Large primary, higher ratios keep yields steady

BY SourceMedia | ECONOMIC | 09/21/21 03:50 PM EDT By Chip Barnett

Triple-A benchmarks were unchanged top to bottom Tuesday as more than $3 billion of diverse credits were easily priced into the primary while broader market volatility eased and stocks gained ahead of the FOMC meeting Wednesday.

With demand strong and steady as the third quarter approaches, the buy-side saw brisk activity in the primary and secondary markets on Tuesday, according to two portfolio managers.

Overall, the municipal market was relatively flat again Tuesday, but with decent interest on secondary bid lists, according to Roberto Roffo, managing director and portfolio manager at SWBC Investment Company.

The primary negotiated and competitive markets are seeing good demand with no trouble clearing bonds, he noted.

?The slightly cheaper ratios and continued inflow of money into municipals has put a ceiling on municipal yields for now,? Roffo said on Tuesday. ?The demand-supply imbalance due to all the cash on hand will support any large new issues this week and in the coming weeks as long as they are priced appropriately.?

Secondary trading continues to provide yield pickup, as the competition for new issues ? given the strong fund flows ? is fierce, according to JB Golden, executive director and portfolio manager at Advisors Asset Management.

The lack of activity, more specifically, the lack of a correlated move between Treasuries and municipals is the most important development to start the week.

?Municipals were steady yesterday with the Treasury market rallying on concerns that the China Evergrande (EGRNF) situation could bleed over into the broader global credit markets,? Golden said. ?The steady read in municipals pushed ratios slightly higher providing cover to an already yield-starved market.?

The 10-year muni-to-Treasury is well above the average for 2021 and Golden expects that with seasonal pressures abating this trend will continue.

Ratios were little changed Tuesday with the 10-year municipal to UST ratio at 71% and the 30-year at 83%, according to Refinitiv MMD. The 10-year ratio was at 75% while the 30-year was at 81%, according to ICE Data Services.

?The lack of a coordinated move to start the week provides some confirmation for us that we could continue to see ratios widen for the balance of the year,? he said. ?The increasing visible supply is welcome and will hopefully provide some relief for investors who have faced net negative supply [during] the summer.?

Supply was certainly not an issue Tuesday with large deals pricing to ample demand.

Massachusetts (Aa1/AA/AA+//) sold $226.215 million of general obligation refunding bonds, 2021 Series A to Wells Fargo Corporate & Investment Banking: 5s of 9/2022 at 0.08%, 5s of 2026 at 0.43% and 5s of 2030 at 0.9%.

The state also sold to BofA Securities $385 million of general obligation bonds consolidate loan of 2021 Series C: 5s of 9/2028 at 0.74%, 5s of 2032 at 1.11%, 2s of 2037 at 2.04%, 2s of 2042 at 2.22% and 2.375s of 2047 at 2.35%, callable in 9/1/2031.

Massachusetts also sold to Jefferies LLC $350 million of general obligation bonds consolidate loan of 2021 Series D: 5s of 9/2048 at 1.68% and 5s of 2051 at 1.71%, callable in 9/1/2031.

Goldman Sachs & Co. priced for the Triborough Bridge and Tunnel Authority (/AA+/AA+/AA+/) $863.168 million of MTA Bridges and Tunnels payroll mobility tax senior lien bonds, Series 2021C.

The first tranche, $313.21 million of payroll mobility tax senior lien bonds, Subseries 2021C-1A, saw bonds maturing in 5/2023 with a 5% coupon yields 0.15%, 5s of 2025 at 0.32%, 5s of 2037 at 1.54%, 4s of 2042 at 1.87%, 4s of 2046 at 2.02% and 5s of 2051 at 1.94%, callable in 11/15/2031.

The second, $75 million of payroll mobility tax senior lien bonds, Subseries 2021C-1B, saw bonds maturing in 5/2021 with a mandatory tender date of 5/15/2026, a 5% coupon to yield 0.55%.

The third, $177.958 million of payroll mobility tax senior lien refunding bonds, Subseries 2021C-2, saw bonds maturing 5/2022 with a 5% coupon yield 0.08%, 5s of 2026 at 0.45%, 5s of 2031 at 1.1% and 4s of 2036 at 1.61%, callable on 11/15/2031.

The fourth, $297 million of payroll mobility tax senior lien bonds, Subseries 2021C-3, saw bonds maturing 5/2051 with a 2.5% coupon yields 2.65%, a 3% coupon yields 2.39% and a 4% coupon yields 2.09%, callable in 11/15/2031.

The issuer also priced $11.378 million of capital appreciation bonds.

Citigroup Global Markets Inc. priced for the New Jersey Health Care Facilities Financing Authority (Aa3/AA-//) $751.845 million of revenue bonds, RWJ Barnabas Health Obligated Group Issue, Series 2021A, with 5s of 2022 at 0.06%, 5s of 2026 at 0.45%, 5s of 2031 at 1.12%, 4s of 2036 at 1.59%, 4s of 2041 at 1.82%, 4s of 2051 at 2.04%, 3s of 2051 at 2.40% and 2.625s of 2051 at par.

Jefferies LLC priced for the Department of Airports of the City of Los Angeles, California, at Los Angeles Airport (Aa3/A+/AA-//) $750.215 million of AMT subordinate revenue bonds, 2021 Series D. Bonds in 5/2026 with a 5% coupon yields 0.57%, 5s of 2030 at 1.21%, 5s of 2035 at 1.58%%, 4s of 2040 at 1.91%, 5s of 2046 at 1.97% and 4s of 2051 at 2.19%, callable in 11/15/2031.

BofA Securities priced for the Orange County Transportation Authority, California (Aa3/AA//) $662.82 million of bond anticipation notes I-405 Improvement Project, Series 2021, with 5s and 4s of 2024 at 0.30%.

Barclays Capital Inc. priced and repriced for Ohio State University (Aa1/AA/AA//) $600 million of general receipts bonds (Multiyear Debt Issuance Program II), Series 2021 A (Green Bonds) with zero to four basis point bumps. Bonds in 12/2022 with a 5% coupon yields 0.07% (-2), 5s of 2026 at 0.46% (-3), 5s of 2031 at 1.05% (-4), 5s of 2036 at 1.34% (-2), 4s of 2041 at 1.72%, 3s of 2044 at 2.13%, 4s of 2048 at 1.90% (-1) and 2.5s of 2051 at 2.49% (-1), callable in 12/1/2031.

BofA Securities priced for the Hospital Service District No. 1 of the Parish of Tangipahoa, Louisiana, (/A-/BBB+//) $129.795 million of hospital revenue refunding bonds (North Oaks Health System Project), Series 2021.

Morgan Stanley & Co. priced for the Cypress-Fairbanks Independent School District, Texas (Aaa/AAA/AA) $121.85 million of unlimited tax school building bonds, Series 2021A: 5s of 2/2024 at 0.21%, 5s of 2028 at 0.71%, 4s of 2033 at 1.25%, 3s of 2038 at 1.63%, 2.25s of 2043 at 2.34% and 2.375s of 2046 at 2.44%, callable in 2/15/2031.

Secondary trading and scales
Trading showed a mostly steady tone. Florida PECO 5s of 2022 at 0.08%. District of Columbia 5s of 2022 at 0.09%. New York City 5s of 2023 at 0.19%-0.16%.

Minnesota 5s of 2024 at 0.20%. Austin, Texas electric and gas 5s of 2024 at 0.23%.

Maryland 5s of 2028 at 0.69%. California 5s of 2029 at 0.80% versus 0.82%-0.81% Monday and 0.87% original. California 5s of 2030 at 0.90% versus 0.91%-0.90% Monday and 0.98% original.

Minnesota 5s of 2030 at 0.90%. Washington 5s of 2033 at 1.14%.

Hennepin County, Minnesota 5s of 2037 at 1.25% and 5s of 2038 at 1.29%. Massachusetts clean water 5s of 2039 at 1.33%.

Washington 5s of 2045 at 1.60%. New York City TFA 5s of 2045 at 1.81% and 4s of 2045 at 1.96%.

Georgia road and tollway 3s of 2049 at 2.01%-2.00%.

Refinitiv MMD's was unchanged with the one-year steady at 0.07% in 2022 and steady at 0.11% in 2023. The yield on the 10-year at 0.94% while the yield on the 30-year held at 1.54%.

The ICE municipal yield curve showed bonds steady in 2022 at 0.08% and at 0.12% in 2023. The 10-year maturity sat at 0.95% and the 30-year yield steady at 1.52%.

The IHS Markit (INFO) municipal analytics curve showed the one-year steady 0.08% and 0.11% in 2023. The 10-year at 0.94% and the 30-year also steady 1.53%.

The Bloomberg BVAL curve showed short yields steady at 0.07% and 0.07% in 2022 and 2023. The 10-year yield sat at 0.93% and the 30-year yield held steady at 1.53%.

The 10-year Treasury was yielding 1.325% and the 30-year Treasury was yielding 1.860% in late trading. The Dow Jones Industrial Average rose 117 points or 0.35%, the S&P 500 gained 0.42% while the Nasdaq rose 0.69% near the close.

FOMC meeting looms; economic data released
Data released Tuesday reflected a murky picture on the strength of the economy, but the market?s eyes were fixed on the Federal Reserve?s policy meeting in Washington, D.C.

The Federal Open Market Committee will announce its decisions on monetary policy Wednesday and while most economists expect the FOMC to hold interest rates at the current level they are divided over whether the Fed will begin tapering.

Too much focus has been placed on the Fed?s taper plans, Tom Garretson, senior portfolio strategist at RBC Wealth Management, told The Bond Buyer, adding that Fed will probably just add some more clues as to the timing.

?That?s not the big story of this meeting because the market has already priced for the tapering process,? he said. ?The key to this meeting will be Fed Chair Powell versus the dot plot, something similar to the June meeting where you had a surprise hawkish pivot where they indicated two rate hikes by 2023 despite no real change or upgrade to their economic outlook. I think that this will be the big focus of this meeting.?

He said he thinks the Fed?s dot plot or interest rate forecast will show a rate by the end of next year and will see an upgrade to the rate hike outlooks for 2023 and their first estimate of their 2024 rate expectations.

?I think the big think to watch after this meeting is how the markets juggle that, if that?s how it plays out in terms of if the Fed becomes a bit more hawkish without actually making the case to do so given that the economic outlook is maybe not as robust as it was at the last meeting back in June, Garretson said.

?The Fed will very likely indicate tapering initiation in November at a rate, though not iron-clad, that will be quite firmly set so as eliminate purchases by mid-2022,? said John Vail, Nikko Asset Management?s chief global strategist.

?It seems apparent that Powell will be re-nominated and will accept the job, but the two other top Fed jobs are also very important for the markets. [Fed Vice Chair Richard] Clarida?s replacement will matter greatly in that such will indicate the long-term tenor of its monetary activism, while [Fed Vice Chair Randal] Quarles? replacement will impact market sentiment on the financial industry,? Vail said.

In economic data Tuesday, the housing market looked strong.

Housing starts rose to 1.62 million in August from 1.53 million in July while building permits increased to 1.73 million last month from 1.63 million in July.

?Total housing starts and housing permits made decent gains in August compared to the month prior, but the focus was on multifamily units,? said Lawrence Yun, National Association of Realtors? chief economist. ?Single-family housing starts fell 2.8% while single-family housing permits, a gauge for future activity, were essentially unchanged after falling in the past four months. Multifamily starts, comprising mostly apartments, increased by 20.6% while multifamily permits rose 15.8%.?

He noted that there was a definite housing shortage as was reflected in the low inventory of homes for sale and in low rental vacancy rates.

?However, a shift toward rental buildings means less access to homeownership over the long run and the accompanying opportunity for wealth gains. Home price gains will surely moderate after experiencing gains of nearly 20% in the first half of this year,? Yun said. ?But given the housing shortage and the lack of big increases in the construction of single-family homes, home prices will continue to move higher than most people?s income gains. That?s good news for property owners, but bad news for those wanting to become homeowners.?

Kelly Mangold, principal at RCLCO Real Estate Consulting, noted the supply difficulties that had hurt sales in the prior month.

?New home starts recovered in August, following a brief period of decline in July due to supply chain issues,? said Kelly Mangold, principal at RCLCO Real Estate Consulting. ?Additionally, the backlog of homes authorized but not started has grown to record levels over the late spring and summer, and as builders are able to secure materials and labor it is not surprising to see starts begin to pick back up.?

She noted the backlog was a promising metric and while some of the pipeline of units may be canceled, it is likely that a good share of the backlog will make it to market due to robust housing demand.

However, the Federal Reserve Bank of Philadelphia?s non-manufacturing survey showed a more mixed picture, with business activity continuing to slow while employment indicators strengthened.

The Philly Fed?s diffusion index for current general activity fell for the third straight month, dropping to 21.9 in September from 37.2 in August, the lowest reading since April.

The share of firms this month who reported increases in general activity at 44% exceeded the 22% who reported decreases ? however, the share of firms reporting decreases nearly doubled from August. The new orders index fell 13 points to 14.7 and the sales/revenues index fell to 16.7 from 29.0 last month.

The current regional activity index plunged 30 points to 9.6 in September.

However, firms continued to report increases in full-time and part-time employment.

The full-time employment index rose six points to 14.1 in September after falling 17 points last month. Of the firms responding to the survey, 21% saw increases in full-time employment and 7% reported declined. Sixty-eight percent reported stable full-time employment. The part-time employment index rose 12 points to 13.8 this month. Of the firms responding, 54% reported steady part-time employment with 22% seeing increases and 8% seeing decreases.

The report showed that price increases remained widespread.

The prices paid index inched up by one point to 51.5. More than 52% of the firms saw increases, 1% reported decreases and 34% reported stable input prices. Over 23% of the firms saw increases in prices received while 3% reported decreases.

Primary still to come
The California Housing Finance Agency (/AA+///) is set to price on Thursday $497.547 million of municipal certificates, Series 2021-2 Class A certificates (social certificates), evidencing beneficial interests in credit enhance custody receipts, serial 2035. Citigroup Global Markets Inc.

The Suffolk Tobacco Asset Securitization Corp. (non-rated) is set to price on Wednesday $179.125 million of tobacco settlement asset-backed bonds, Series 2021A-2 senior bonds and Series 2021B-1 subordinate bonds, consisting of $122.425 million, Series 21A2, serials 2024-2041, term 2050 and $56.7 million, Series 21B1, terms 2031 and 2050. Jefferies LLC.

The Residential Care Facilities for the Elderly Authority of Fulton County, Georgia, (non-rated) is set to price on Wednesday $131.775 million of Series 2021A & Series 2021B (Canterbury Court Project), consisting of $120.775 million, Series A and $11 million, Series B. Ziegler.

The Rampart Range Metropolitan District No. 5 in Douglas County, Colorado, is set to price on Thursday $117.700 million of limited tax supported and special revenue bonds, Series 2021, terms 2036, 2041 and 2051. Jefferies LLC.

The California Community Housing Agency is set to price on Thursday $117.505 million of essential housing revenue bonds, Series 2021A-1 senior bonds and Series 2021A-2 junior bonds (K Street Flats), consisting of $70 million, Series 21A1, term 2057 and $47.505 million, Series 21A2, term 2050. Jefferies LLC.

The Suffolk Tobacco Asset Securitization Corp. is set to price on Wednesday $84.3 million of tobacco settlement asset-backed bonds, Series 2021B-2 subordinate bonds, term 2066. Jefferies LLC.

Competitive:
Miami-Dade County School District is set to sell $450 million of tax anticipation notes, Series 2021 at 10 a.m. on Wednesday.

New York State Thruway Authority (A1/A/-) is set to sell $259.49 million of general revenue bonds Series O Bonds Maturity Group 1 at 10:15 a.m. on Thursday.

New York State Thruway Authority is set to sell $287.455 million of general revenue bonds Series O Bonds Maturity Group 2 at 10:45 a.m. on Thursday.

Lynne Funk 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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