Municipal yields held steady for the seventh session in a row in light trading Thursday as the Dormitory Authority of the State of New York’s $2.5 billion of competitive loans were the focus while U.S. Treasuries made gains and equities were mixed on heightened Omicron concerns.
Triple-A yield curves were little changed on the day while U.S. Treasuries were stronger and ratios rose slightly with the five-year muni-to-UST ratio at 49% in five years, 69% in 10 and 79% in 30, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the five at 47%, the 10 at 72% and the 30 at 80%.
For 40 straight weeks, investors have put cash into municipal bond mutual funds, as buyers continue to show confidence in the market. Refinitiv Lipper said inflows into municipal bond funds totaled $804 million in the latest reporting period while high-yield funds were a substantial amount of that total, adding $702 million of new investment.
It was all about DASNY (/AA+/AA+//), which sold $2.5 billion of exempt and taxable personal income tax revenue bonds in six tranches.
DASNY sold $1.014 billion of general purpose state personal income tax revenue bonds to Morgan Stanley & Co. in two tranches. The first tranche, $467.145 million of Series 2021E Bidding Group 3 Bonds, saw bonds maturing in 3/2037 with a 4% coupon yield 1.62% and 3s of 2041 at 2.09%, callable in 3/15/2032.
The second tranche, $546.53 million of Series 2021E Bidding Group 1, saw bonds maturing in 3/2023 with a 5% coupon yield 0.23%, 5s of 2026 at 0.53% and 5s of 2031 at 1.15%.
DASNY sold $433.36 million of general purpose state personal income tax revenue bonds, Series 2021E Bidding Group 2 Bonds to RBC Capital Markets. Bonds in 3/2032 with a 5% coupon yield 1.22% and 5s of 2036 at 1.34%, callable in 3/15/2032.
Citigroup Global Markets won DASNY’s $348.79 million of general purpose state personal income tax revenue bonds, Series 2021E Bidding Group 4 Bonds. Bonds in 3/2042 with a 4% coupon yield 1.8% and 4s of 2046 at 1.93%, callable in 3/15/2032.
BofA Securities won DASNY’s $367.125 million of general purpose state personal income tax revenue bonds, Series 2021E Bidding Group 5 Bonds. Bonds in 3/2047 with a 4% coupon yield 1.94% and 3s of 2051 at 2.33%, callable in 3/15/2032.
And Wells Fargo Corporate & Investment Banking won DASNY’s $339.72 million of taxable general purpose state personal income tax revenue bonds, Series 2021F. Bonds in 3/2023 at 0.74% par, 1.55% in 2026 and 1.875% of 2030 at par.
Elsewhere in the primary, J.P. Morgan Securities priced for Oregon Health and Science University (Aa3/AA-/AA-//) $339.23 million of tax-exempt fixed rate green revenue bonds, Series 2021A. Bonds in 7/2033 with a 5% coupon yield 1.36%, 5s of 2036 at 1.47%, 4s of 2041 at 1.79%, 4s of 2044 at 1.91%, 4s of 2051 at 2.01% and 3s of 2051 at 2.43%, callable in 1/1/2032.
Barclays Capital Inc. priced for the Utah Board of Education (Aa1/AA+//) $188.865 million of University of Utah green general revenue bonds. Bonds in 8/2024 at a 5% coupon yield 0.39%, 5s of 2026 at 0.63%, 5s of 2031 at 1.13%, 4s of 2036 at 1.47%, 4s of 2041 at 1.67%, 5s of 2046 at 1.65% and 4s of 2051 at 1.88%, callable in 8/1/2031.
The North Dakota Public Finance Authority (Aa2/AA//) sold $388.575 million of taxable legacy infrastructure revenue bonds to J.P. Morgan Securities. Bonds in 12/2023 at 0.87% par, at 1.59% in 2026, 2.33% in 2031, 2.78% in 2036, and 3.2s of 2041 at 3.12%, callable in 12/1/2031.
The Pulaski County Special School District, Arkansas, sold $108.75 million of refunding and construction bonds to Robert W. Baird. Bonds in 2/2023 with a 5% coupon yield 0.40%, 5s of 2026 at 0.70%, 2s of 2031 at 1.50%, 2s of 2036 at 2%, 2.25s of 2041 at par, 2.5s of 2046 at par, 2.5s of 2048 at 2.55%, callable in 1/1/2027.
Refinitiv Lipper reports $804M inflow
In the week ended Dec. 8, weekly reporting tax-exempt mutual funds saw $803.635 million of inflows, Refinitiv Lipper said Thursday. It followed an inflow of $36.005 million in the previous week.
Exchange-traded muni funds reported inflows of $24.516 million, after inflows of $37.124 million in the previous week. Ex-ETFs, muni funds saw inflows of $779.119 million after outflows of $1.118 million in the prior week.
The four-week moving average remained positive at $739.640 million, after being in the green at $1.013 billion in the previous week.
Long-term muni bond funds had inflows of $978.924 million in the latest week after inflows of $120.353 million in the previous week. Intermediate-term funds had inflows of $194.386 million after outflows of $14.018 million in the prior week.
National funds had inflows of $825.164 million after inflows of $112.065 million while high-yield muni funds reported inflows of $702.289 billion in the latest week, after inflows of $53.250 million the previous week.
Looking ahead
As the close of 2021 approaches, municipal experts are looking back at the previous 11 months and weighing their technical forecast for 2022, and supply is a primary consideration, according to Jeff Lipton, managing director and head of municipal credit and market strategy and municipal capital markets at Oppenheimer Inc.
Forecasting 2022’s overall volume at between $450 billion and $460 billion, Lipton said his prediction would have been closer to $500 billion were it not for the fact that a new version of direct-pay and a reinstatement of tax-exempt advance refundings did not make it to the Build Back Better legislation.
He said supply will be influenced by available federal stimulus funding, which could obviate the need for bond financing; the outlook for the economy in general — including GDP, employment, and inflation — and for municipal credit specifically; as well as historically low interest rates, according to Lipton.
He noted that so far in 2021, volume trends were influenced by some unique considerations that shifted issuer sentiment.
“Pandemic-driven developments, particularly allocations of federal stimulus money directed toward state and local issuers that relieved certain pressures to float new bonded debt, and a wait-and-see approach taken by many issuers awaiting the future of key muni bond provisions as part of a broader legislative package certainly influenced volume trends,” Lipton said in a report Wednesday.
January 2022 may bring about a more typical “January effect,” with lighter weekly calendars as extended pent-up supply came about toward the end of 2021 coupled with growing reinvestment needs from maturing securities and bond redemptions, Lipton said.
“Muni technicals coupled with a more favorable credit outlook than initially anticipated will likely bring continued active buyer interest from SMAs, ETFs, and mutual funds through, at least, the early months of 2022,” Lipton said.
“All in all, we believe that performance for the first month of 2022 begins from a good place,” Lipton wrote, noting that new-issue product ramped up in December providing buyers with cash on hand the opportunity to choose among “a generous suite of offerings in terms of satisfying credit, structure and diversification needs.”
Other aspects of the supply forecast should lead to some upticks in volume in 2022, according to Lipton.
“We would also posture that expectations for still-historically attractive interest rates should provide fertile ground for the issuer community,” Lipton said.
At the same time, he expects that improving cash flows, available stimulus funds, and compelling long-term rates should keep short-term note issuance lower next year.
Lipton made the case for solid performance in the coming year ahead.
“Similar to 2021, sustained favorable technicals throughout 2022 should be accretive to performance and munis can be expected to outperform Treasuries with net negative supply, potentially extending this outperformance and given what we expect to be a march to higher rates as a tighter monetary policy takes hold,” Lipton said.
He anticipates 2022 performance for the municipal bond index to be comparable to or modestly lower than 2021 aggregate performance.
Parsing the performance data for November, municipals earned 85 basis points to slightly outperform Treasuries by eight basis points, and continue to earn better returns year to date, even compared with other fixed income asset classes, such as corporate bonds, Lipton wrote.
Year to date through Dec. 7, municipals are outperforming Treasuries 1.44% versus a loss of 2.15%, respectively.
Lipton said high-yield muni performance should be positive in 2022, however he predicts that it will be lower year over year as investment grade spreads display some widening movement.
“Relative value ratios are demonstrating a richer bias so far for December with the 30-year benchmark right where it was about a year ago,” Lipton said, noting that current ratios are close to their historical tightness of 40 years ago.
Going forward, Lipton said the taxable muni presence in 2022 should elevate its appeal to existing tax-efficient investments, such as retirement accounts seeking alternative investment proxies, as well as to foreign buyers desiring to add diversification and above average credit quality to their portfolios.
“This will likely occur against a backdrop of zero to negative yielding global sovereign debt, continuing to form a redefined muni buyer base,” he said. “Having said this, we believe that taxable issuance has the potential to fall below the 20% threshold, with a noted drop in taxable advance refundings as Treasury yields are likely to trend higher and the universe of outstanding tax-exempt advance refundable candidates continues to narrow.”
Lipton added that pension obligation bonds are one area to watch for continued taxable growth in 2022.
AAA scales
Refinitiv MMD’s scale was unchanged, save for a one basis point cut on bonds in 2023-2025: the one-year at 0.15% and 0.25% in 2023. The 10-year sat at 1.03% and at 1.48% in 30.
The ICE municipal yield curve showed yields steady at 0.18% in 2022 and to 0.29% in 2023. The 10-year maturity was steady at 1.05% and the 30-year yield was also steady at 1.50%.
The IHS Markit municipal analytics curve was up one to 0.18% in 2022 and steady at 0.25% in 2023. The 10-year was at 1.02% and the 30-year at 1.49% as of a 3 p.m. read.
The Bloomberg BVAL curve was steady at 0.17% in 2022 and 0.23% in 2023. The 10-year yield sat at1.05% and the 30-year yield steady at 1.49%.
Treasuries were stronger and equities ended in the red.
The five-year UST was yielding 1.257%, the 10-year at yielding 1.488%, the 20-year at 1.911% and the 30-year Treasury was yielding 1.866% at the close. The Dow Jones Industrial Average lost a half a point, the S&P was down 0.72% while the Nasdaq lost 1.71% at the close.
Chip Barnett contributed to this report.