Weakness pervades ahead of larger calendar

Bonds

Municipals were weaker Monday along with U.S. Treasuries while stocks sold off on the ongoing crisis in the Ukraine.

Triple-A yield curves saw two to five basis point cuts while UST yields rose up to six basis points, paring back some of Friday’s gains.

Municipal to UST ratios showed the five-year at to 81% (down from 82% Friday), 95% in 10-years (up from 93%%) and 96% in 30 (up from 94%), according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the five at 79% (down from 81%), the 10 at 98% (up from 97%) and the 30 at 96% (up from 95%) at a 4 p.m. read.

As municipals continue to underperform the moves in U.S. Treasuries, current ratios are attractive and present a buying opportunity, noted Vikram Rai, head of Citi’s municipal strategy group.

The 10-year ratio is almost “artificially cheap,” but the five-year ratio is attractive. It represents an attractive opportunity for separately managed accounts and investors in intermediate-dated bonds, he said.

Rai expects ratios and spreads will stay elevated in March and April but doesn’t think there will be a sustained rise further in ratios.
“I anticipate many windows of opportunity to put cash to work, and I think the levels that will be as good as it gets,” Rai said during a weekly call Monday.

Peter Block, managing director of credit strategy at Ramirez & Co., also noted munis’ underperformance to UST.

“The fragmentation and illiquidity of the tax-exempt muni market reared its ugly head last week as the asset class posted negative returns,” Block said.

Due to economic volatility and the concern of rising rates, he said fund outflows should continue to be a problem, which will likely be exacerbated by tax season redemptions and sales fueled by good equity returns in 2021.

Fund outflows were large last week, totaling $2.82 billion and $8.56 billion for the year. With just normal trade throughput, investor bids wanted in competition remained over 60% above average, indicating market liquidity imbalances.

Reinvestment is relatively light at roughly $56 billion, resulting in around $14 billion positive net supply, assuming volatility moderates and fresh supply materializes as Block forecasts at around $70 billion over the next two months.

Spreads have virtually become liquidity concessions as a result of the relatively robust fundamentals of issuers, and hence continue to widen on most names, particularly for sub-5% coupon structures, Block said. Taxable double-A-rated muni spreads are growing in lockstep with investment-grade corporate spreads, albeit to a lesser extent, and seem modestly rich at 95% of investment-grade corporates, he said.

“The relationship between tax-exempt muni and corporate bond yields tightened enough last week that taxable institutional investors in high-tax states such as California and New York should look at double-exempt muni bonds as an alternative to comparably rated corporate bonds,” said CreditSights strategists Pat Luby and John Ceffalio..

To acquire double-A-rated tax-exempts instead of corporates, CreditSights strategists said a taxable investor would have to accept a 29 basis point penalty as of Friday’s close, and a 23 basis point penalty for single-A rated munis. These penalties are less severe, they said, than they were at the conclusion of the previous week when the penalty for preferring munis were 41 basis points for double-A-rated bonds and 34 basis points for single-A-rated bonds.

For an investor with a 32% or higher marginal tax rate, 10-year tax-exempt returns are break even when compared to corporate yields. The crossover tax rate is reduced to 29% for single-A rated bonds, they said

Individual investors subject to the 37% federal income tax rate will find tax-exempt yields appealing, while investors subject to lower tax rates may find better yields. For example, when comparing double-A-rated 10-year tax-exempt munis to taxable munis, the crossover tax rate is 27%, and 32% when comparing tax-exempt munis to corporates, according to CreditSights.

On the Bloomberg short-term offering system as of Friday, dealers were offering $4.976 billion in variable rate demand notes, the most since Feb. 10.

“The system displays bonds from more than a dozen market participants, but at least one major broker/dealer does not show offering on the system, so the actual float in the street could be much higher than what we show,” they said.

Last week, muni client “buy” trades outnumbered “sell” trades by $1.4 billion each day on average. The last time “sell” trades outnumbered “buys” occurred on Jan. 25, they noted.

This week’s new issuance must be priced to sell to clear the market, according to a weekly report from Nuveen.

“The municipal selloff was due to limited liquidity rather than credit concerns,” Nuveen said. “Markets will remain volatile due to the precarious situation in Ukraine. However, with municipal yields lagging, munis continue to be cheap compared with Treasuries. This dynamic should pique the interest of crossover buyers at these levels.”

Secondary trading
Georgia 5s of 2023 at 0.89%. New York City 5s of 2023 at 1.06%-1.01% versus 1.03% on Friday. New York City 5s of 2024 at 1.31%-1.29% versus 1.27% Thursday. Charlotte, North Carolina 4s of 2025 at 1.29%.

Illinois Finance Authority Ascension Health 5s of 2027 at 1.53%. Gwinnett County, Georgia schools 5s of 2027 at 1.45% versus 1.43%-1.41% Friday and 1.42% original. Maryland DOT 5s of 2028 at 1.60%-1.59%.

NYC Municipal Water Finance Authority 5s of 2031 at 1.86%-1.85% versus 1.73% original. DASNY 5s of 2032 at 1.92%-1.91%. Washington 5s of 2033 at 1.88%. Baltimore County, Maryland 5s of 2037 at 1.94% versus 1.73% original.

Washington 5s of 2044 at 2.25%-2.24%. NYC TFA 5s of 2044 at 2.47%. Washington 5s of 2046 at 2.28%-2.27%.

AAA scales
Refinitiv MMD’s scale saw two to five basis point cuts in spots at the 3 p.m. read: the one-year at 0.86% (+2) and 1.10% (+2) in two years. The five-year at 1.36% (+2), the 10-year at 1.66% (+5) and the 30-year at 2.08% (+5).

The ICE municipal yield curve cut three to four basis points: 0.85% (+3) in 2023 and 1.13% (+4) in 2024. The five-year at 1.37% (+3), the 10-year was at 1.70% (+4) and the 30-year yield was at 2.09 (+4) in a 4 p.m. read.

The IHS Markit municipal curve was also cut: 0.86% (+2) in 2023 and 1.13% (+2) in 2024. The five-year at 1.40% (+2), the 10-year at 1.68% (+3) and the 30-year at 2.05% (+3) at a 4 p.m. read.

Bloomberg BVAL saw two to five basis point cuts: 0.84% (+2) in 2023 and 1.07% (+2) in 2024. The five-year at 1.38% (+2), the 10-year at 1.66% (+4) and the 30-year at 2.06% (+4) at a 4 p.m. read.

Treasuries were weaker while equities were in the red near the close.

The two-year UST was yielding 1.541% (+6), the five-year was yielding 1.698% (+6), the 10-year yielding 1.773% (+4), and the 30-year Treasury was yielding 2.177% (+2) near the close. The Dow Jones Industrial Average lost 756 points or 2.25%, the S&P was down 2.81% while the Nasdaq lost 2.47% near the close.

The only economic indicator Monday showed consumer credit in January rising at the slowest pace in a year and came in far below analysts’ expectations. Borrowing increased $6.8 billion from a revised $22.4 billion gain in December, the Federal Reserve reported Monday. Economists surveyed by IFR Markets had expected a gain of $23.8 billion.

Primary to come:
California (Aa2/AA-/AA/) is set to price Wednesday $2.209 billion of general obligation bonds, various purpose general obligation bonds and various purpose general obligation refunding bonds, consisting of $1.458 billion of Series 22NM, serials 2023-2033, 2047, 2049 and 2052 and $751.09 million of Series 22REF, serials 2023-2024, 2035, 2037 and 2042. Wells Fargo Bank.

The Regents of the University of Michigan (Aaa/AAA//) is set to price Wednesday $1.5 billion of bonds, consisting of $1.2 billion of Series 2022A and $300 million of Series 2022B. Barclays Capital.

The Regents of the University of Michigan (Aaa/AAA//) is also set to price $582.74 million of taxable general revenue bonds, Series 2022C. Goldman Sachs.

The New York City Transitional Finance Authority (Aa1/AA+//) is set to price Wednesday $844.855 million of tax-exempt future tax-secured subordinate bonds, consisting of $780.45 million of Fiscal 2022 Series D Subseries D-1, serials 2023-2034 and 2037-2041 and $64.405 million of Fiscal 2022 Series E, serials 2022-2030. Jefferies.

The University of Massachusetts Building Authority (Aa2/AA-/AA/) is set to price Wednesday $559.565 million, consisting of $351.95 million of taxable project revenue bonds, Senior Series 2022-2, serials 2024-2037, terms 2042 and 2052 and $207.615 million of taxable refunding revenue bonds, Senior Series 2022-3, serials 2022-2037, term 2041. Citigroup Global Markets.

Denver Public Schools, Colorado (Aa1/AA/AA/) is set to price Thursday $345 million of general obligation bonds, Series 2022A. Stifel, Nicolaus & Co.

Howard University (/BBB-/BBB-//) is set to price Tuesday $300 million of taxable corporate CUSIP bonds, Series 2022A. J.P. Morgan Securities.

Northwest Independent School District, Texas (Aaa//AAA/) is set to price $289.255 million of taxable unlimited tax bonds, Series 2022, serials 2022-2045, insured by Permanent School Fund Guarantee Program. RBC Capital Markets.

Allen Independent School District, Texas (Aaa/AAA//) is set to price Tuesday $221.595 million of taxable unlimited tax bonds, Series 2022, serials 2022-2044, insured by Permanent School Fund Guarantee Program. RBC Capital Markets.

Jefferson Parish Consolidated Waterworks District No. 2, Louisiana (/AA//) is set to price Tuesday $177.745 million of water revenue and refunding bonds, Series 2022, serials 2023-2042, insured by Build America Mutual. Stifel, Nicolaus & Co.

The Hospitals and Higher Education Facilities Authority of Philadelphia (Baa3/BBB/BBB/) is set to price Wednesday $173.905 million of revenue bonds, Series 2022, serials 2035-2042. RBC Capital Markets.

Nova Southeastern University, Florida is set to price Tuesday $150 million of taxable corporate CUSIP bonds, Series 2022. Morgan Stanley.

The Dormitory Authority of the State New York (A3/BBB+//) is set to price Wednesday $148.015 million of tax-exempt The New School Revenue Bonds, Series 2022A. Goldman Sachs.

Virginia Electric and Power Company (A2/BBB+//) is set to price Tuesday $137.5 million of bonds, consisting of $37.5 million of Series 2008C and $100 million Series 2010A. J.P. Morgan Securities.

Louisiana (Aa3/AA-//) is set to price Tuesday $121.25 million of gasoline and fuels tax second lien revenue refunding bonds, 2022 Series A. Morgan Stanley.

The Northern California Power Agency (Aa3//AA-/) is set to price Thursday $119.72 million of Hydroelectric Project Number One revenue bonds, 2022 Refunding Series A, serials 2024-2032. Citigroup Global Markets.

The District of Columbia Water and Sewer Authority is set to price Thursday $100 million of public utility subordinate lien multimodal revenue bonds, Series 2022E. RBC Capital Markets.

Competitive:
The Board of Trustees of the University of Alabama System (/AA//) is set to sell $159.3 million of University of Alabama at Birmingham general revenue bonds, Series 2022-A, at 11 a.m. Tuesday. The issuer is also set to sell $9.71 million of University of Alabama at Birmingham general revenue bonds, Series 2022-B, at 11 a.m. eastern Tuesday.

The New York City Transitional Finance Authority (Aa1/AA+//) is set to sell $198 million of taxable future tax-secured taxable subordinate bonds, Fiscal 2022 Subseries D-2, at 10:45 a.m. eastern Wednesday.

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