Supply scarcity supporting muni outperformance

It was all about the primary Tuesday, with a lightly traded secondary market taking the back seat doing little to move triple-A yield curves in either direction, as large deals from Minnesota, the Los Angeles Department of Airports, San Antonio, Texas, and Philadelphia were the focus.

U.S. Treasuries were weaker on the short end and stocks ended in the red ahead of the much-anticipated July consumer price index reading due Wednesday.

UST yields rose by as much as six basis points on bonds inside 10 years while munis were a basis point or two weaker on the short end or unchanged, depending on the scale.

Muni-UST ratios on Tuesday were little changed on the day’s moves, with the five-year at 61%, the 10-year at 80% and the 30-year at 97%, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the five at 61%, the 10 at 84% and the 30 at 97% at a 4 p.m. read.

Summer supply scarcity
Current and expected tax-exempt product scarcity, August reinvestment, inconsistent fund flows, “and perhaps the summer heat have all made municipal bond prices a bit sticky in the face of Treasury bond losses and the inverted yield curve,” noted Matt Fabian, a partner at Municipal Market Analytics, in the firm’s weekly Outlook.

Fabian noted municipals outperformed UST aggressively last week, moving ratios richer but “still well cheap to moments of peak richness over the last year.”

“Exceptional reinvestment demand and a modest mutual fund inflow subdued selling pressure last week, and net supply held below $5B again: a rarity for non-holiday weeks, in particular in 2022,” Fabian said.

Increasingly constructive supply-and-demand dynamics spurred substantial municipal outperformance versus comparable UST in July, noted BlackRock strategists Peter Hayes, James Schwartz and Sean Carney in a monthly performance report.

“Favorable supply-and-demand technicals surpassed already lofty seasonal expectations and provided a strong tailwind in July,” they said.

They noted a lack of issuance from historical norms, reinvestment income from maturities, calls, and coupons outpacing issuance by $23 billion, which made July the largest net-negative supply month since December 2016.

Mutual fund flows, which have been “starkly negative throughout most of 2022,” turned more mixed with a blend of less severe outflows and modest inflows. As a result, bid-wanted activity declined to just $1.0 billion per day on average, from $1.4 billion per day on average in June. That trend has continued on average.

“Although outperformance removed some value from the asset class, we anticipate that municipal bonds will benefit from positive summer-seasonal trends in August,” they said.

Supply is expected to remain light and net negative, while demand should continue to improve behind positive performance, they noted.

Bond Buyer 30-day visible supply sits at $11.03 billion while Bloomberg data pegs net negative supply at $11.44 billion.

“However, despite underlying relative strength, interest rates will likely remain the main driver of total returns,” BlackRock said.

As Hayes noted during a Bond Buyer Leaders session last month, “I do think that there are better days ahead.”

“We’re going to get back some of that performance,” he said. “Are we going get it all back in the next five months? I’d like to say yes, but that’s unrealistic. It’s a good entry point for people who may be sitting in cash and waiting for an opportunity.”

Busy primary Tuesday
Kicking off the week’s negotiated slate, Goldman Sachs & Co. priced for the Department of Airports of the City of Los Angeles (Aa2/AA/AA/) $978.695 million of Los Angeles International Airport refunding AMT, non-AMT and green bonds.

The first series, $599.395 million Series 2022G AMT green bonds, saw 5s of 5/2025 at 2.31%, 5s of 2027 at 2.49%, 5s of 2032 at 3.19%, 5.5s of 2037 at 3.46%, 4s of 2042 at 4.07%, 5.25s of 2047 at 3.86%, 4s of 2047 at 4.16%, 5s of 2047 at 3.91%, and 5s of 2052 at 4.01%, callable 11/15/2031.

The second tranche, $172.655 million of Series 2022H AMT bonds, saw 5s of 5/2025 at 2.31%, 5s of 2027 at 2.49%, 5s of 2032 at 3.19%, 5.5s of 2037 at 3.46%, 5s of 2042 at 3.77%, 5.5s of 2047 at 3.81%, 5s of 2052 at 4.01%, callable 11/15/2031.

The last tranche, $206.645 million of Series 2022I non-AMT green bonds, saw 5s of 5/2025 at 1.71%, 5s of 2027 at 1.84%, 5s of 2032 at 2.44%, 5s of 2037 at 3.01%, 5s of 2042 at 3.37%, 4s of 2048 at 3.77% and 5s of 2048 at 3.52%, callable 11/15/2032.

RBC Capital Markets priced for Philadelphia (A1/A+/A+/) $294.810 million of water and wastewater revenue bonds, Series 2022C. Bonds in 6/2023 with a 5% coupon yield 1.68%, 5s of 2027 at 1.97%, 5s of 2032 at 2.56%, 5s of 2037 at 3.20%, 5s of 2042 at 3.44%, 5.5s of 2047 at 3.59%, and 5.5s of 2052 at 3.67%, callable 6/1/2032.

Siebert Williams Shank & Co. priced for San Antonio, Texas, (Aaa/AAA/AA+/) $185.835 million, consisting of $57.880 million of general improvement bonds, Series 2022, with 5s of 2/2023 at 1.77%, 5s of 2027 at 1.92%, 5s of 2032 at 2.45%, 5s of 2037 at 2.99% and 4s of 2042 at 3.75%, callable 2/1/2032; $80.110 million of combination tax and revenue certificates of obligation, Series 2022, with 5s of 2023 at 1.77%, 5s of 2027 at 1.91%, 5s of 2032 at 2.45%, 5s of 2037 at 2.99% and 4s of 2042 at 3.75%, callable 2/1/2032; and, $47.825 million of tax notes, Series 2022, maturing in 2/2023 with a 5% coupon to yield 1.77% and 5s of 2024 at 1.79%.

Siebert also priced $100.49 million of taxable GOs for the issuer. Pricing details were not yet available.

Morgan Stanley & Co. priced for Cook County, Illinois, (A2/A+/AA-/) $211.525 million of sales tax revenue bonds in two series. The first, $153.385 million, saw 5s of 11/2022 at 1.80%, 5s of 2023 at 1.91%, 5s of 2027 at 2.34%, 5s of 2032 at 3.00%, 5s of 2041 at 3.60%, 5s of 2042 at 3.62%, and 5.25s of 2045 at 3.68%, callable 11/15/2032.

The second series, $58.14 million, saw 5s of 11/2023 at 1.91%, 5s of 2027 at 2.34%, 5s of 2032 at 3.00%, and 5s of 2037 at 3.41%, callable 11/15/2032.

Raymond James & Associates priced for the Aubrey Independent School District, Texas, (Aaa/AAA//) $196.165 million of unlimited tax school building bonds, Series 2022, Permanent School Fund Guarantee Program. Bonds in 2/2027 with a 5% coupon yield 1.94%, 5s of 2032 at 2.53%, 5s of 2037 at 3.04%, 5s of 2042 at 3.27%, 4s of 2047 at 3.98% and 4s of 2052 at 4.04%, callable 2/15/2032.

Leading off the competitive market, recently upgraded Minnesota (Aaa/AAA/AAA/) sold $220 million of general obligation state trunk highway bonds, Series 2022B, to Morgan Stanley & Co. Bonds in 8/2023 with a 5% coupon yield 1.59%, 5s of 2027 at 1.83%, 5s of 2032 at 2.27%, 3.25s of 2037 at 3.27%, and 3.5s of 2042 at 3.61%, callable 8/1/2032.

The state sold $129.350 million of GO state various purpose bonds, Series 2022A, to J.P. Morgan Securities LLC.

Minnesota sold $124.815 million of GO state various purpose bonds, Series 2022A, to Barclays Capital: 5s of 8/2033 at 2.42%, 5s of 2037 at 2.64%, 5s of 2042 at 2.89%, callable 8/1/2032.

The state sold $107.595 million of GO state various purpose refunding bonds, Series 2022D, to BofA Securities: 5s of 8/2023 at 1.60%, 5s of 2027 at 1.83%, 5s of 2032 at 2.28%, noncall.

Minnesota also sold $9.510 million of GO taxable state various purpose bonds, Series 2022C, to Northland Securities Inc. Bonds in 8/2023 with a 4% coupon yield 3.30%, 4s of 2027 at 3.30% and 4s of 2032 at 3.45%, noncall.

The Board of Education for the Nebo School District, Utah, sold $101.230 million of general obligation school building and refunding bonds, Series 2022, to Raymond James & Associates. Bonds in 7/2023 with a 5% coupon yield 1.59%, 5s of 2027 at 1.84%, 5s of 2032 at 2.31%, and 3.25s of 2037 at 3.30%, callable 7/1/2032.

Secondary trading
New York City 5s of 2023 at 1.81%. California 5s of 2024 at 1.68%-1.66%. Maryland 5s of 2024 at 1.74%. Wake County, North Carolina, 5s of 2024 at 1.74%-1.71%.

Wisconsin 5s of 2026 at 1.84%. Wake County 5s of 2026 at 1.78%. Montgomery County, Maryland, 5s of 2027 at 1.86% versus 1.89% Monday. Princeton University 5s of 2027 at 1.81%-1.80%. Prince George’s County, Maryland, 5s of 2027 at 1.76%-1.67%.

District of Columbia 5s of 2033 at 2.60% versus 2.50% Thursday. Washington 5s of 2037 at 2.84% versus 2.85% Monday. Washington 5s of 2040 at 3.03%.

Los Angeles Department of Water and Power 5s of 2043 at 2.95%. California 5s of 2047 at 3.07%-3.06% versus 3.00%-2.96% Wednesday.

AAA scales
Refinitiv MMD’s scale was left unchanged at the 3 p.m. read: the one-year at 1.59% and 1.69% in two years. The five-year at 1.82%, the 10-year at 2.24% and the 30-year at 2.91%.

The ICE AAA yield curve was weaker in spots: 1.65% in 2023 (+2) and 1.69% in 2024 (+1). The five-year at 1.83%, the 10-year was at 2.29% (+1) and the 30-year yield was at 2.92% at 4 p.m.

The IHS Markit municipal curve was unchanged: 1.56% in 2023 and 1.69% in 2024. The five-year was at 1.82%, the 10-year was at 2.24% and the 30-year yield was at 2.92% at a 4 p.m. read.

Bloomberg BVAL was unchanged: 1.54% in 2023 and 1.65% in 2024. The five-year at 1.83%, the 10-year at 2.25% and the 30-year at 2.91% at 4 p.m.

Treasuries were weaker at the close.

The two-year UST was yielding 3.260% (+5), the three-year was at 3.198% (+6), the five-year at 2.958% (+5), the seven-year 2.883% (+3), the 10-year yielding 2.784% (+2), the 20-year at 3.237% (+3) and the 30-year Treasury was yielding 3.001% (+1) at the close.

New-issue calendar:
The Triborough Bridge and Tunnel Authority, New York, (Aa3/AA-/AA-/AA/) is set to price Thursday $400 million of general revenue bonds, Series 2022A. Morgan Stanley & Co.

Cook County, Illinois, (A2/A+/AA-/) is set to price Thursday $279.805 million, consisting of $270.620 million of general obligation refunding bonds, Series 2022A, serials 2022-2029 and 2033 and $9.185 million of taxable general obligation refunding bonds, Series 2022B, serials 2022-2025, 2029 and 2033. Barclays Capital.

The Hays Consolidated Independent School District, Texas, (Aaa//AAA/) is set to price Thursday $182.230 million of unlimited tax school building bonds, Series 2022, insured by the Permanent School Fund Guarantee Program. FHN Financial Capital Markets.

The Sarasota County Public Hospital District, Florida, (A1//AA-/) is set to price Thursday $150 million of Sarasota Memorial Hospital Project fixed rate hospital revenue bonds, Series 2022. J.P. Morgan Securities.

The Lehigh County Industrial Development Authority, Pennsylvania, (A1/A+//) is set to price Thursday $115.500 million of non-AMT PPL Electric Utilities Corporation Project pollution control revenue refunding bonds, Series 2016. Morgan Stanley & Co. 

The authority (A1/A+//) also is set to price Thursday $108.250 million of non-AMT PPL Electric Utilities Corporation Project pollution control revenue refunding bonds, Series 2016B. Morgan Stanley & Co.