Bonds

Unrated deals, ESG lead $7B calendar; issuance still lags demand

Municipal bonds were little changed Friday ahead of a $7 billion holiday-shortened week — led by the Washington Metropolitan Area Transit Authority’s $800 million-plus green bond deal — as investors head into the last week before the June reinvestment season begins.

There are 19 deals larger than $100 million in a mixture of credits that should keep yields steady, all else being equal. About $1.64 billion of ESG bonds will be priced, equal to about half of the total issued in the first quarter, according to Refinitiv MMD. Joining WMATA in selling ESG bonds in that burgeoning market are issuers from New Jersey, California, Wisconsin and Nebraska.

Infrequent issuer Hawaii brings highway bonds, gilt-edged Loudoun County, Virginia, will lead the small competitive calendar (one of only two deals of size) and nonrated senior housing deals will provide yield investors with some paper. Another California issuer will bring taxable pension obligation bonds as that trend continues.

The total potential volume is estimated at $6.99 billion, of which $970 million are taxable. There are $5.591 billion of negotiated deals versus a revised $2.559 billion that were sold this week. Bonds scheduled for competitive sale are $1.403 billion compared with $1.790 billion this week.

Strong technicals have been the theme, and with federal aid and better-than-expected tax receipts coming in, issuers are not tapping the market as much as investors would hope.

“At this point there is very little excitement in the asset class,” Barclays strategists Mikhail Foux, Clare Pickering and Mayur Patel wrote in a weekly report. “As rates move up and down in a narrow trading range, high-quality tax-exempts just follow, but with a much smaller amplitude. Supply is definitely not overwhelming — many municipalities don’t really need to tap the market, as they have ample cash as tax receipts are surpassing expectations with the U.S. economy starting to recover, while federal funds received through the American Recovery Plan, is addressing their needs.”

And while so far this year, nearly all U.S. fixed-income assets are under water, with the exception of corporate high yield, “and of course tax-exempts, as the latter dramatically outperformed Treasuries … while also making them one of the best-performing fixed-income market segment in the U.S. this year,” they said.

The Barclay’s strategists are less sanguine about municipal performance heading into the summer, though.

“It is going to be very hard for tax-exempts to continue performing. If rates move higher this summer, muni yields will likely follow,” they wrote. “We don’t expect them to meaningfully outperform despite the positive technicals that could be especially strong this summer. Some one-off stories like Puerto Rico and tobacco in the past several weeks, and Illinois this week where we see value in litigated GOs after this week’s Supreme Court decision, still attract investor attention, and provide short-lived opportunities, but they are more of an exception than a rule.”

While at current levels, tax-exempts provide little value versus Treasuries, compared with taxable munis they offer even less value, Barclays noted, adding that back in February, when some tax-exempt investors considered buying taxable munis instead, “the story might repeat itself again” now.

Municipal to UST ratios closed at 62% in 10 years and 67% in 30 years on Friday, according to Refinitiv MMD. ICE Data Services saw ratios on the 10-year at 61% and the 30-year at 68%.

Secondary trading and scales
Trading was light but several prints showed some firmness. Maryland 5s of 2023 traded at 0.18%. Huntsville, Alabama, 5s of 2023 at 0.20%. Utah 5s of 2026 at 0.53%-0.50%.

Washington 5s of 2028 at 0.81%. Denver City and County 5s of 2030 at 0.99%. Delaware 5s of 2031 at 1.02%. Maryland 5s of 2034 at 1.12%.

Washington 5s of 2040 at 1.54%. Alamo, Texas, 3s of 2040 at 1.69% versus 1.76% original. Los Angeles DWP 5s of 2041 at 1.41%. New York City TFA 4s of 2045 at 1.96%-1.94%.

On Refinitiv MMD’s AAA benchmark scale, yields were steady at 0.10% in 2022 and 0.14% in 2023, the 10-year stayed at 1.01% and the 30-year dropped one basis point to 1.57%.

The ICE AAA municipal yield curve showed yields at 0.11% in 2022 and 0.16% in 2023, the 10-year stayed at 1.01% while the 30 sat at 1.59%.

The IHS Markit municipal analytics AAA curve showed yields at 0.10% in 2022 and 0.13% in 2023, the 10-year sat at 0.98% and the 30-year at 1.57%.

The Bloomberg BVAL AAA curve showed yields steady at 0.08% in 2022 and 0.10% in 2023, 0.98% in the 10-year and the 30-year sat at 1.59%.

The 10-year Treasury was yielding 1.63% and the 30-year Treasury was yielding 2.34% near the close. Equities were mixed with the Dow up 203 points, the S&P 500 rose 0.19% and the Nasdaq lost 0.16%% near the close.

Primary market to come
In the competitive market, Loudoun County, Virginia, (Aaa/AAA/AAA/) is set to sell $156.5 million of unlimited tax general obligation bonds, 2021-2040, at 10:15 a.m. Tuesday.

The New Jersey Infrastructure Bank (/AAA//) is set to sell $118.6 million of environmental infrastructure green bonds, 2022-2043, at 10:30 a.m. Tuesday.

Frisco, Texas, ISD is set to sell $90 million of unlimited tax general obligation bonds, serials 2022-2043, at 11 a.m. Tuesday.

In the negotiated market, the Washington Metropolitan Area Transit Authority (/AA/AA/AA+) is set to price on Tuesday $874 million of dedicated revenue green bonds (Climate Bond Certified). BofA Securities will run the books.

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 University of Nebraska Facilities Corp. (Aa1/AA//) is set to price on Wednesday $344.79 million of university facilities program bonds, $260.6 million of series 2021A, and $84.2 million of green Series 2021B. BofA Securities is lead underwriter.

The California Public Finance Authority (////) is set to price on Wednesday $307.9 million of Enso Village Project senior living revenue and refunding green bonds, Series 2021A,B-1,B-2,B-3&C. Ziegler will run the books.

Houston Combined Utility System (/AA/AA/) is set to price on Wednesday $259.5 million of first lien revenue refunding bonds, serials 2022-2041, terms 2046, 2051. UBS Financial Services Inc. is lead underwriter.

The System is also set to price on Wednesday $100.3 million of taxable first lien revenue refunding bonds, Series 2021B, serials 2021-2038. UBS Financial Services Inc. is head underwriter.

The CSCDA Community Improvement Authority (////) is set to price on Wednesday $216.9 million of essential housing revenue bonds, (Union South Bay) Series 2021 A-1 & A-2 (social bonds) consisting of $35 million Series A-1, serial 2045 and $181.9 million of Series A-2, serial 2056. Stifel, Nicolaus & Company, Inc. is head underwriter.

The Alaska Municipal Bond Bank (A1/A+//) is set to price $201.7 million of general obligation and refunding taxable bonds on Wednesday. BofA Securities is bookrunner.

Ohio (Aa2/AA//) is set to price on Tuesday $151 million of major new infrastructure project revenue bonds, $92.7 million of exempts and $58.2 million of taxables. BofA Securities is head underwriter.

The North Carolina Medical Care Commission (////) is set to price $149.8 million of health care facilities first mortgage revenue bonds (Lutheran Services for the Aging), Series 2021 A&C, consisting of $114.2 million of Series A, serials 2022-2031, terms 2036, 2041, 2051. The second, $35.6 million of Series C, serials 2022-2031, terms 2036, 2042. Truist Securities Inc. is lead underwriter.

Hawaii (Aa2/AA+//) is set to price on Thursday $145.7 million of highway revenue bonds. Morgan Stanley & Co. LLC is bookrunner.

The City of El Segundo, Los Angeles County, (/AA+//) is set to price on Wednesday $144.1 million of taxable pension obligation bonds. J.P. Morgan Securities LLC is head underwriter.

The E-470 Public Highway Authority (A2/A//) is set to price on Tuesday $138.6 million of senior revenue refunding bonds, Series 2021B (SOFR index term rate bonds). Morgan Stanley & Co. LLC will run the books.

The Leander Independent School District, Texas, (/AAA//) is set to price on Tuesday $130.1 million unlimited tax refunding bonds, Series 2021A and taxable Series 2021B, Permanent School Fund guarantee program. Raymond James & Associates, Inc. is head underwriter.

The Wisconsin Housing and Economic Development Authority (Aa2/AA//) is set to price $128.1 million of home ownership revenue bonds, 2021 Series A (non-AMT social bonds), serials, 2021-2032, term 2052. RBC Capital Markets is lead underwriter.

The Florida Development Finance Corp. (////) is set to price $103.9 million of solid waste disposal revenue bonds (Waste Pro USA, Inc. Project), Series 2021, serials 2033. Citigroup Global Markets Inc. is set to run the books.

The South San Francisco Public Facilities Financing Authority (/AA+//) is set to price on Wednesday $100 million of lease revenue bonds, Series 2021A. Stifel, Nicolaus & Company, Inc. is lead underwriter.

Economic data
Existing home sales fell 2.7% in April to a seasonally adjusted annual rate of 5.85 million, from a non-revised 6.01 million and a 3.7% decline in March.

Sales have fallen for three straight months.

Economists polled by IFR Markets estimated 6.09 million sales.

“It is a clear trend that the combination of price increases and low inventory is frustrating home buyers, as they are either priced out or are choosing to back out,” according to Ralph McLaughlin, chief economic advisor at Kukun.

Buyers should return, he said, when the headwinds clear. “Maybe new inventory will come, which would help and also maybe interest rates will go up, which will cool prices some,” he said. “The housing market needs more new homes, as that will free up existing inventory.”

Buyers are snapping up homes quickly, according to Scott Ruesterholz, portfolio manager at Insight Investment. “The average home was sold in 17 days, from 18 days last month, so as supply hits the market, buyers quickly emerge.”

Insufficient supply “may cap the pace of sales and create further upward pricing pressure,” he said. “Supply issues should abate later this year as new home construction is completed and the mortgage forbearance programs end.”

Sales year-over-year are up 33.9% from 4.37 million in April 2020.

“Last year was a really low benchmark, so to me, the year-over-year number is misleading,” said McLaughlin. “I wouldn’t be surprised if this trend continues.”

Aaron Weitzman contributed to this report.

Articles You May Like

Stocks to Buy on Lumber Crash