Bonds

Munis are weaker, new-issue calendar rises to $11.5B

Municipals were weaker ahead of a heavier new-issue calendar, while U.S. Treasury yields rose and equities ended down.

Investors will be greeted Monday with a new-issue calendar estimated at $11.488 billion, one of the largest year to date.

Triple-A benchmark yields were cut two to six basis points, depending on the scale, while U.S. Treasury yields rose six to 13 basis points.

The two-year muni-Treasury ratio was at 54%, the three-year at 56%, the five-year at 58%, the 10-year at 60% and the 30-year at 85%, according to Refinitiv MMD’s 3 p.m. ET read. ICE Data Services had the two-year at 58%, three-year at 57%, the five-year at 58%, the 10-year at 61% and the 30-year at 88% at 4 p.m.

“The recovery and stabilization from March’s banking problem have been the overriding macro themes,” said BofA strategists Yingchen Li and Ian Rogow. While “tightening bank lending is a concern for economic performance later this year,” they noted that the “economic data released over the past few weeks — especially the March employment report — continue to show a picture of resilience.”

In the meantime, inflation is trending down. 

Investors were focused on the March consumer price index release this past week, which “showed an easing in core price pressures,” according to Barclays strategists Mikhail Foux, Clare Pickering and Mayur Patel.

After this release, they kept their baseline forecast unchanged, as they expect it to decline to 3.0%  year-over-year in December and to 2.5% in 2024. This producer price index “also came in slightly lower than market expectations, confirming that inflation pressures are abating,” they said.

Market participants “are still expecting the Fed to raise their target rate one more time in May, and pause after that until late Q3 or Q4,” despite slightly softer inflation readings, they said.

“In this environment, a stronger-than-expected data point may generate some selloff in Treasuries, while a weaker data point would result in a bull steepening,” BofA strategists said. “Overall, however, Treasury yields appear to be in no rush to move out the ranges traced out in March, reflecting a stabilization process.”

For munis, range-bound USTs “are generally very positive for the market, especially when compared to the very volatile macro environment in March,” they noted. However, unlike USTs, BofA strategists said “muni AAA rates have broken below the ranges from March, with the 10-year AAA fast approaching 2%, a target [they] set for 1H23.”

For long-term muni bonds, BofA strategists said “macro market and supply/demand conditions are dominating the picture, pushing the high-grade muni market to a relatively rich valuation versus Treasuries.”

They predict principal redemption and coupon payments in 2Q23 total to $142 billion, significantly higher than 1Q23.

Current levels of muni-UST ratios are similar of 2021. ”Yield chasing in the high-grade muni market is back in some ways as investors are forced to go slightly lower in coupons, longer in maturities or slightly lower in rating to find some yield,” BofA strategists said.

This month, long-dated USTs have fallen five to 10 basis points, but munis continue to outperform, “recouping some of the March losses,” they said.

“The IG index has already generated a total return of 1.2%, while the HY index has done slightly better 1.7%,” according to Barclays strategists.

They noted that lower-rated munis “underperformed higher-rated credits by 70bp last month during the mini-banking crisis, and their gains this month is just a partial reversal of that trend.”

Despite stronger performance in April, they said “IG-HY yield differential is currently still at the wides for the year and is comparable with the levels last reached in early 2021 and the yield differential has only been increasing as of late.”

Technicals for “this market segment are quite supportive at the moment, as issuance has been extremely subdued (less than $3 billion in the first three and a half months of the year), while HY fund flows have turned positive, bringing $2 billion-plus over the same timeframe,” they said.

BofA strategists said the tax season effect this year “has had no bearing on the muni market — neither the short or longer maturities.”

They believe the “lack of a money market effect during this year’s tax season reflects two facts about investors: there were not much capital gains in 2022 due to a dismal stock market and bond market returns; and they are already holding abundant taxable money market assets in their portfolios.”

Calendar stands at $11.5B

There are $9.970 billion of negotiated deals on tap and $1.518 billion on the competitive calendar.

The negotiated calendar is led by $2.4 billion of GOs from the state of Illinois, followed by $1.1 billion of school facilities construction refunding bonds from the New Jersey Economic Development Authority in two deals and $847 billion of energy supply revenue bonds from Energy Southeast, Alabama.

Boston leads the competitive calendar with $350 million of GOs, followed by Boulder Valley School District No. RE-2, Colorado, with $184 million of GOs.

Secondary trading
Washington 5s of 2024 at 2.38%. Maryland 5s of 2024 at 2.40%. Ohio 5s of 2025 at 2.34%.

Connecticut 5s of 2028 at 2.21%-2.19%. Charlotte waters, North Carolina, 5s of 2028 at 2.08%. Wisconsin DOT 5s of 2029 at 2.13%.

Wake County, North Carolina, 5s of 2031 at 2.07%-2.06% versus 2.05% Tuesday and 2.25% original on 3/28. DC 5s of 2032 at 2.13%. Triborough Bridge and Tunnel Authority 5s of 2033 at 2.07%-2.08%.

California 5s of 2045 at 3.29%-3.28% versus 3.24%-3.23% Wednesday and 3.41%-3.30% original on 4/6. DC 5s of 2047 at 3.43%-3.42%. Texas Water Development Board 5s of 2047 at 3.45%-3.44% versus 3.64% on 3/29 and 3.66% on 3/28.

AAA scales
Refinitiv MMD’s scale was cut two to five basis points: The one-year was at 2.36% (+5) and 2.23% (+5) in two years. The five-year was at 2.08% (+5), the 10-year at 2.10% (+2) and the 30-year at 3.18% (+2) at 3 p.m.

The ICE AAA yield curve was cut two to six basis points: 2.43% (+2) in 2024 and 2.31% (+2) in 2025. The five-year was at 2.05% (+5), the 10-year was at 2.09% (+4) and the 30-year was at 3.23% (+4) at 4 p.m.

The IHS Markit municipal curve was cut three to five basis points: 2.35% (+3) in 2024 and 2.22% (+3) in 2025. The five-year was at 2.05% (+3), the 10-year was at 2.08% (+5) and the 30-year yield was at 3.17% (+3), according to a 4 p.m. read.

Bloomberg BVAL was cut two to five basis points: 2.33% (+4) in 2024 and 2.26% (+4) in 2025. The five-year at 2.05% (+4), the 10-year at 2.09% (+3) and the 30-year at 3.18% (+3) at 4 p.m.

Treasuries were weaker.

The two-year UST was yielding 4.096% (+13), the three-year was at 3.827% (+12), the five-year at 3.600% (+10), the seven-year at 3.554% (+8), the 10-year at 3.516% (+7), the 20-year at 3.853% (+7) and the 30-year Treasury was yielding 3.740% (+6) at 4 p.m.

Primary market
Illinois (A3/A-/BBB+) is set to price $2.37 billion of taxable and tax-exempt general obligation bonds in four series maturing from 2024 to 2037. Wells Fargo Bank.

Energy Southeast (A1//A+/) is set to price $846.8 million of energy supply revenue bonds in a two-pronged deal consisting of both fixed rated and index rate bonds. Morgan Stanley & Co.

The New Jersey Economic Development Authority is set to price $801.5 million of school facilities construction refunding bonds on Thursday, serials, 2024 to 2028, term 2035. Barclays.

The Bay Area Toll Authority is set to price $500 million of toll bridge revenue bonds (A3/AA-/AA-/) and fixed-rated subordinate bonds (A1/AA-/AA-/) Wednesday. BofA Securities.

Austin, Texas, (Aa3/AA-/AA-/) is set to price $428.1 million of electric utility system revenue refunding and improvement bonds, serials 2025 to 2034, terms in 2048 and 2053, Wednesday. Barclays Capital.

Cypress-Fairbanks, Texas, Independent School District is slated to price Tuesday $368.4 million of unlimited tax school building bonds, serials 2024 to 2044 with a term in 2048, insured by the Texas Permanent School Fund Guarantee Program.
Jefferies LLC.

The New Jersey Economic Development Authority (A2/A-/A-/) is set to price $348 million of school facilities construction refunding forward delivery bonds Thursday. Serials 2024 to 2027 with terms from 2033 to 2039. Barclays Capital.

The Ohio Water Development Authority (Aaa/AAA//) is set to price $339 million of water pollution control loan fund refunding revenue bonds on Tuesday. Serial 2024 to 2032. Ramirez & Co.

The Massachusetts Water Resources Authority (/A+/AA-/) is set to price $325 million of general revenue and refunding green bonds Wednesday. BofA Securities.

The SSM Health Care Corporation (/A+/AA-/) is set to price $300 million of taxable refunding bonds Tuesday. Bullet maturing 2028. Citigroup Global Markets.

The Missouri Health & Educational Facilities Authority (Aa2/AA//) is set to price Thursday$275 million of health facilities revenue bonds. Bullet maturing 2033. RBC Capital Markets.

Texas (Aaa//) is set to price $250 million of bonds for the Texas Veterans Land Board Wednesday. Jefferies LLC.

The Rockwell, Texas, Independent School District is set to price Thursday $234.1 million of unlimited tax school building bonds and unlimited tax refunding bonds, PSF insured. Jefferies LLC.

The Northside Independent School District is set to price $200 million of variable rate unlimited tax school building bonds, PSF insured. Term 2053. Ramirez & Co.

The Arizona Board of Regents (Aa2/AA//) is set to price $190.33 million of taxable and tax-exempt system revenue bonds on behalf of Arizona State University Wednesday. Tax-exempt Series 2023 A consists of green bonds, and Series 2023 C is taxable. JPMorgan Securities LLC.

The Oklahoma Water Resources Board (/AAA/AAA/) is set to price $175 million of revolving fund revenue bonds for the state’s drinking water program Tuesday. Serials,
2027 to 2043, terms, 2048 and 2053, BofA Securities.

The Frisco, Texas, Independent School District is set to price $150 million of unlimited tax school building and refunding bonds Tuesday. PSF insured. Piper Sandler & Co.

The Ohio Housing Finance Agency (Aaa///) is set to price $149.9 million of non-AMT residential mortgage revenue social bonds Tuesday.
J.P. Morgan Securities.

The Northside, Texas, Independent School District (Aaa/AAA//) is set to price Tuesday $136.4 million of unlimited tax school building and refunding bonds. Serials 2024-2025 and 2027 to 2053. PSF insured.Stifel, Nicolaus & Co.

The Jersey City Municipal Utilities Authority is set to price $130 million of project notes on behalf of Hudson County Thursday. Stifel, Nicolaus & Co.

Wake County, North Carolina, (Aa1/AA+/AA+/) is set to price $115.9 million of limited obligation bonds Wednesday. Serials 2024 to 2041. BofA Securities.

Ohio is set to price on behalf of the Ohio Higher Educational Facility Commission (Aa3/AA-//) $108.9 million of climate bond certified higher educational facility green revenue bonds. Morgan Stanley & Co.

The Monmouth County, N.J., Improvement Authority is set to price $104.2 million of government pool loan project notesWednesday. Mature in 2024. Raymond James & Associates.

The Maine State Housing Authority (Aa1/AA+//) is set to price $100 million of mortgage purchase, social bonds. Serials 2026 to 2028, terms, 2043, 2048, and 2053. Barclays Capital.

Competitive:
Boston (Aaa/AAA//) is set to sell $350 million general obligation bonds Thursday.

Boulder, Co., Valley School District #RE-2 (Aa1/AA+//) is set to sell $184.4 million general obligation bonds Tuesday.

Williamson County, Texas, (Aaa//AAA/) is set to sell $150 million of GOs Wednesday.

Christine Albano contributed to this report.

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