High-yield sector seeing some pushback

Bonds

Municipal triple-A benchmark yield curves were mixed, with some weakness arriving later in the afternoon, but the asset class outperformed a risk-on trade in equities that moved U.S. Treasury yields higher.

A softer tone later in the day emerged and ICE Data Services cut their scales one to two basis points outside of five years, Bloomberg BVAL saw a basis point cut in spots along the curve, mostly out long, while IHS Markit cut one in 10-years while Refinitiv MMD was unchanged on the day.

The 10-year UST was five basis points cheaper than Monday’s close at 1.53% with the 30-year at 2.10% near the close.

The 10-year municipal-to-UST ratio is at 75% and the 30-year at 80%, according to Refinitiv MMD. ICE Data Services had the 10-year at 73% and the 30 at 81%.

The end of September witnessed increased spread within the investment-grade space, “and we are now at cheaper relative value ratios, and valuations for higher-quality cohorts have created some relative interest,” said Jeff Lipton, head of municipal fixed income research at Oppenheimer.

The increase in yields and spread widening across municipal sectors has given some pause to high-yield investors after months of stagnation. An increased focus on credit differentiation is starting to emerge.

“… Any significant market sell-off would likely impact high-yield performance the most, with more pronounced widening in credit spreads and we have witnessed the first outflow in high-yield cash in some time,” Lipton said.

A large high-yield bid list came out Monday, which “we haven’t seen in a long time,” said Nick Venditti, a senior portfolio manager on the Municipal Fixed Income Team at Wells Fargo Asset Management. “You’re starting to see little spider cracks.”

“The days of blindly buying any and every deal that comes to market are probably over,” Venditti said. “We’ve been in an environment where risk has paid and buying the longest, worst bond has been a fail-safe way to invest. We’re returning to a period where bottom-up fundamental value investing is going to outperform.”

Secondary selling has fallen some but lower-rated credits have been a larger portion of bid lists, upwards of 25%.

On Monday, VanEck’s High-Yield Municipal exchange traded fund posted $115 million of outflows and high-yields had two straight months of negative performance — though still outperforming other municipal sectors.

“Investors who have been out the risk spectrum, it makes sense for them to take one step down the risk ladder,” Venditti said. “I’m still relatively bullish on munis, but I do think the days of them going up and up every single day are probably over, and you’re going to have to attack in a smarter, well thought out way.”

Lipton said performance trajectory for the asset class is less clear as the fourth quarter gets underway and uncertainties abound for all sectors.

“Although we believe that munis still have the ability to generate positive performance, admittedly such performance could be compromised should technicals become much less constructive, prospects for higher taxes and President Biden’s overall legislative agenda fade considerably, and should Washington’s political dysfunction create further bond market dislocation and spread widening,” he said.

As for the primary market Tuesday, deals were well received. BofA Securities priced for the Riverside County Transportation Commission, California, (/A/BBB+//) $517.25 million of million of toll revenue senior lien refunding bonds. The first series, $435.01, saw 4s in 6/2037 at 1.96%, 4s of 2041 at 2.23%, 4s of 2046 at 2.39% and 3s of 2049 at 2.90%, callable June 1, 2031; and, $82.25 million of toll revenue senior lien refunding bonds, 2021 Series C. Bonds in 6/2047 with a 4% coupon yield 2.53%, callable June 1, 2031.

BofA also priced $88.8 million of taxables for the Riverside County Transportation Commission with bonds in 6/2030 at 2.477%, at 2.627% in 2031, 3.127% in 2036 and 3.335% in 2041, all priced at par, callable June 1, 2031.

UBS Financial Services Inc. priced and repriced with bumps of four to nine basis points the Metropolitan Government of Nashville and Davidson County, Tennessee’s (Aa2/AA///) $378.785 million of water and sewer revenue green bonds, Series 2021 A. Bonds in 7/2022 with a 5% coupon yield 0.09% (-5), 5s of 2026 at 0.51% (-6), 5s of 2031 at 1.21% (-9), 4s of 2036 at 1.60% (-8), 3s of 2041 at 2.06% (-6), 4s of 2046 at 2.00% (-4) and 2.625s of 2051 at 2.6%, callable July 1, 2031.

Barclays Capital priced for the Lower Colorado River Authority (/A/AA-/) $253.885 million of refunding revenue bonds. Bonds in 5/2023 with a 5% coupon yields 0.50%, 5s of 2026 at 0.85%, 5s of 2031 at 1.67%, 5s of 2036 at 1.92% and 5s of 2041 at 2.09%, callable May 15, 2031.

Morgan Stanley & Co. priced for the California Infrastructure And Economic Development Bank (A3/A-//) $145.255 million of sustainability revenue bonds (California Science Center Phase III Project). The first tranche, $41.98 million, 2021 Series A, saw bonds maturing in 5/2026 with a 4% coupon at 0.64%, 4s of 2031 at 1.45%, 4s of 2036 at 1.95%, 4s of 2041 at 2.12%, 4s of 2046 at 2.3% and 4s of 2055 at 2.42%, callable Nov. 1, 2031.

The second tranche, $103.275 million, 2021 Series B, saw bonds maturing at 5/2032 with a 4% coupon yields 1.62%, 4s of 2036 at 1.95%, 4s of 2041 at 2.12%, 4s of 2046 at 2.30% and 4s of 2051 at 2.35%, callable Nov. 1, 2031.

The St. Louis Metropolitan Water District privately placed $106.905 million of revenue bonds with Barclays Capital. Bonds in 5/2027 with a 5% coupon yield 2.205, 5s of 2031 at 2.69%, 5s of 2036 at 2.92%, 5s of 2041 at 3.10% and 5s of 2046 at 3.25%.

Secondary trading
Maryland DOT 5s of 2024 at 0.30%-0.29%. Maryland 5s of 2025 at 0.41%. Maryland DOT 5s of 2027 at 0.77%.

California 5s of 2029 at 1.04%. Princeton 5s of 2029 at 0.92%. Connecticut 5s of 2030 at 1.17%.

Wisconsin 5s of 2031 at 1.24%, the same as Monday. Minnesota 5s of 2031 at 1.20%. Maryland 5s of 2032 at 1.24%, the same as Thursday. Maryland 5s of 2034 at 1.33%-1.32% versus 1.34%-1.33% Monday.

Fairfax County 4s of 2039 at 1.57%-1.50%. Georgia 4s of 2039 at 1.45%, the same as Friday.

California 5s of 2041 at 1.62%, the same as Monday. Washington 5s of 2042 at 1.72% versus 1.66% a week ago.

New York City water 5s of 2044 at 1.91%. Washington 5s of 2045 at 1.82%. NYC TFA 5s of 2045 at 1.99%.

AAA scales
According to Refinitiv MMD, short yields were steady at 0.13% and at 0.20% in 2022 and 2023. The yield on the 10-year sat at 1.14% while the yield on the 30-year stayed at 1.67%.

The ICE municipal yield curve showed bonds steady in 2022 at 0.15% and at 0.19% in 2023. The 10-year maturity rose one basis point to 1.12% and the 30-year yield rose two to 1.70%.

The IHS Markit municipal analytics curve showed short yields up one basis point to 0.14% and 0.18% in both 2022 and 2023. The 10-year yield was up one to 1.12% and the 30-year yield was steady at 1.66%.

The Bloomberg BVAL curve showed short yields steady at 0.15% and 0.16% in 2022 and 2023. The 10-year yield was steady at 1.12% and the 30-year yield rose one basis point to 1.68%.

In late trading, Treasuries were softer as equities regained Monday’s losses.

The 10-year Treasury was yielding 1.53% and the 30-year Treasury was yielding 2.10%. The Dow Jones Industrial Average gained 443 points, or 1.30%, the S&P rose 1.38% while the Nasdaq was up 3.35%.

Economy
Looking past current issues, including the debt ceiling and inflation, the economic outlook is “awfully bright,” said Scott Colbert, executive vice president and chief economist at Commerce Trust Co.

“We expect growth to increase. We expect inflation to peak and continue to roll over. And hopefully the transition to a higher interest rate environment is rather moderate and slow, which affords us a rather positive outlook for the financial markets,” he said.

Inflation should come down, with the recent personal consumption expenditure indexes at 30-year highs providing the peak, Colbert said. But, he noted, inflation remains “a lot stickier than people thought. And it’s a lot stickier than the Fed thought.”

The added inflation “has caused interest rates to rise,” Colbert said. “And that’s probably the biggest risk to any economic outlook that we have, is how fast interest rates are likely to rise.”

The coronavirus will continue to impact the economy, he noted. “I think the number one factor to focus on, still, is the coronavirus,” since it will drive or stall growth depending on the number of new cases.

Indeed, the surge in COVID cases as a result of the Delta variant “has disproportionately affected service industries,” said Berenberg chief economist for the U.S., Americas and Asia Mickey Levy. “We expect demand for services to remain strong, underpinned by growth in employment, wages, and declining daily COVID cases, but supply constraints will continue to weigh on the service sector.”

The Institute for Supply Management’s services PMI rose to 61.9 in September from 61.7 in August. Economists polled by IFR Markets expected a 59.5 read.

Business activity/production and new orders were rising faster than last month. Prices also gained. Employment was growing slower, the report said.

“The inventory sentiment sub-index remains in contractionary territory,” Levy said. “Given the pervasiveness and persistency of the ongoing supply disruptions, businesses will face substantial challenges meeting demand and replenishing inventories in the short term.”

While the PMI has dipped from summer highs, Tuesday’s read “suggests that activity hasn’t meaningfully stalled in the sector despite the rise of the Delta variant,” said Wells Fargo Securities senior economist Tim Quinlan and Economist Shannon Seery. “A decline in the supplier deliveries index and improvement in inventory sentiment suggests supply issues may be improving, albeit only incrementally.”

Also released Tuesday, the international trade deficit widened to $73.3 billion in August from $70.3 billion in July. Economists expected a rise to $70.5 billion.

“Tangled supply chains and severe transportation bottlenecks continued to be on full display,” said Quinlan, Seery and Economic Analyst Sara Cotsakis in a note. “The better-than-expected outturn for imports in [Tues]day’s report suggests net exports will be less of a boost to growth than the half-a-percentage point we currently have penciled in for the third quarter.”

On Monday, the Biden administration said its trade policy with China “essentially will keep existing tariffs in place,” but allow U.S. importers to request exemptions, they said. “With many industries already reeling from higher input costs amid supply shortages, this development should provide some relief to industries whose only supplier may be China.”

Primary market to come
The Alabama Federal Aid Highway Finance Authority (Aa2/AAA//) is set to price on Wednesday $1.49 billion of taxable special obligation revenue bonds, Series 2021B. BofA Securities.

The San Diego Unified School District is set to price on Wednesday $575 million, consisting of: $17.885 million, Series N-1 (Aa2///), $207.115 million, Series N-2 (Aa2//AAA/AAA), $18.54 million, Series E-1 (Aa2///) and $331.46 million, Series E-2 (Aa2//AAA/AAA). J.P. Morgan Securities LLC.

The San Diego Unified School District (Aa2//AAA/AAA/) is also set to price Wednesday $431.18 million of 2021 taxable general obligation refunding green bonds (dedicated unlimited ad valorem property tax bonds) (Election of 2012, Series ZR-1), serials 2022 and 2024-2036, term 2042. Citigroup Global Markets.

The Omaha Public Power District, Nebraska, (Aa2///) is set to price Wednesday $428.94 million of electric system revenue bonds, 2021 Series A and 2021 Series B, consisting of $373.12 million, Series 2021A and $55.82 million, Series 2021B. BofA Securities.

The Central Texas Regional Mobility Authority (A3/A-//) is set to price Thursday $342.555 million of taxable senior lien revenue refunding bonds, Series 2021E, serials 2022-2036, terms 2041 and 2045. Jefferies LLC.

The Central Texas Regional Mobility Authority (A3/A-///) is also set to price Thursday $311.83 million of senior lien revenue refunding bonds, Series 2021D, serials 2022-2041, terms 2044 and 2046. Jefferies LLC.

The School District of Philadelphia (A2//A+/) is set to price Wednesday $312.94 million of general obligation green bonds, Series A of 2021 and Series B of 2021, consisting of $263.58 million of Series A, insured by Pennsylvania State Aid Intercept Program, serials 2022-2041, term 2046 and $49.36 million of Series B, serials 2022-2031. Siebert Williams Shank & Co.

The State Public Works Board of the state of California (Aa3/A+/AA-/) is set to price Wednesday $294.67 million of forward delivery lease revenue refunding bonds, 2022 Series C, serials 2023-2037. Barclays Capital Inc.

Montgomery County, Ohio, (A1//AA-/) is set to price Wednesday $237.225 million of hospital facilities revenue bonds, Series 2021 (Dayton Children’s Hospital), serials 2025-2041, terms 2046 and 2051. RBC Capital Markets.

The Equitable School Revolving Fund is set to price Wednesday $234.58 million of national charter school revolving loan fund revenue bonds, consisting of $134.265 million of Series AZ (/A//), serials 2022-2041, terms 2046 and 2051; $25 million of Series SUB (non-rated), terms 2031 and 2051; $31.555 million of Series CA (/A//), serials 2022-2041, terms 2046, 2051 and 2055; $18.345 million, Series MA (/A//), serial 2041, terms 2046 and 2051; and $25.415 million of Series NY (/A//), serial 2041, terms 2046 and 2051. RBC Capital Markets.

Lee County, Florida, (A2//A/A+/) is set to price Thursday $207.515 million of airport revenue bonds, Series 2021B (AMT). BofA Securities.

Fairview Health Services (A3/A///) is set to price Wednesday $200 million of taxable bonds, Series 2021, serials 2031 and 2051. Citigroup Global Markets.

Indiana University Foundation is set to price Wednesday $150 million of taxable bonds, Series 2021. Wells Fargo Corporate & Investment Banking.

The Bethlehem Area School District Authority, Pennsylvania, (A1///) is set to price Thursday $101.505 million of school revenue bonds (Bethlehem Area School District Project), Series 2021, SOFR index rate mode, consisting of $30.41 million, Series A, $40.795 million, Series B and $30.33 million, Series C. RBC Capital Markets.

Competitive:
Rhode Island (Aa2/AA/AA/) is set to sell $90.5 million of general obligation bonds consolidated capital development loan of 2021, Series E at 10:15 a.m. eastern Wednesday.

Rhode Island (Aa2/AA/AA) is set to sell $44.5 million of taxable general obligation bonds consolidated capital development loan of 2021, Series F at 10:45 a.m. Wednesday.

Caitlin Devitt contributed to this report.

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