High-yield gains near 5% YTD, outperforming all sectors in May

Bonds

Municipals were little changed Tuesday, largely ignoring a weaker U.S. Treasury market, as participants await light supply with a lot of cash on hand.

Municipal to UST ratios started the week hovering at recent levels, closing at 61% in 10 years and 66% in 30 years, according to Refinitiv MMD. ICE Data Services saw ratios on the 10-year at 61% and the 30-year at 68%.

May’s price performance brought slightly softer levels inside 10 years and modest improvements further out the curve, but the the bigger theme in munis was a risk-on trade that took hold, “with notable spread compression across several sectors,” said Kim Olsan, senior vice president at FHN Financial.

The best performance for munis in May, and throughout 2021 so far, is high-yield. Refinitiv Lipper reported $1.466 billion of inflows into municipal bond mutual funds last week, of which high-yield made up $813.8 million, the third highest inflows in 2021.

Along with investment-grade revenue sectors surging ahead, municipal high-yield gained over 1% last month, Olsan noted.

“Stubbornly low yields and limited supply have pushed the year-to-date gain to near 5%. Such an outsized gain dwarfs other high-yield categories this year — the Bloomberg Barclay’s Global High Yield index has gained 1.88% and the U.S. High Yield index is up 2.25%,” Olsan noted.

The Bloomberg Barclays Municipal High Yield (LMHYTR) Index, “continued to prove that even the lowest, non-rated tax-free bonds have a captive audience from yield-starved investors,” Eric Kazatsky, Bloomberg Intelligence strategist said.

High-yield returns for May were 1.15%, according to Bloomberg. The broad muni index gained 0.30% last month, but is still struggling to surpass the 1% mark for the full year, Olsan noted.

“That puts 2021 at the third-lowest gain over the last 10 years through the first five months — ahead of 2013’s 0.37% return and 2018’s loss of 0.35%,” Olsan said. “With yields still below higher targets, GOs are lagging with just a 0.36% YTD return. Revenue bonds, by contrast, earned 0.38% in May and are up 1.03% this year as sub-sectors play catch up to 2020’s weaker profiles.”

The revenue sector winners in May included healthcare with +0.53% gains, transportation with +0.42%, each benefiting from “the reach for yield and improving metrics,” Olsan said, noting that each sector is now up more than 1% for the year.

“Utility credits are more or less treading water this year, up just 0.20% while nominal yield pickups to GOs and wider-trading revenue names have taken the shine off a sector that flourished during lockdown periods,” she said.

May’s taxable muni supply was $6 billion, a drop from an average of $8 billion in the first four months.

Despite lower volumes, performance hinged on taxable asset classes. Taxable munis staged a 0.67% gain in May but are down on the year with a 1.35% loss.

The Bloomberg Barclays Municipal Taxable Bond Index (BTMNTR), “coming off one of the best April performances in several years, fell in-line with the quieter tone of U.S. rates in May,” Kazatsky said. “Despite staying negative, taxable munis have outperformed both the Bloomberg Barclays Global Aggregate (minus 2.35%) and the U.S. Aggregate (minus 2.29%) YTD.”

Secondary trading and scales
Trading showed a steady tone.

Portland, Oregon 5s of 2028 at 0.76%-0.75%. Charles County, Maryland 4s of 2028 at 0.81%-0.80%. Loudoun County, Virginia 5s of 2028 at 0.81% versus 0.84% Thursday. Prince George’s County, Maryland 5s of 2029 at 0.85%. New Mexico 5s of 2029 at 0.86%. California 5s of 2031 at 1.09%-1.08%. Virginia College Building Authorty 5s of 2031 at 1.04%. Maryland 5s of 2032 at 1.09%.

Texas A&M 3s of 2041 at 1.73%-1.72%. University of Texas 2.24s of 2046 at 2.31%.

New York City waters 5s of 2050 at 1.70%. Los Angeles DWP 5s of 2050 at 1.58%-1.59%. Lamar Texas ISD 3s of 2051 at 1.99%, the same as Friday.

On Refinitiv MMD’s AAA benchmark scale, yields were steady across the curve at 0.08% in 2022 and 0.11% in 2023, the 10-year at 0.99% and the 30-year at 1.52%.

The ICE AAA municipal yield curve showed yields steady at 0.08% in 2022 and to 0.12% in 2023, the 10-year stayed at 0.99% while the 30 was steady at 1.55%.

The IHS Markit municipal analytics AAA curve showed yields steady at 0.08% in 2022 and 0.11% in 2023, the 10-year at 0.96% and the 30-year steady at 1.53%.

The Bloomberg BVAL AAA curve showed yields steady at 0.07% in 2022 and 0.09% in 2023, steady at 0.96% in the 10-year and the 30-year remained at 1.54%.

The 10-year Treasury was yielding 1.61% and the 30-year Treasury was yielding 2.30% near the close. Equities were up with the Dow gaining 67 points, the S&P 500 rose 0.064% and the Nasdaq gained 0.11% near the close.

Economy
Tuesday’s data showed more of the same: strength in the manufacturing sector, with price pressures and supply-chain issues.

“The May ISM manufacturing index surprised on the upside in terms of the headline measure, but the sub-components moved in both directions,” said Tim Quinlan and Sarah House, senior economists at Wells Fargo Securities. “The story that emerges is one of a manufacturing sector that could be growing much faster were it not for supply-side growing pains.”

The Institute for Supply Management’s manufacturing PMI gained to 61.2 in May from 60.7 in April.

IFR Markets estimated a reading of 60.8.

The new orders index index grew, while the production index slipped.

The prices index slipped to a still-elevated 88.0 in May from 89.6 in April, levels not seen since 2008.

“This is consistent with widespread evidence of significant price pressures in manufacturing industries,” said Berenberg chief economist for the U.S., Americas and Asia Mickey Levy. “77% of respondents indicated higher prices vs. 1% reporting lower prices.”

“The ongoing struggles for the supply-side of the economy to meet demand has left price pressures growing at a breakneck pace and although the prices paid index fell in May, the drop does not offer much in the way of meaningful relief,” Quinlan and House said.

Manufacturers “may very well be able to pass costs on given the strong demand backdrop.”

The Texas Manufacturing Outlook Survey also showed strength, although the expansion in may was slower than in April, and price pressures.

The general business activity index fell to 34.9 in May from 37.3 in April, while the index measuring activity at the firm level dropped to 22.0 from 29.1.

IFR estimated a reading of 34.0 for general activity.

The outlook uncertainty index jumped to 14.7 from zero, “indicating that uncertainty is back on the rise,” according to the Dallas Fed.

“Input prices and wage pressures accelerated further in May,” according to the report.

Prices paid for raw materials gained to an all-time high of 79.9 from 71.4.

Also released Tuesday, construction spending nudged 0.2% higher in April after a revised 1.0% gain in March, first reported as 0.2% increase. Year-over-year spending is up 9.8%.

IFR expected spending to rise 0.6% in the month.

“Material price pressures are hampering the construction sector and builders’ ability to meet strong residential demand plus the return of nonresidential projects and supply shortages, which contribute to the price spikes, are expected to ease but not until later this year,” said Yelena Maleyev, economist at Grant Thornton.

Primary market to come
Main Street Natural Gas, Inc. (//AA/) is on the day-to-day calendar with $771.6 million of gas supply revenue bonds, Series 2021A, serials 2022-2028, term 2051, puts due 12/01/2028. RBC Capital Markets is head underwriter.

The Metropolitan Washington Airports Authority (Aa3/A+/AA-/) is set to price $689.5 million of AMT airport system revenue and refunding bonds, Series 2021A, serials 2021-2051. Citigroup Global Markets Inc. is head underwriter.

The CSCDA Community Improvement Authority (////) is set to price on Wednesday $364.3 million of senior and mezzanine essential housing revenue refunding bonds (Pasadena Portfolio) (social bonds). Goldman Sachs & Co. LLC is lead underwriter.

The Michigan State Housing Development Authority (/AA//) is set to price on Thursday $321 million of rental housing revenue bonds, Series 2021 A (non-AMT) and Series B taxables. BofA Securities is bookrunner.

The West Contra Costa Unified School District, California, is set to price on Thursday $149.3 million of general obligation refunding bonds, Series A and Series B taxable refunding bonds. J.P. Morgan Securities LLC is head underwriter.

Bell County, Texas, (/AA+//) is set to price on Wednesday $138 million of combination tax and revenue certificates of obligation, serials 2022-2041. Raymond James & Associates, Inc. is head underwriter.

The Chicago Transit Authority is set to price on Wednesday $127.2 million of capital grant receipts revenue bonds in two series, consisting of $104.5 million of Series 5307 (/A/BBB//) and $22.7 million of Series 5337 (/A+/BBB/). BofA Securities is lead underwriter.

The Rhode Island Health and Educational Building Corp. (/AA//) is set to price $127.1 million of public schools social revenue refunding bonds, Series 2021 F (City of East Providence Issue). Oppenheimer & Co. is bookrunner.

The Fresno Unified School District (Aa3///) Is set to price on Thursday $125 million of general obligation bonds, $45 million Series D and $80 million Series A. Stifel, Nicolaus & Company, Inc. is lead underwriter.

Wake Forest University (Aa3/AA//) is set to price on Thursday $125 million of taxable Series 2021 bonds, term 2051. Wells Fargo Securities, LLC is head underwriter.

The Spokane Public Facilities District (Aa1/AA+//) is set to price on Wednesday $121.4 million of taxable sales and lodging tax refunding bonds. Barclays Capital Inc. will run the books. Indications of interest Tuesday afternoon.

The Contra Costa Transportation Authority (/AA+/AAA/) is set to price on Wednesday $103.6 million of limited tax sales tax revenue refunding bonds Wells Fargo Securities is the lead underwriter.

The Indiana Housing and Community Development Authority (Aaa/AAA/) is set to price on Wednesday $98.8 million of single-family mortgage revenue social bonds. J.P. Morgan Securities LLC is head underwriter.

The Arlington Higher Education Finance Corp. (/AAA//) is set to price on Thursday $96.6 million of Lifeschool of Dallas taxable variable rate education revenue refunding bonds, insured by the Permanent School Fund Guarantee Program. D.A. Davidson & Co. is bookrunner.

The Water Authority of Western Nassau County, New York, (A1//AA-/) is set to price on Thursday $96.4 million of water system revenue exempt and taxable green bonds. BofA Securities is head underwriter.

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