With each passing day, fears surrounding COVID-19 elevate as the equity sell-off pressed on for the seventh day on Friday. The biggest winners have and will continue to be muni issuers, as they can sell debt at historic lows and participants don’t see the movement slowing.
COVID-19 has pushed benchmark muni yields down to record lows numerous times in the month of February, resulting in the largest February in terms of issuance to date, going all the way back to 1986, the furthest back Bond Buyer data tracks.
The month of March will get off to a good start, with estimated issuance of $8.5 billion. There is a total of 29 deals scheduled $100 million or larger, with eight of them competitive. Nine of the $100 million or larger deals are taxable or have a taxable tranche.
“Munis have been and always will be undervalued as an asset class,” said Dan Heckman, senior fixed-income strategist at U.S. Bank Wealth Management. “Although, we could get some buyer resistance if Treasury yields keep dropping, resulting in munis underperformance”
Heckman noted that in his eyes, the value continues to be further out on the yield curve, with the short-end being too expensive and not rewarding enough. He also added that the primary market might be “getting a little ahead of itself.”
“People are getting a little less comfortable about getting too aggressive,” he said. “I can see some resistance from the standpoint of when you get yields well below 1%, it starts to get unattractive.”
With so much uncertainty surrounding COVID-19, no one knows how long this will last for and nothing lasts forever, so Heckman has a hunch that smart and savvy issuers will not be sitting on their hands.
“If issuers have been on sidelines, they should get off the sideline and strike while the iron is hot,” he said. “The rubber band is getting stretched pretty far and at some point we will see some snap back.”
RBC Capital Markets is expected to price New York City’s (Aa1/AA/AA/NR) $860 million of tax-exempt general obligation bonds on Wednesday after a two-day retail order period.
The Big Apple is also selling $500 million of taxable GOs in the competitive market, also on Wednesday.
Staying in the competitive arena, Maryland (Aaa/AAA/AAA/ ) and its top-tier ratings is scheduled to sell a total of $779.27 million of GO and taxable GO bonds in four separate sales.
BB&T Capital Markets is slated to price New Hope Cultural Education Facilities Finance Corp., Texas’ (NR/NR/NR/ ) $668.95 million of senior living revenue tax-exempt and taxable bonds on Wednesday.
JP Morgan is scheduled to price the California Earthquake Authority’s $400 million of federally taxable revenue bonds on Thursday.
Munis were slightly stronger on Friday on the MBIS benchmark scale, with yields falling one basis point in both the 10- and 30-year maturities. High-grades were also slightly stronger, with yields on MBIS’ AAA scale decreasing by less than one basis point in the 10-year maturity and by one basis point in the 30-year maturity.
On Refinitiv Municipal Market Data’s AAA benchmark scale, the yield on the 10-year muni GO was one basis points lower to a fresh record low of 0.93% and the 30-year muni GO was unchanged from the record low of 1.52% which was set on Thursday.
The 10-year muni-to-Treasury ratio was calculated at 81.6% while the 30-year muni-to-Treasury ratio stood at 92.1%, according to MMD.
Stocks are having the worst week since the 2008 financial crisis. The market selloff is now on its seventh day as the COVID-19 the virus continues to spread rapidly across the globe and country. Fed Chairman Jerome Powell said that the Fed is “closely monitoring” the COVID-19 situation and will act “as appropriate.”
“The market is frankly way, way ahead of the Fed,” Heckman said. “I am in the camp where I am not advocating for a rate cut, but at this point they should probably do it.”
To Heckman’s point, the market is currently forecasting a greater than 50% chance that interest rates will be cut at the next Federal Open Market Committee meeting March 17 and 18.
The Dow Jones Industrial Average was down about 2.93%, the S&P 500 index was lower by 2.38% and the Nasdaq lost roughly 1.74% late in the session Friday.
The three-month Treasury was yielding 1.282%, the Treasury two-year was yielding 0.887%, the five-year was yielding 0.910%, the 10-year was yielding 1.146% and the 30-year was yielding 1.660%.
Looking through trade activity, below are some secondary trading that caught our eye.
· Howard County, MD, GO, 5s of 2022, traded at 0.78%.
· Mecklenberg County, NC, 5s of 2030, traded at 0.96%.
· Baltimore Country, MD 4s of 2037, traded at 1.45%. On Feb. 26, it traded at a 1.59%-1.51%.
· NYC TFAs, 4s of 2039, traded at 1.63%-1.62%. On Feb. 26, it traded at 1.71%. On Feb. 20, it traded at 1.92%.
· NYC TFAs, 4s of 2045, traded at 1.82%-1.81%. They were trading at 1.88% on Feb. 26.
Lipper reports 60th week of inflows
For the 60th straight week, investors keep pouring cash into the municipal market continuing the streak as the money flowing into cash-exempt mutual funds.
In the week ended Feb. 26, weekly reporting tax-exempt mutual funds added $2.266 billion of inflows, after inflows of $1.767 billion in the previous week, according to data released by Refinitiv Lipper late on Thursday.
Exchange-traded muni funds reported inflows of $522.955 million, after inflows of $180.347 million in the previous week. Ex-ETFs, muni funds saw inflows of $1.743 billion after inflows of $1.587 billion in the prior week.
The four-week moving average remained positive at $1.948 billion, after being in the green at $1.838 billion in the previous week.
Long-term muni bond funds had inflows of $1.674 billion in the latest week after inflows of $1.124 billion in the previous week. Intermediate-term funds had inflows of $359.445 million after inflows of $497.491 million in the prior week.
National funds had inflows of $2.040 billion after inflows of $1.562 billion while high-yield muni funds reported inflows of $592.060 million in the latest week, after inflows of $481.181 million the previous week.
Data appearing in this article from Municipal Bond Information Services, including the MBIS municipal bond index, is available on The Bond Buyer Data Workstation.