Municipals opened the week steady with a firmer tone Monday, while U.S. Treasury yields fell again and equities moved up and down throughout the day, as the COVID Delta variant’s spread and its effects hang over all markets.
Municipal-to-UST ratios rose as a result. ICE Data Services showed the 10-year muni/UST ratio at 71% and the 30-year at 74%. Refinitiv MMD had ratios at 70% in 10 years and 75% in 30.
While municipals have cheapened some relative to their taxable counterparts and triple-A benchmark yields were little changed, underperforming the taxable movements, a firmer tone was exhibited in secondary trading.
Even with the ultra low yields across the municipal credit spectrum, the asset class performed well in July and returns for the year are all in the green.
Municipals returned 0.83% in July with a year-to-date return of 1.90%. High-yield returned 1.20% in July and 7.40% year-to-date. Taxables led July with 1.65% returns and 1.95% for the year.
“At the outset of July it seemed somewhat improbable that muni yields could muster deeper performance, but near-0% money market rates and not-much-higher one-year yields have prodded more flows into the 2-5 year space, while demand for long-duration munis took levels down 10-15 basis points during the month,” noted Kim Olsan, senior vice president at FHN Financial. “Macro themes in place all year have only become more entrenched: munis are one of the last tax-shelter conduits, issuers have steadily come to market but stimulus funds have negated some financing needs and seasonals have played a large role in flows.”
Breaking down performance, general obligation bonds returned 0.82% in July and 1.38% YTD while revenue bonds returned 0.88% and 2.26% YTD.
“It is the first month this year where GO gains most closely matched the revenue category,” Olsan said.
One possible explanation is that allocations are beginning to recognize the outperformance of revenue credits and adjusting commitments accordingly, she said.
AAAs saw 0.80% in July and 0.86% YTD; AAs 0.78% in July and 1.29% YTD; As at 0.81% and 2.67% YTD; BBB 1.26% and 5.22% YTD.
In the high-yield sector, hospitals returned 1.40% in July, 6.47% YTD; transportation, 1.09%, 9.45% YTD; Education, 1.51%, 9.30% YTD; leasing, 1.86%, 14.39% YTD; tobaccos, 1.73%, 7.08% YTD and Puerto Rico, 1.21%, 6.60% YTD.
“High yield is on a tear, returning almost 7.50% this year — already surpassing the annual gains of a broad market index for 7 of the last 10 years,” Olsan said, adding that a combination of low absolute rates and better revenue streams within several high-yield spaces is leading to the outperformance.
During July, the rally had the effect of forcing inquiry out the curve for comparable yields. Intermediate bonds were up 0.95% and long-term bonds gained over 1%, pushing the 2021 return to 3.42% (second only to high-yield munis), Olsan said.
A buyer of a 25-year AA bond is offered about 35 basis points less yield now than at the end of February following the selloff. In terms of credit allocations, AAA and AA indices moved a comparable amount as single-A names, all gaining between 0.77% and 0.80%.
“The BBB space was up 1.24% but the matched performance in A-rated bonds to high grades may be signaling the gap will begin to shrink,” she noted.
The largest issuers in July: California with 0.83%, 1.50% YTD; New York 0.79%, 2.28% YTD; Texas 0.79%, 1.18% YTD; Pennsylvania 0.89%, 2.38% YTD; Florida 0.86%, 2.08% YTD. Illinois saw 0.93% in July and 4.51% YTD.
Secondary trading and scales
Trading showed some firmer prints. Virginia 5s of 2022 traded at 0.05% versus 0.06% Friday. South Carolina 5s of 2022 at 0.05%. Texas 5s of 2022 at 0.04%.
California 5s of 2023 at 0.10%-0.09% versus 0.13% on July 14. New York City 5s of 2024 at 0.14$. Montgomery County, Maryland, 5s of 2025 at 0.25% versus 0.28% Thursday. University of Michigan 5s of 2026 at 0.34%.
Fairfax County, Virginia, 4s of 2027 at 0.51%. Loudoun County, Virginia, 5s of 2027 at 0.39%. California 5s of 2028 at 0.60%.
Georgia 5s of 2033 at 0.94%-0.92% versus 0.93% Friday.
According to Refinitiv MMD, yields were steady at 0.05% in 2022 and at 0.06% in 2023. The yield on the 10-year sat at 0.82% while the yield on the 30-year stayed at 1.39%.
ICE municipal yield curve saw the one-year fall one basis point to 0.04% in 2022 and to 0.05% in 2023. The 10-year maturity was steady at 0.85% and the 30-year yield at 1.37%.
The IHS Markit municipal analytics curve saw the one-year steady at 0.05% and the two-year at 0.06%, with the 10-year steady at 0.83%, and the 30-year yield at 1.37%.
Bloomberg BVAL saw levels at 0.04% in 2022 and 0.04% in 2023, both steady, while the 10-year fell one basis point to 0.82% and the 30-year fell one to 1.36%.
Treasuries fell while equities were mixed. The 10-year Treasury was yielding 1.185% and the 30-year Treasury was yielding 1.86% in late trading. The Dow Jones Industrial Average lost 46 points or 0.13%, the S&P 500 fell 0.06% while the Nasdaq gained 0.16%.
The economy may not be as strong as some think, according to analysts.
“There was little in today’s reports to indicate that the economy is improving as quickly as many are assuming or hoping,” said Steve Sosnick, chief strategist at Interactive Brokers.
While both reports missed expectations, they both suggested a recovering economy.
While construction spending data can be “somewhat volatile,” the Institute for Supply Management report still showed expansion and prices paid data “can be interpreted as more evidence that inflation might be transitory after all,” Sosnick said.
Indeed, supply chain issues continue to hamper the manufacturing sector. “By some measures, those issues were worse in July, others provide some rays of light,” said Tim Quinlan and Sarah House, senior economists at Wells Fargo Securities.
The ISM manufacturing PMI slipped to 59.5 in July from 60.6 in June.
Economists polled by IFR Markets expected a reading of 60.9.
“One could argue that the ISM miss has a goldilocks aspect to it, with growth not too hot and not too cold,” said Sosnick.
New orders and production, while still above 50.0, declined from June. Employment rose to 52.9 from 49.9, although comments from respondents still mention it’s difficult to find workers.
Prices slid to 85.7 from 92.1. “This is not enough of a softening to suggest that upward pressure on goods inflation has fully run its course,” Quinlan and House said.
While there were indications of improvement on supply issues, they said, it’s too soon to say the constraints have peaked. “Bottlenecks are therefore likely to keep the heat turned up on prices and keep inflation elevated in the coming months, and inventory restocking is not yet in the cards and while the easing in the supplier delivery index is a step in the right direction, supply chains remain a long way off from the seemingly frictionless state of before COVID.”
Also released Monday, construction spending ticked up 0.1% in June after falling a revised 0.2% in May, initially reported as a 0.3% drop.
Economists expected a 0.4% rise.
Again, supply chain issues are partly to blame. “The recovery remains uneven as supply chain disruptions and labor shortages constrain builders’ ability to move projects past the planning stages,” said Yelena Maleyev, economist at Grant Thornton.
And the Delta variant could become an issue since economic hits from previous strains were overcome “by unprecedented levels of federal money,” she said. “The support is expected to run out in January unless Congress completes infrastructure legislation and other funding initiatives.”
Primary market to come
The New York City Transitional Finance Authority (Aa1/AAA/AAA/) is set to price $934.435 million of future tax-secured subordinate refunding bonds on Wednesday. Serials 2022-2023, 2025-2038. Siebert Williams Shank & Co., LLC.
The TFA will also sell $119 million of taxables at 10:45 a.m. eastern on Wednesday.
Mt. San Antonio Community College District, California, (Aa1/AA//) is set to price on Thursday $227.975 million of general obligation bonds. RBC Capital Markets.
Baptist Health South Florida Obligated Group (A1/AA-//) Is set to price $300 million of taxable notes on Tuesday. BofA Securities.
The Port of Beaumont Navigation District of Jefferson County, Texas, (nonrated) is set to price $225 million of dock and wharf facility Jefferson Gulf Coast Energy Project revenue bonds. Morgan Stanley & Co. LLC.
The Port of Beaumont Industrial Development Authority (nonrated) is set to price $200 million of taxable facility revenue bonds (Jefferson Gulf Coast Energy Project). Morgan Stanley & Co. LLC.
The California Municipal Finance Authority Special Finance Agency VII is set to price on Wednesday $219.925 million of essential housing revenue bonds (The Breakwater Apartments). Jefferies LLC, New York
The Illinois Finance Authority (Aa2/AA+//) is set to price on Tuesday $211.64 million of Northwestern Memorial Healthcare revenue refunding bonds (fixed period bonds), serials 2022-2024, 2026-2029, 2032-2041, term 2043. Barclays Capital Inc.
The University of Wyoming (/AA//) is set to sell $205.24 million of facilities revenue bonds at 10:45 a.m. eastern on Wednesday.
Prosper Independent School District, Texas, (Aaa//AAA/) (PSF guarantee) is set to price on Wednesday $200 million of unlimited tax school building bonds. FHN Financial Capital Markets.
Williamson County, Texas, (/AAA/AAA/) is set to sell $200 million of limited tax notes at 10 a.m. Tuesday.
The Industrial Development Authority of Pima County, Arizona, (/A//) is set to price on Wednesday $197.250 million of Tucson Medical Center revenue refunding bonds, $174.275 million, serials 2031-2051, $22.975 million, 2025-2030. Barclays Capital Inc.
Meade County, Kentucky, (Baa1/A-//) is set to price on Wednesday $196.99 million of Nucor Steel Brandenburg Project green industrial building revenue bonds. BofA Securities.
Eagle Mountain-Saginaw Independent School District, Texas, (Aaa//AAA/) (PSF guarantee) is set to price $177.18 million of unlimited tax school building bonds, serials 2022-2041, term 2046, 2051. HilltopSecurities.
Chapman University (A2///) is set to price $175 million of taxable bonds, serials 2026-2036, terms 2041, 2051 on Thursday. Wells Fargo Corporate & Investment Banking.
Clifton, New Jersey, Board of Education is set to sell $168.282 million of general obligation unlimited tax school bonds at 11 a.m. eastern Thursday.
The South Carolina State Housing Finance and Development Authority (Aaa///) is set to price on Thursday $166 million of non-AMT mortgage revenue bonds, serials 2022-2033, terms 2036, 2041, 2046, 2052. Citigroup Global Markets Inc.
The Arizona Industrial Development Authority (A1/A//A+) is set to price on Thursday $151.995 million of Phoenix Children’s Hospital forward delivery bonds. BofA Securities.
The Louisiana Local Government Environmental Facilities and Community Development Authority (/AA//) is set to price on Wednesday $150.925 million of taxable revenue refunding bonds (LCTCS ACT 360 Project) insured by Assured Guaranty Municipal Corp., serials 2022-2039. Raymond James & Associates, Inc.
Whittier, California, (/AA//) is set to price on Wednesday $144 million of taxable pension obligation bonds, serials 2022-2036, terms 2041, 2046. Stifel, Nicolaus & Company, Inc.
West Rankin Utility Authority, Mississippi, (/AA//) is set to price on Tuesday $143.615 million of taxable revenue refunding bonds, serials 2022-2048. Insured by Assured Guaranty Municipal Corp. Raymond James & Associates, Inc.
The Glendale Unified School District, California, (Aa1///) is set to price on Wednesday $143.140 million of taxable general obligation refunding bonds. RBC Capital Markets.
The Santa Monica-Malibu Unified School District, California, is set to price on Tuesday $122 million of taxable refunding general obligation bonds. Raymond James & Associates, Inc.
The Temple College District, Texas, (/AA-//) is set to price $110.33 million of limited tax bonds. Piper Sandler & Co.
The city of Little Rock, Arkansas, (Aa3///) is set to price $108.895 million of taxable Water Reclamation System refunding revenue bonds, serials 2024-2035, term 2037. Crews & Associates, Inc.
The Department of Veterans Affairs of the state of California (Aa3/AA/AA-/) is set to price $108.565 million of taxable home purchase revenue refunding bonds, serials 2022-2026, 2034-2036, term 2040. Academy Securities.