Primary leads secondary to lower yields; Not time to taper, Daly says

BY SourceMedia | MUNICIPAL | 05/04/21 04:16 PM EDT By Aaron Weitzman

Municipal secondary trading was constructive Tuesday with one to two basis point bumps to triple-A scales 10-years and out, riding along with a stronger U.S. Treasury market and a selloff in equities while new-issues came at compelling levels.

After just one session, the 10-year muni is back below 1% with ICE Data Services and Refinitiv MMD at 0.99% while Bloomberg BVAL is at 0.96% and IHS Markit (INFO) at 0.95%.

Municipal to UST ratios closed at 62% in 10 years and 69% in 30 years on Tuesday, according to Refinitiv MMD, while ICE Data Services had the 10-year at 61% and the 30 at 70%.

Daly: Fed far from its goals
?Now is not the time to start talking about normalization,? Federal Reserve Bank of San Francisco President Mary Daly said in a video fireside chat.

The Federal Reserve remains ?a long way? from its dual mandate of stable prices and full employment, she said. Although she?s optimistic, the road to recovery is long and the virus is not yet defeated, noting outbreaks in India and Japan.

?I am bullish about the future but there?s still a very big hole to dig out of,? she said. ?I like where we are at, as policy is perfect because it is outcome based, not based on estimates or forecasts.?

Noting that 8.5 million people are still unemployed, Daly said, ?full employment is a moving target? and it?s difficult to define. She said in her mind, until those who lost their jobs, recent graduates and those who were forced to retire are employed ?we won't have full employment.?

These thoughts differ from Federal Reserve Bank of Dallas President Robert Kaplan, who said last week he believes it?s time for the Fed to discuss tapering asset purchases.

Daly is a voter on the Federal Open Market Committee which Kaplan is not.

Inflation should be transitory, she said. ?The same tolerance we had for 1.5% inflation, should also be there for readings on the other side of 2%,? Daly said. ?A little? inflation ?will be good for us.?

New issues
The primary helped the secondary along with competitive new issues from Massachusetts and the Port Authority seeing decent bids, as there is both need and availability in the primary market.

Massachusetts' competitive loans were structured from 2035-2042 with 3% and 2% coupons out longer while the larger tranche had bonds in 2047 with a 3% coupon yielding 2.13% and the long bond, 2.125s of 2051 at 2.29%. The Port Authority of New York and New Jersey (Aa3/A+/A+/) sold noncallable AMT 3s and 2s maturing from 2027 to 2034 with a ~54 basis point spread to triple-A benchmarks.

Negotiated loans were repriced to lower yields. Northside, Texas, ISD repriced by two to five basis points with lower coupons on bonds outside of 10 years. Iowa Finance Authority green bonds priced three to seven basis points lower than morning price talk.

?The scenario does not change at all, there is continued strength in the primary market; it?s lackluster in the secondary, but definitely stronger today with the Treasury market,? a New York municipal manager said, adding that the longer end of the secondary market was up one or two basis points on increased demand there.

Trading in the secondary showed firmer prints on high-grades. California 5s of 2029 traded at 0.98%. Anne Arundel 5s of 2029 at 0.87%. Vermont 4s of 2030 at 1.00%. Nassau County, New York, 5s of 2032 at 1.12%. Austin, Texas, 4s of 2033 at 1.17%-1.14%. Hennepin County, Minnesota, 5s of 2023 at 1.13%-1.12% versus 1.17%-1.14% Friday.

Maryland 5s of 2036 traded at 1.24%-1.25%. Montgomery County, Pennsylvania, 5s of 2037 at 1.31%-1.29%.

New York City TFA 4s of 2038 at 1.76%-1.75%. Massachusetts 5s of 2039 at 1.39% versus 1.41% Monday.

NYC water 5s of 2048 at 1.76%. NYC 5s of 2050 at 1.80%.

Primary details
Massachusetts (Aa1/AA/AA/) sold $200 million of general obligation bonds to Morgan Stanley & Co. and $400 million general obligation bonds to Jefferies. The $200 million saw 3s of 2035 yield 1.51%, 3s of 2036 at 1.55%, 2s of 2041 at 2.05% and 2s of 2042 at 2.08%, priced to the call on 3/1/2031. Jefferies LLC bought the $400 million offering with 3s of 2047 at 2.13%, 2s of 2050 at 2.28% and 2.125s of 2051 at 2.29%.

J.P. Morgan Securities LLC repriced $212.5 million of unlimited tax school building and refunding bonds, Series 2021, Permanent School Fund Guarantee Program for the Northside Independent School District, Texas, (Aaa//AAA/). Bonds saw two to five basis point bumps. Bonds in 2022 with a 5% coupon yield 0.07% (-4), 5s of 2026 at 0.51% (-2), 5s of 2031 at 1.13% (-3), 3s of 2036 at 1.45% (-5), 3s of 2041 at 1.66% (-4), 2.375s of 2045 at 2.26% (-2) and 2.375s of 2051 at 2.32% (-2). Callable in 8/15/2030.

Piper Sandler & Co. priced $209.2 million of state revolving fund revenue green bonds, Series 2021A, for the Iowa Finance Authority (Aaa/AAA//) with three to seven basis point bumps from morning price talk. Bonds in 2022 with a 5% coupon yield 0.10% (-3), 5s of 2026 at 0.53% (-4), 5s of 2031 at 1.09% (-5), 5s of 2036 at 1.28% (-7), 5s of 2041 at 1.48% (-7), 5s of 2046 at 1.65% (-5) and 5s of 2051 at 1.71% (-5).

The Port Authority of New York and New Jersey (Aa3/A+/A+/) sold $186 million of alternative minimum tax consolidated bonds to BofA Securities. Bonds in 2027 with a 3% coupon yield 1.06%, 2s of 2031 at 1.65%, 2s of 2034 at 1.90%. Not callable.

The primary still has a robust calendar ahead with Pennsylvania's $1 billion competitive loan on tap Wednesday and high-grade Seattle coming with a smaller $166 million competitive deal.

High-grades are competing for attention with high-yield paper, but investors have fewer high-yield issues from which to choose.

?Credit trends are better with the reopenings in New York City, we?re getting back to some normalcy? the manager said.

Scales
On Refinitiv MMD?s AAA benchmark scale, yields were at 0.09% in 2022 and 0.12% in 2023. The yield on the 10-year fell one basis point to 0.99% and the 30-year fell two to 1.58%.

The ICE AAA municipal yield curve showed yields at 0.09% in 2022 and 0.14% in 2023, the 10-year fell one basis point to 0.99%, while the 30-year fell two basis points to 1.57%.

The IHS Markit (INFO) municipal analytics AAA curve showed yields steady at 0.10% in 2022 and 0.13% in 2023, the 10-year fell to 0.95% and the 30-year fell to 1.59%.

The Bloomberg BVAL AAA curve showed yields steady at 0.06% in 2022 and 0.08% in 2023, with the 10-year steady at 0.96%, and the 30-year yield one basis point lower at 1.58%.

The three-month Treasury note was yielding 0.02%, the 10-year Treasury was yielding 1.595% and the 30-year Treasury was yielding 2.27% near the close. Equities sold off with the Dow losing 96 points, the S&P 500 falling 1.06% and the Nasdaq off 2.33% near the close.

Trade deficit not worrying analysts
A record high trade deficit doesn?t concern analysts since it is reflective of the U.S. economy strengthening compared to other countries.

The international trade deficit swelled to a record $74.5 billion in March from a revised $70.5 billion in February, first reported as $71.1 billion, the U.S. Census Bureau announced on Tuesday.

Economists polled by IFR Markets estimated a $74.3 billion shortfall.

The trade deficit ?difficult to interpret on its own,? said Steve Sosnick, chief strategist at Interactive Brokers (IBKR), since opinions vary as to whether a high deficit is good, bad or neutral.

?If it?s rising because the economy is strengthening relative to its peers and capital inflows are strong, that is not necessarily a worrisome sign and I?d argue that is the case right now,? he said.

?The reopening trade is driving demand for goods, many of which are imported, and is evident in the widespread reports of supply chain bottlenecks,? Sosnick said. ?Meanwhile, there is no shortage of foreign demand for U.S. assets, so as long as this situation can be perceived to be transitory ? to steal a phrase from Federal Reserve Chair Jerome Powell ? it is not yet worrisome.?

Exports in March increased by $12.4 billion to $200.0 billion and imports rose $16.4 billion to $274.5 billion.

?The U.S. economy continues to lead the way in vaccinations, which is fueling a speedier domestic recovery and therefore a rebound in imports,? said Jay Bryson, chief economist, and Shannon Seery, economist, at Wells Fargo Securities. ?Digging into the details we see what the domestic data on manufacturing and consumption have already demonstrated; supply and demand are out of whack. Imports are helping make up for the imbalance.?

And the deficit will continue rising ?as the U.S. economy heats up and the rest of the world tries to get their economies reopened,? said Ed Moya, senior market analyst, at OANDA. ?Investors are a little unsure on how to navigate the next couple of quarters of roaring U.S. growth that is unlikely to be reciprocated by the rest of the world.?

Another issue is it will be ?several months? before it?s clear ?if the Fed is making a policy mistake, ? and that is making some traders nervous.?

Separately, factory orders gained 1.1% in March, compared to the revised 0.5% decline in February, first reported as a 0.8% drop.

Economists expected orders to rise 1.3%.

?The factory orders report is consistent with a strengthening economy,? said Interactive?s Sosnick. ?The fact that factory orders rose less than expected while durable goods across all categories rose more than expected could also partly explain the increase in the trade deficit, since the former is more U.S. centric than the latter.?

Competitive market to come
On Wednesday, Pennsylvania (Aa3//AA-/) is set to sell $1.04 billion of tax-exempt and taxable general obligation bonds at 11 a.m.

Seattle, Washington, (/AAA//) is set to sell $166 million of tax-exempt and taxable general obligation bonds. The first, $144.8 million of exempts at 10:45 a.m. and the second, $21.4 million of taxables, at 11:15 a.m.

On Thursday, Milwaukee, Wisconsin, (/A/AA-/) is set to sell $118.9 million of general obligation promissory notes at 11 a.m., $30.9 million of general obligation corporate purpose bonds at 11 a.m., $21.9 million of taxable general obligation promissory notes at 11:30 a.m., and $13.6 million of taxable general obligation corporate purpose bonds at 11:30 a.m.

Negotiated pricings scheduled this week
The Main Street Natural Gas, Inc. (Aa2//AA/) is on the day-to-day calendar with $747.1 million of gas supply revenue bonds, serials 2022-2028, a term in 2051, puts due 12/1/2028. RBC Capital Markets Inc. is lead underwriter.

The Washington State Housing Finance Commission (/BBB+//) is set to price $571.961 million of social municipal certificates Series 2021-1 Class X, serial 2035, on Thursday. Citigroup Global Markets Inc. is head underwriter.

The North Texas Tollway Authority (A2/A//) is set to price $448.7 million of system revenue and refunding second tier bonds, Series 2021B. J.P. Morgan Securities LLC will run the books.

The North Texas Tollway Authority is also set to see $402.9 million of system revenue and refunding first tier taxable bonds, Series 2021A, serials 2026-2038, term 2043, on Wednesday. RBC Capital Markets is head underwriter.

The California Infrastructure and Economic Development Bank (A2///) is set to price $281.4 million of California Academy of Sciences index mode sustainability revenue bonds on Wednesday. Series 2018A, Series 2018B, Series 2018C and Series 2018D remarketing. Wells Fargo Securities is bookrunner.

The California Department of Water Resources (Aa1/AAA//) is set to price $264 million of taxable Central Valley Project water system revenue bonds on Wednesday. Morgan Stanley & Co. LLC is lead underwriter.

The DWR is also set to price on Wednesday $212.2 million of Central Valley Project water system revenue bonds, Series BD. Morgan Stanley (MS) will also run the books.

The state of Ohio (Aa2/AA/AA/) is set to price on Wednesday $228.6 million of capital facilities lease-appropriation bonds, $150 million of Series MHF, serials 2022-2031 and $78.6 million of Series ABF, serials 2022-2041. Loop Capital Markets will run the books.

The Maine Health and Higher Educational Facilities Authority (A1/AA/A+/) is set to price on Wednesday $157 million of taxable revenue bonds, Series 2021B, serials 2022-2036, term 2043. Raymond James & Associates, Inc. will run the books.

The Wisconsin Housing and Economic Development Authority (Aa3/AA//) Is set to price $156.3 million of housing refunding revenue bonds, non-AMT, Series 2021 A, $75.5 million of serials 2023-2059, and Series 2021 B, $80.8 million, serials 2045-2051. Wells Fargo Securities is head underwriter.

The L?Anse Creuse Public Schools, Macomb County, Michigan, (/AA//) is set to price $149.7 million of taxable 2021 refunding bonds, insured by the Michigan School Building Qualified Loan Program. J.P. Morgan Securities LLC is head underwriter.

The Riverside Community College District of Riverside and San Bernardino Counties, California, (Aa1///) is set to price $140.6 million of 2021 general obligation refunding bonds on Wednesday. Piper Sandler & Co. is bookrunner.

The American Museum of Natural History (Aa3/AA//) is set to price $135 million of taxable sustainability corporate CUSIP bonds, term 2052. Morgan Stanley & Co. LLC is lead underwriter.

El Paso, Texas, (/AA/AA/) is set to price on Thursday $146.5 million of taxable and tax-exempt general obligation bonds, $105.6 taxable, $40.9 exempts. El Paso will also price $78 million of exempt certificates of participation. J.P. Morgan Securities LLC is bookrunner.

The School Board of Palm Beach County, Florida, (Aa3//AA-/) is set to price $112.9 million of tax-exempt and taxable certificates of participation. J.P. Morgan Securities LLC is lead underwriter.

Christine Albano contributed to this report.

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

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