Municipal yields stay put amid sideways trading

Bonds

Municipal yields held steady on AAA benchmarks Thursday amid choppy trading that veered toward sideways as inflows, rich muni/U.S. Treasury ratios and not enough new paper have become status quo in the market.

Municipals are decoupled from U.S. Treasuries, which can clearly be seen in rich ratios (the 10-year muni as low as 70% of UST, down from 110% in the fall) which, while atypical, is not hard to see given the shortage of new issuance, especially high-grades, and investors clamoring for any cash.

The 10-year muni-to-Treasury ratio was calculated at 75% while the 30-year muni-to-Treasury ratio stood at 83%, according to Refinitiv MMD.

The 10-year muni-to-Treasury ratio was calculated at 77% while the 30-year muni-to-Treasury ratio stood at 86%, according to ICE. The five-year ratio held at 50%.

The muni AAA 10-year yield is hovering around 0.70% after a low of 0.54% in August and the high in mid-March of 2.86%. The 30-year, in the low 1.40% range, fell to 1.28% in August and hit its high also in mid-March at 3.30%-plus.

With 10-year yield average of 1.01% and the 30-year at 1.75% in 2020, buyers are faced with intermediate levels half of what they were just after the COVID-19-led crisis adjustment in late-April.

Meanwhile, Refinitiv Lipper reported inflows at net $201 million for the week ending Dec. 2, down from $386 million the week prior.

Secondary activity saw large blocks of high-grade paper trading at tight levels and high-yield trading also showed more tightening. High-yield has rebounded significantly after being hit hard in March and April.

New Jersey Transportation Trust Fund blocks broke free by 10 to 15-plus basis points Thursday. The 5s of 2050 traded 10 basis points lower at 2.74% from 2.84% original. The 4s of 2050 traded as low as 2.91% from the 3.06% original level.

Traders noted the transportation bonds didn’t come with the same concessions as the New Jersey GOs, traders said, so the same kind of gap up in the secondary (about 50 or 60 basis points) was not expected.

The repricings of New Jersey, the oversubscriptions on its deals, the trading up dramatically in the secondary, all point to investors’ faith in the market and that money is out there to put to work.

However, some traders noted the market is in a game of chicken with ratios/low absolute yields competing with redemptions/coupons for the end of 2020.

“Amid historically low absolute rates, coupon income could be more of a driver of municipal total returns in 2021, while revenue bonds may be poised to outperform general obligation pledges,” wrote Eric Kazatsky, senior U.S. municipals for Bloomberg Intelligence. “Technical support remains, though COVID-19-related effects are still an unquantified risk.”

Taxable debt, he notes, will continue to be an area to watch after a record issuance year. Many shops are predicting even more taxable munis in 2021 after a record 2020.

“There’s little doubt that the U.S. economy is in the midst of a recession,” Kazatsky wrote. “However, there does seem to be disagreement as to the depth and any timing of recovery, much of which hinges on COVID-19 vaccines. What is certain is that municipal bonds have proven to be a haven asset class with their uncorrelated risk profile and performance in prior recessionary periods.”

There is perhaps a sense settling in that COVID-19 credit concerns have generally mostly been priced in for municipals and the asset class is resilient and will make it through whatever is next.

Primary market
Two large competitive deals priced.

The Metropolitan St. Louis Sewer District, Mo., sold $120 million of Series 2020B wastewater system revenue bonds to JPMorgan Securities.

The bonds, all 5% coupons, priced at yield of 0.15% in 2021, 0.23% in 2025, 0.73% in 2030 and 1.46% on the 2050s. Bonds were put away in 2021-2031 and 2034-2045.

PFM Financial Advisors and Independent Public Advisors are the financial advisors. Gilmore & Bell and White Coleman are the bond counsel.

Wells Fargo won $91 million of general obligation bonds from the city of Frisco, Texas (Aaa/AAA//). The 5s of 2022 yielded 0.18%, 2026 at 0.26%, 5s of 2030 at 0.82% and 2s of 2040 yielded 1.80%.

Secondary market
High-grade municipals were unchanged, according to final readings on Refinitiv MMD’s AAA benchmark scale. Short yields were flat at 0.14% in 2021 and 0.15% in 2022. The yield on the 10-year was unchanged at 0.72% while the yield on the 30-year was at 1.42%.

The 10-year muni-to-Treasury ratio was calculated at 75% while the 30-year muni-to-Treasury ratio stood at 83%, according to MMD.

The ICE AAA municipal yield curve showed short maturities unchanged at 0.15% in 2021 and 0.16% in 2022. The 10-year maturity was at 0.71% while the 30-year yield was unchanged 1.43%.

The 10-year muni-to-Treasury ratio was calculated at 77% while the 30-year muni-to-Treasury ratio stood at 86%, according to ICE. The five-year ratio held at 50%.

The IHS Markit municipal analytics AAA curve showed short yields at 0.14% and 0.15% in 2021 and 2022, respectively, and the 10-year up one basis point at 0.71% as the 30-year yield at 1.43%.

Treasuries fell a few basis points as equities were up again. The 10-year Treasury was yielding 0.92% and the 30-year Treasury was yielding 1.67%. The Dow rose 85 points, the S&P 500 fell 0.062% and the Nasdaq gained 0.23%.

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