Divergence between municipals and Treasuries holds ratios low


Municipal bonds were steady Monday as strong technicals and the dearth of new-issue supply relative to redemptions continued to flatten the yield curve and keep muni/U.S. Treasury ratios low.

Treasuries pared back Friday’s losses to see the 10-year hover around 0.93% Monday but the divergence of municipal rates from UST continues while investors await a new-issue calendar. The 10-year muni was around 0.72% on AAA benchmarks.

The primary’s diversity of credits and size relative to November has grown, but it is just not enough to push yields higher as redemptions flood the market.

“Even as COVID-19 risks have reignited in almost all sectors, technicals related to fund inflows have been the driving force for the market and have served to keep yields in check, despite the market historically hitching itself directionally to Treasuries,” said Eric Kazatsky, senior U.S. Municipals strategist at Bloomberg Intelligence.

Treasury yields were up last week, following an upward yield bias over the last month, and municipals have decoupled from historical relationships with Treasuries, and even movements in corporate bonds and equities.

“The 10-year AAA spot has outperformed the UST by 26 basis points since early November, causing relative value to fall to 73%,” said Kim Olsan, senior vice president at FHN Financial. “Its lowest value in the last 10 years was hit this past January when it reached 70%. While all major spots have seen ratios fall, some are not yet at their lowest points.”

Olsan noted that a span between April and July of 2019 saw lower values reached when the 5-year AAA/UST traded to 60% (currently at 63%) and the 30-year AAA hit a ratio of 86% (now 89%).

“Based on upcoming supply that includes a broader mix of smaller-scale deals, a modest correction may build over the week,” Olsan said.

A wider view into early 2021 offers minimal relief with money coming out of the market via redemptions exceeding what is projected from incoming supply.

“Given those considerations, structures of all varieties are playing larger roles in how money is being allocated, with valuable concessions sought after on a flattening yield curve,” Olsan said.

Over the last 3 months, the 1-30 year slope has averaged 145 basis points, but is currently reading 128 basis points.

The taxable theme that has dominated 2020 has opened up the investor base for the municipal market.

“The stubbornly low ratios, and high valuations, of tax-exempt bonds in the shorter portion of the muni curve could result in some investors eyeing alternatives within the broader muni credit universe,” Kazatsky said. “With a similar low correlation to corporate credits and equity markets as their tax-exempt cousins, taxable municipal bonds continue to be a cheap alternative for investors not locked into exempt-only mandates.”

Taxables are poised to return near or above 10% for the year, more than any other sector of the municipal market.

Kazatsky said the spreads for the Bloomberg Barclays Taxable Muni Index, at 131 basis points, offer a 56-basis point pickup vs. like-duration A corporate debt and 73 basis points of additional spread vs. comparable AA corporates.

Primary market
The University of Connecticut priced bonds for retail for the second day with one to two basis point bumps in scales.

Loop Capital Markets is pricing $284 million of University of Connecticut (A1/A+/A/NR) general obligation new-money and refunding bonds. The first series, $166.7 million, had 5s of 2022 yielding 0.29% (-3 basis points from Friday), 5s of 2025 at 0.49%, 5s of 2030 at 1.12% (-2), and 4s of 2035 at 1.70% and 3s of 2041 at 2.14%, priced to the call. The second series is $118 million of refunding bonds maturing from 2022-2031.

The second series, $117 million of refunding bonds, had 5s of 2022 at 0.29%, 5s of 2025 at 0.49%, 1.5s of 2030 at 1.12% (-2) and 5s of 2030 at 1.12% (-2) and 5s of 2031 at 1.24% (-1), priced to the call.

The Puerto Rico Aqueduct and Sewer Authority (NR/NR/NR/) will bring the largest deal of the week, $1.369 billion of senior lien revenue refunding bonds; serials 2021-2025; terms, 2030, 2035, 2040, and 2047. Barclays Capital Inc. is set to price the deal.

Massachusetts plans to sell $1.2 billion of taxable general obligation revenue anticipation notes. J.P. Morgan Securities is head underwriter.

The Florida Development Finance Corp. (NR/NR/NR/NR) is set to sell $950 million of Brightline Passenger Rail Project surface transportation facility revenue green bonds subject to the alternative minimum tax on Thursday. The bonds mature on 1/1/2049. Morgan Stanley & Co. is lead underwriter.

Connecticut has plans to sell $800 million of general obligation bonds Tuesday. The unlimited tax GOs are serials from 2022-2041. Jefferies is bookrunner on the deal.

The New York Transportation Development Corp. (BAa1/NR/BBB/NR) plans to sell $628 million of Terminal 4 John F. Kennedy International Airport Project special facility revenue refunding bonds. J.P. Morgan Securities LLC is lead underwriter.

Miami-Dade County, Florida (NR/A+/A+/NR) is set to price $507 million of taxable subordinate special obligation bonds. J.P. Morgan Securities runs the books.

The Georgia State Road and Tollway Authority is set to price $491 million of grant anticipation revenue bonds (A2/AA/A+) and reimbursement revenue bonds (A1/AA/A+) in two series. The first, $393 million of GARBs, are serials 2021-2032 and the second, $98 million of RRBs, also serials, 2021-2032. Citigroup Global Markets Inc. is set to price the deal.

The New York City Housing Development Corp. (Aa2/AA+/NR/NR) has $473 million of multifamily housing revenue sustainable development bonds in two series, $321 million and $152 million, with Morgan Stanley & Co. running the books.

The Suffolk County, New York, will price $410 million of tax anticipation notes for 2021 taxes. J.P. Morgan Securities is head underwriter.

The Texas Public Finance Authority (Aa1/AA+/NR/NR) plans to issue $400 million of taxable lease revenue and refunding bonds (Texas Facilities Commission) serials 2022-2041. Siebert WIlliams Shank & Co. is lead underwriter.

The Tarrant County Cultural Education Facilities Finance Corp., Texas, (A2/AA//) will price $303 million of taxable Hendrick Medical Center hospital revenue bonds insured by Assured Guaranty Municipal Corp. Serials 2021-2030 and terms in 2040 and 2050. KeyBanc Capital Markets will run the books.

The Jefferson County School District, Colorado, (Aa2/AA//) plans to price $279 million of revenue bonds in two series, 2025-2040, series 2020B, 2021-2025. Baird will run the books.

The Los Angeles Department of Water and Power (Aa2/NR/AA/AA+) will price $244 million of water system revenue refunding bonds, serials 2021, 2032-2041. Siebert Williams Shank & Co. is bookrunner.

The Sports Authority of the Metropolitan Government of Nashville and Davidson County, Tennessee, (Aa3/AA/NR/NR) plans to price taxable public improvement revenue bonds, serials 2023-2035, Terms 2040, 2051. Citigroup Global Markets Inc. will run the books.

The State of Ohio’s Public Facilities Commission (Aa1/AA+/AA+/NR) plans to price $206 million of infrastructure improvement general obligation and conservation project GOs. Morgan Stanley & Co. is head underwriter.

The Port of Morrow, Oregon, (Aa2/NR/AA/NR) plans to price $202 million of taxable refunding transmission facilities revenue bonds (Bonneville Cooperation Project No. 8) with terms in 2041, 2043. Wells Fargo Securities is lead underwriter.

The William S. Hart Union High School District north of Los Angeles, California, (Aa2///) plans to issue $177 million of taxable GO refunding bonds. Stifel, Nicolaus & Company, Inc. is head underwriter.

The City of Boston, Massachusetts, (Aaa/AAA//) plans to sell $163 million of GO and GO refunding bonds. BofA Securities leads the deal.

The City of Scottsdale, Arizona (Aaa/AAA/AAA/) plans to price $159.8 million of taxable general obligation bonds on Thursday. Morgan Stanley & Co. LLC is head underwriter.

The Minnesota Housing Finance Agency (Aa1/AA+//) is set to price $125 million of residential housing finance AMT and non-AMT bonds on Wednesday. The first series, $16.5 million of AMT bonds, are serials 2021-2028. The second series, $108 million are serials 2021-2022, 2028-2032, terms in 2035, 2040, 2045 and 2051. RBC Capital Markets is head underwriter.

Boston, Massachusetts, (Aaa/AAA//) is set to price $106 million of taxable general obligation and GO refunding bonds on Wednesday. BofA Securities is lead underwriter.

The Oklahoma Water Resources Board (NR/AAA/AAA/) is set to price $100 million of master trust revolving fund revenue bonds on Tuesday. BofA Securities is bookrunner.

The New Jersey Housing and Mortgage Finance Agency (NR/AA-/NR/NR) is set to price $98 million of multifamily revenue bonds non-AMT and taxables. Wells Fargo Securities is bookrunner.

Secondary market
Trading showed a steady secondary.

California GOs, 5s of 2022, traded at 0.15% versus 0.18% Friday. Loudoun County, Virginia GO 5s of 2025 traded at 0.27%. Forsyth County, Georgia GOs, 5s of 2026, at 0.29% versus 0.27% Friday. North Carolina GOs, 5s of 2029, at 0.67%-0.66% versus 0.65% Friday. Montgomery County, Maryland 4s of 2029 at 0.72%, the same as Friday. Texas waters, 5s of 2030, at 0.75% versus 0.77%-0.75% Friday.

Metro St. Louis waters, 5s of 2048 traded at 0.146%-1.37% versus originals at 1.44%. Massachusetts GOs, 5s of 2050, traded at 1.61% versus 1.64% Wednesday.

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 74% while the 30-year muni-to-Treasury ratio stood at 81.8%, according to MMD.

The ICE AAA municipal yield curve showed short maturities slightly firmer at 0.14% in 2021 and 0.15% in 2022. The 10-year maturity was unchanged at 0.72% while the 30-year yield was unchanged 1.44%.

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 was at 52%.

The IHS Markit municipal analytics AAA curve showed short yields at 0.13% and 0.14% in 2021 and 2022, respectively, and the 10-year steady at 0.71% as the 30-year yield was at 1.43%.

Treasuries fell and equities were mixed. The 10-year Treasury was yielding 0.93% and the 30-year Treasury was yielding 1.69%. The Dow lost 175 points, the S&P 500 fell 0.28% while the Nasdaq rose 0.39%.

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