Muni fundamentals ‘simply overpowering’

Bonds

Municipals held steady to slightly firmer in spots Friday after flat retail sales moved U.S. Treasuries stronger while equities gained back mid-week losses.

Despite the slight pressure from economic data and overall market volatility, municipals continue to hold their own place in the capital markets.

In the current environment, muni technicals are “simply overpowering,” said Barclays strategists Mikhail Foux, Clare Pickering and Mayur Patel in a weekly report.

“This week was a good example: rates were under pressure, and tax-exempts were not completely immune, as muni yields have moved higher in sympathy, but still outperformed Treasuries,” they wrote. “Five-year tax-exempts have been rich for some time, as a result their yields and ratios have been steadily adjusting higher, but longer-dated munis continued to outperform, with 30-year ratios getting very close to their all-time lows reached earlier this year.”

Municipal to UST ratios closed at 62% in 10 years and 68% in 30 years on Friday, according to Refinitiv MMD and ICE Data Services.

As for technicals, demand remains quite strong despite poor valuations.

“If anything, higher yields might bring more investors to the municipal space, possibly improving appetite for tax-exempts even further,” the Barclays strategists noted.

Issuers are sitting on cash and in no hurry to tap the market aggressively, they said.

The total potential volume for the week of May 17 is estimated at $8.532 billion: $6.15 billion of negotiated deals and $2.381 billion scheduled for competitive sale.

Another week of larger state general obligation bond deals, led by Connecticut whose GO rating was boosted to A-plus on Thursday by S&P Global Ratings and AA-minus by Fitch Ratings on Friday. The state is set to price $700 million of exempts and $300 million of taxables.

Colorado comes with $500 million negotiated and West Virginia with $200 million competitive while Guam (Ba1///) put its $258.5 million of business privilege tax refunding bonds Series 2021F tax-exempt forward delivery bonds on the calendar for Tuesday for those looking for yield. Triple-A Prince George’s County, Maryland, offers $271 million of GOs on Tuesday in the competitive market.

Some issuers “might actually expect a resurrection of tax-exempt refundings, keeping their interest in placing new deals at bay,” Barclays said in its report.

It is especially true for healthcare, education, and state and local governments, while issuers in transportation, utility and housing sectors have been actually surpassing last year’s pace.

The muni market is rich and will likely remain fully valued for some time, they said.

“If Treasury yields continue to move up, while having some spillover effects into the muni space, to us it would be a buying opportunity, as tax-exempts will likely continue to do well for the time being,” according to Barclays.

Secondary trades and scales
Trading showed firmer prints. Maryland 5s of 2022 traded at 0.13%. California 5s of 2024 at 0.24% versus 0.35%-0.28% Thursday. Columbus, Ohio, 5s of 2024 at 0.31%-0.30%. Fairfax County, Virginia, 4s of 2024 at 0.29%. Washington 5s of 2025 at 0.42%. Tennessee 5s of 2025 at 0.36%.

Utah 5s of 2028 at 0.74%. Florida PECO 5s of 2032 at 1.13% versus 1.16% Thursday. Fairfax County 4s of 2038 at 1.47% versus 1.57% original.

Energy Northwest 5s of 2040 traded at 1.50% versus 1.54%-1.52% Thursday and 1.51% original. Los Angeles Department of Water and Power 5s of 2050 traded at 1.65%.

On Refinitiv MMD’s AAA benchmark scale, yields were steady at 0.09% in 2022 and 0.13% in 2023. The yield on the 10-year sat at 1.01% and the 30-year at 1.59%.

The ICE AAA municipal yield curve showed yields at 0.10% in 2022 and 0.16% in 2023, the 10-year stayed at 1.01% while the 30-year sat at 1.60%.

The IHS Markit municipal analytics AAA curve showed yields at 0.11% in 2022 and 0.14% in 2023, the 10-year at 0.99% and the 30-year at 1.59%.

The Bloomberg BVAL AAA curve showed yields steady at 0.08% in 2022 and 0.10% in 2023, at 0.98% in the 10-year and the 30-year at 1.49%.

The 10-year Treasury was yielding 1.64% and the 30-year Treasury was yielding 2.36% near the close. Equities rose with the Dow gaining 387 points, the S&P 500 rose 1.55% and the Nasdaq gained 2.35%.

Economic indicators
Despite a flat month in April, experts expect retail sales to improve with the continued economic reopening, although the numbers have been volatile, as stimulus payments were often quickly spent.

Given the payouts in March, “it is best to take a moving average of the monthly retail sales,” said Berenberg chief economist for the U.S., Americas and Asia Mickey Levy, because sales remain at a high level.

Retail sales were unchanged in April after an upwardly revised 10.7% jump in March, first reported as a 9.8% gain. Excluding autos sales fell 0.8% after a 9.0% surge.

Economists polled by IFR Markets predicted sales would increase 1.0%, with ex-autos up 0.9%.

“The retail sales control group that is calculated directly in GDP — retail sales excluding autos, building supplies, and gasoline stations — fell 1.4% following a 7.6% rise in March,” Levy noted. “Even with this decline, the April retail sales control group is 2.3% higher than its first quarter average. This is consistent with our forecast of robust growth in consumption in the second quarter.”

“The on-again, off-again dynamic with spending and big cash windfalls has injected new volatility into retail sales figures,” said Wells Fargo Securities senior economist Tim Quinlan and economist Shannon Seery.

The monthly retail sales change averaged 0.3% in the 10 years ending December 2019, they wrote in a report, never seeing an increase more than 2.2% or a decline larger than 2.0%. “Between last year’s lockdowns and a reopening surge in goods spending, this year’s stimulus checks and late winter storms, it’s no wonder why retailers are struggling to manage inventory and anticipate demand.”

Given the volatility, they said, their “outlook is not influenced one way or another by today’s report” since they expect a “surge in consumer spending tied to the reopening of the service sector.”

“Investors are starting to drink the Fed’s Kool-Aid that inflation will be transitory,” said Ed Moya, senior market analyst for the Americas at OANDA. Referring to the eight individuals associated with the New York Yankees who tested positive for COVID-19 despite having been vaccinated more than two weeks ago, he noted, “it is fascinating to see how less sensitive the U.S. is now to news of a fresh coronavirus outbreak.”

But, with only one of those individuals showing symptoms, “suggests the vaccines are working,” he said. “The U.S. is widely expected to have a very normal summer.”

Indeed, the Centers for Disease Control loosened mask restrictions for those who have been vaccinated, which “will lead to more consumer activity during the spring and summer months,” said Yelena Maleyev, economist at Grant Thornton.

Also released Friday, the University of Michigan consumer sentiment index slipped to 82.8 in the preliminary May read from 88.3 in April. The index stood at 73.2 in May 2020.

Economists estimated a reading of 90.3.

The current conditions index fell to 90.8 in May from 97.2 in April, while the expectations index declined to 77.6 from 82.7.

Separately, import prices climbed 0.7% in April after an upwardly revised 1.4% March, originally reported as a 1.2% gain, while exports rose 0.8% following an upwardly revised 2.4% gain the prior month, first reported as a 2.1% increase.

Economists expected prices to rise 0.6% for both imports and exports.

Elsewhere, industrial production climbed 0.7% in April, after an upwardly revised increase of 2.4%, first reported as a 1.4% rise.

Economists had expectations of a 1.1% increase.

Capacity utilization gained to 74.9% in April from an unrevised 74.4% in March.

Economists predicted a 75.1% level.

Also, business inventories increased 0.3% March, after a revised 0.6% gain in February, first reported as 0.5% increase.

Economists projected inventories to gain 0.3%.

Business sales were up 5.7% in March, after a 1.6% drop in February.

Muni primary deals to come
In the competitive market, Prince George’s County, Maryland, (/AAA//) is set to sell $271.6 million of general obligation consolidated public improvement bonds, Series 2021A on Tuesday at 10:45 a.m.

West Virginia (/AA//) is set to sell $200 million of general obligation state road bonds at 10:15 a.m. and $14.265 million of GO state road refunding bonds at 10:45 a.m. Tuesday.

On Wednesday, the Virginia College Building Authority (Aa1/AA+//) is set to sell $535.2 million of educational facilities revenue bonds, Series 2021A (21st Century Collage and Equipment Programs) at 10:30 a.m.

Seattle (Aa1/AA+//) is set to sell $112.9 million of drainage and wastewater system improvement and refunding revenue bonds 2021 at 10:45 a.m. Wednesday.

Fulton County, Georgia, is set to sell $175 million of general fund tax anticipation notes, series 2021, at 10 a.m. Wednesday.

Ladue School District, Missouri, (/AAA//) is set to sell $126 million of unlimited tax general obligation bonds at noon Wednesday.

In the negotiated space, Connecticut (Aa3/A+/AA-/) will sell $700 million of general obligation bonds in three series on Wednesday, $300 million 2021 Series B social bonds, $175 million 2021 Series C refunding GOs, and $225 million 2021 Series D forward delivery social refunding bonds. BofA Securities is bookrunner.

Connecticut (Aa3/A+/AA-/) is also set to price $300 million of taxable refunding GOs, serials 2022-2031, on Wednesday. UBS Financial Services Inc. is head underwriter.

Colorado (Aa2/AA-//) is set to price on Wednesday $500 million of Rural Colorado certificates of participation Series 2021A. J.P. Morgan Securities LLC is head underwriter.

The City of Phoenix Civic Improvement Corp. (Aa2/AAA//) is set to price on Tuesday $317.3 million of junior lien water system revenue bonds Series 2021A, $250 million, series 2026-2041, term 2045 and $67.3 million of refunding bonds, serials 2022-2026. Siebert Williams Shank & Co., LLC is lead underwriter.

The Charlotte-Mecklenburg Hospital Authority, North Carolina, (Aa3/AA-//) is set to price on Thursday $300 million of taxable healthcare revenue bonds Series 2021A, serial 2051. Citigroup Global Markets Inc. is bookrunner.

The authority is also set to price on Thursday $300 million of variable rate healthcare revenue bonds, three-, seven- and 10-year Series 2021B, C and D. Citigroup Global Markets Inc. is bookrunner.

The California Municipal Finance Authority (/AA//) is set to price on Tuesday $275.6 million of student housing revenue bonds (CHF-Davis II, L.L.C. – Orchard Park Student Housing Project) Series 2021, insured by Build America Mutual. J.P. Morgan Securities LLC is head underwriter. Underlying ratings: (Baa3///).

The Metropolitan Water District of Southern California (/AA+/AA+/) is set to price on Tuesday $271.2 million of subordinate water revenue bonds, 2017 Series C (SIFMA Index Mode), subordinate water revenue refunding bonds, 2017 Series D (SIFMA Index Mode), subordinate water revenue refunding bonds, 2017 Series E (SIFMA Index Mode). J.P. Morgan Securities LLC is bookrunner.

The Government of Guam (Ba1///) is set to price on Tuesday $258.5 million of business privilege tax refunding bonds Series 2021F tax-exempt forward delivery, serials, 2026-2031, terms 2036, 2042. Citigroup Global Markets Inc. is head underwriter.

The Maricopa County Special Health Care District, California, (Aa3//AA-/) is set to price on Thursday $243 million of general obligation bonds, Series 2021 D. J.P. Morgan Securities LLC is head underwriter.

The Alamo Community College District (Aaa/AAA//) is set to price $188 million of limited tax bonds, Series 2021 on Tuesday. J.P. Morgan Securities LLC is set to run the books.

The Minnesota Housing Finance Agency (Aa1/AA+//) is set to price $178.1 million of AMT and non-AMT residential housing finance bonds on Wednesday. $24 million Series 2021C, serials, 2022-2028 and $154.1 million Series 2021D, serials 2022, 2027-2032, terms 2036, 2041, 2046, 2052, 2052. RBC Capital Markets is head underwriter.

The Pennsylvania Housing Finance Agency (Aa2/AA+//) is set to price on Wednesday $175.2 million of single family mortgage revenue bonds, Series 2021-135A (non-AMT social bonds), Series 2021-135B AMT social bonds. Barclays Capital Inc. is head underwriter. Retail order period on Tuesday.

The Sioux Falls School District No. 49-5, Minnehaha and Lincoln Counties, South Dakota, (/AA+//) is set to price on Thursday $159 million of general obligation refunding bonds, taxable Series 2021. D.A. Davidson & Co. is bookrunner.

The State of Louisiana (/AA//) Is set to price $155.3 million of grant anticipation revenue bonds, Series 2021, on Wednesday. J.P. Morgan Securities LLC is lead underwriter.

The City of Phoenix Civic Improvement Corp. (Aa2/AA//) is set to price $151.4 million of taxable Series 2021C refunding junior lien water system revenue refunding bonds, serials 2026-2041 and term 2044. Siebert Williams Shank & Co., LLC is head underwriter.

Carroll County, Kentucky, (A1/A//) is set to price on Tuesday $131.9 million of environmental facilities revenue bonds, $54 million of Series 2006B, remarketing refunding and $77.9 million of Series 2008A remarketing bonds. BofA Securities is bookrunner.

Grand Forks, North Dakota, is set to price $118 million of solid waste disposal facility revenue bonds (Red River Biorefinery, LLC Project), Series 2021A (Green Bonds), Series 2021B (Green Bonds) (Turbo Bonds). Jefferies LLC is lead underwriter.

The City of Aurora, Colorado, (/AA+/AA+/) is set to price on Tuesday $111.7 million of first-lien water revenue bonds (SEAM Facility & Other System Improvements Project) Series 2021. Morgan Stanley & Co. LLC is head underwriter.

The Town of Hempstead Local Development Corp., New York, (A1/A//) is set to price on Thursday $100 million of tax-exempt and taxable revenue bonds, Series 2021 (Hofstra University Project). Barclays Capital Inc.

Aaron Weitzman contributed to this report.

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