials: 2021-2022, 2029-2035; term: 2038. Jefferies LLC will run the books.
The Washington State Convention Center is set to price $345 million of nonrated green junior lodging tax notes on Tuesday. J.P. Morgan Securities LLC is lead underwriter.
The Cleveland-Cuyahoga County Port Authority is set to price $279.9 million of taxable VA Cleveland Health Care Center Project federal lease revenue bonds on Tuesday, serials 2021, term, 2031. Huntington Securities, Inc. is head underwriter.
The Pennsylvania Turnpike Commission (A1/A+/A+/AA-) is set to price $250 million of turnpike revenue bonds on Tuesday, serials 2022-2041; terms 2046, 2051. PNC Capital Markets LLC is bookrunner.
The Successor Agency to the La Quinta Redevelopment Agency is set to price $158.9 million of tax allocation taxable refunding bonds, serials 2021-2034. HilltopSecurities is head underwriter.
The Board of Trustees of the University of Arkansas (Aa2///) is set to price $138.9 million of UAMS Campus various facilities taxable and tax-exempt revenue bonds on Wednesday. $96.61 million exempt, $42.38 taxable. BofA Securities is bookrunner.
The Ontario International Airport Authority, California, (/AA/A-/) is set to price $115 million of airport revenue bonds, Non-AMT, AMT and taxable on Wednesday. Insured By: Assured Guaranty Municipal Corp. Morgan Stanley & Co. LLC is lead underwriter.
The Kentucky Asset/Liability Commission (A1///) is set to price on Wednesday $114.6 million of general fund refunding project notes, 2021 Series A. Morgan Stanley & Co. LLC is head underwriter.
The CSCDA Community Improvement Authority, nonrated, is set to price $112.5 million of essential housing revenue bonds (Moda at Monrovia Station social bonds). Citigroup Global Markets Inc. will run the books.
The Advocate Health and Hospitals Corporation (Aa3/AA/AA/) is set to price on Wednesday $100 million of taxable corporate CUSIP bonds (Advocate Aurora Health Credit Group) Reopening of 2049 CUSIP 007589AC8. Citigroup Global Markets Inc. is lead underwriter.
The issuer is also set to price $100 million of taxable corporate CUSIP bonds (Advocate Aurora Health Credit Group) Reopening of 2028 CUSIP 007589AA2. Citi will run the books.
The Texas Department of Housing and Community Affairs (Aaa/AA+//) is set to price $100 million of residential mortgage revenue bonds, serials 2022-2033; term: 2036, 2041, 2051 and 2052. Jefferies LLC is lead underwriter.
In the competitive markets, Palm Springs USD, California is set to sell $118 million of general obligation bonds at noon eastern on Tuesday.
Oklahoma City is set to sell $116 million of tax-exempt GOs at 9:30 a.m. eastern and $30 million of taxable GOs at 10 on Tuesday.