Primary the focus; Illinois spreads tighten further

Bonds

Municipals were little changed in uneven trading, even as U.S. Treasuries lost ground and equities saw another day of gains.

The primary market was the focus on Tuesday. Illinois saw its spreads tighten further on its competitive junior sales tax bonds — plus-39 in 10-years with a 4% coupon — while Montgomery County, Maryland, general obligation bonds were bought a few basis points above triple-A benchmarks.

Traders in particular are not surprised at how easily new issues — particularly sought-after specialty state paper such as New York and lower-rated, higher-yielding issuers such as Illinois — have been placed in the primary.

“We’ve got a nice mix of credits and ratings to work with to close out August” a New York trader said. “The fundamentals do not hurt. I don’t care where the money is coming from or being directed, the story of this year since early spring really has been those large mutual fund complex inflows.”

“I just think the market is content to end this up-and-down summer (for markets outside munis) on steady footing,” the trader said.

Illinois (//BBB+/BBB+/AA+) sold $130 million of junior sales tax Build Illinois Bonds to BofA Securities: Bonds in 6/2022 with a 3% coupon yield 0.20% (+14 to generic high grades), 4s of 2026 at 0.67% (+30), 4s of 2031 at 1.28% (+39) and 3s of 2034 at 1.73% (+68).

The state’s GOs started the year at a 197 basis point spread. The state’s 10-year in a March outing landed at a 120 basis point spread to the AAA.

Elsewhere in the competitive market on Tuesday, gilt-edged Montgomery County, Maryland, sold $335.25 million of general obligation bonds to Wells Fargo Corporate & Investment Banking. Bonds in 8/2022 with a 5% coupon yield 0.06%, 5s of 2026 at 0.40%, 5s of 2031 at 0.92%, 2s of 2036 at 1.82%, and 2s of 2041 at 2.01%.

Dallas (/AAA/AA+/) sold $127.55 million of waterworks and sewer system revenue refunding bonds to BofA Securities. Bonds in 10/2022 with a 5% coupon yield 0.07%, 5s of 2026 at 0.49%, 5s of 2031 at 1.03%, 3s of 2036 at 1.52%, 3s of 2041 at 1.74%, 3s of 2046 at 1.91%, and 3s of 2050 at 2.00%.

Wisconsin (/AAA/AAA/) sold $100 million of environmental improvement revenue refunding green bonds to J.P. Morgan Securities LLC. Bonds in 6/2023 with a 5% coupon yield 0.08%, 5s of 2026 at 0.39%, 4s of 2031 at 0.96% (PTC), 4s of 2036 at 1.29% and 4s of 2040 at 1.49%, callable June 1, 2030.

In the negotiated market, Jefferies LLC priced for the Pennsylvania Turnpike Commission $246.5 million oil franchise tax senior revenue bonds, Series A of 2021 (Aa3//AA/AA): 5s of 2026 at 0.53%, 5s of 2031 at 1.13%, 5s of 2046 at 1.81% and 4s of 2051 at 2.00%. The second, $353.42 million oil franchise tax subordinated revenue bonds, Series B of 2021 (A2//A+/AA-), saw 5s of 2026 at 0.60%, 5s of 2031 at 1.20%, 4s of 2041 at 1.86%, 5s of 2046 at 1.91% and 4s of 2051 at 2.10%.

Citigroup Global Markets Inc. priced for Houston $219.32 million and $70 million of AMT airport system special facilities revenue bonds (//B-/) on behalf of United Airlines, Inc. terminal improvement projects. Bonds in 7/2041 with a 4% coupon yield 2.875%, callable July 1, 2029.

Goldman Sachs & Co. LLC priced for the Wisconsin Public Finance Authority (nonrated) $153 million of Sky Harbour Capital LLC Aviation Facilities Project senior special facility revenue bonds. Bonds in 7/2036 with a 4% coupon yield 3.80%, 4s of 2041 at par and 4.25s of 2054 at par, callable July 1, 2031.

Wells Fargo Corporate & Investment Banking priced for the City and County of Broomfield, Colorado, (Aa2///) $132.61 million of water activity enterprise revenue bonds: 5s of 12/2022 at 0.07%, 5s of 2026 at 0.43%, 5s of 2031 at 1.05%, 5s of 2036 at 1.37% 4s of 2041 at 1.69% and 4s of 2046 at 1.87%.

Roberto Roffo, managing director and portfolio manager at SWBC Investment Company, noted the demand for new issues “remains robust as there is still a significant amount of cash on hand due to the strong inflows we have seen all year.”

“I do believe the end of summer doldrums have had an effect on the market lately and has been the main reason for the relatively calm market,” Roffo agreed.

Between the cash inflows, dividend payments, and bond redemptions, the market is still in a net negative supply environment, which should support municipal bonds for the time being, according to Roffo. “Municipal bond ratios to Treasuries are also off their historic lows and approaching their one-year average, which should also help support the demand for munis going forward.”

The 10-year muni-to-Treasury ratio was at 68% while the 30-year muni-to-Treasury ratio stood at 78%, according to MMD. The 10-year muni-to-Treasury ratio was at 71% while the 30-year muni-to-Treasury ratio stood at 78%, according to ICE.

August is always a tricky month for the municipal market, noted Bloomberg Intelligence’s Eric Kazatsky.

“The levels of re-investable cash are high and quite often add to the supply imbalance that peaks in the summer,” he said. “While primary-market sales have been fair, secondary trading hasn’t been as robust. In fact, the trading data for municipals looks especially worse vs. prior years and supports anecdotal evidence of slowness across many trading desks.”

Kazatsky said, EMMA MSRB data from Aug. 1-20 show just $108 billion of par traded.

“While that seems like a large amount, it pales in comparison to the similar period’s $145 billion in 2020 and $161 billion in 2019. In fact, this August marks the lowest par volume of the past five years,” he added.

Secondary trading and scales
Trading was light. Madison, Wisconsin, 4s of 2022 traded at 0.06%. Delaware 5s of 2022 at 0.05%. Baltimore County, Maryland, 5s of 2022 at 0.06%.

Washington Suburban Sanitation District 5s of 2024 at 0.22%. Massachusetts clean water 5s of 2024 at 0.16%. Florida PECO 5s of 2025 at 0.26%. Gwinnett County, Georgia, 4s of 2025 at 0.28%-0.26% versus 0.24% a week ago. University of Michigan 5s of 2026 at 0.36%-0.35% versus 0.34% on Aug. 12.

Maryland 5s of 2030 traded at 0.85%-0.84% versus the same a day prior. California 5s of 2031 at 1.01%-0.99%. Maryland 5s of 2032 at 0.99% versus the same a week ago.

New York City TFA 5s of 2033 at 1.24%. Fairfax County water 4s of 2039 at 1.33%. NYC TFA 4s of 2045 at 1.88%. New York City water 5s of 2048 at 1.73%.

According to Refinitiv MMD, short yields were steady at 0.06% in 2022 and rose a basis point to 0.09% in 2023. The yield on the 10-year stayed at 0.88% while the yield on the 30-year sat at 1.50%.

The ICE municipal yield curve showed bonds up one basis point in 2022 at 0.06% and to 0.10% in 2023. The 10-year maturity sat at 0.91% and the 30-year yield remained at 1.49%.

The IHS Markit municipal analytics curve showed short yields steady at 0.06% and 0.08% in 2022 and 2023, respectively. The 10-year yield was at 0.90% and the 30-year yield at 1.49%.

The Bloomberg BVAL curve showed short yields steady at 0.06% and 0.06% in 2022 and 2023. The 10-year yield was at 0.89% and the 30-year yield at 1.49%, both steady.

In late trading, Treasuries were softer as equities traded higher.

The 10-year Treasury was yielding 1.291% and the 30-year Treasury was yielding 1.906%. The Dow Jones Industrial Average gained 79 points or 0.23%, the S&P 500 increased 0.26% while the Nasdaq gained 0.61%.

Eyes still on Jackson Hole
The markets remain focused on Jackson Hole and speculating what will be said about tapering.

Federal Reserve Board Chair Jerome Powell’s “keynote address in Jackson Hole will take on outsized importance, as investors await formal acknowledgment of sustainable inflation trends and details on the Fed’s prospective change in monetary policy,” said Phil Orlando, chief equity market strategist at Federated Hermes.

The markets will be watching for “further detail on how the Fed is measuring progress toward its inflation and employment goals, and for hints on its taper intentions,” said Wilmington Trust Economists Luke Tilley and Rhea Thomas.

The markets expect tapering to begin between November and January, with an announcement a month or two before it begins, said Jake Remley, senior portfolio manager at Income Research + Management.

“The risk that it’s delayed to late 1Q 2022 or beyond has dropped meaningfully over the past four weeks given the steady drop in continuing unemployment claims as well as firming core CPI even as the COVID-19 Delta variant spreads,” he said.

Although, given the emergence of the “Delta variant, the Fed may want to see August employment and inflation data, released in the first half of September … before really firming up its plans. So, I doubt the Fed will give us much on the taper this week at Jackson Hole.”

So with no clarification on tapering, Remley will be watching for “any evidence on a rethink with regards to full employment,” given “the disconnect between high unemployment and very high job openings.”

But, it’s not just inflation and employment, noted Jason Tzitzouris, strategas chairman, and Ross Mayfield, chief investment strategist at Baird Private Wealth Management. The debt ceiling, the fiscal 2022 budget and the possibility of tax increases will all play a part in Fed policy, they said.

“The Fed has to be cautious in their communication here because if the market prices-in rate hikes just as the impact of the fiscal drag hits, 2022 could be another lost year where economic growth underperforms potential and inflation expectations deflate in a way the Fed does not want,” Tzitzouris and Mayfield said.

Of course, the Delta variant is a wild card, causing an increase in cases, hospitalizations, and deaths. But uncertainty can go either of two ways, said Grant Thornton Chief Economist Diane Swonk, depending on whether it disrupts supply chains or demand more.

If it affects supply chains more than demand, inventories would “rebuild more slowly, while inflation persists at higher levels for longer,” she said. “This would force the Federal Reserve to be more aggressive in tightening to curtail unwanted inflation.”

But if it leads to lesser demand while not hitting supply chains, “this would prompt firms to rebuild inventories much faster than expected, alleviating the upward pressure on prices and forcing the Federal Reserve back to the sidelines for even longer.”

In data released Tuesday, new home sales rose to a 708,000 seasonally adjusted annual rate in July from an upwardly revised 701,000 in June, first reported as 676,000. Economists polled by IFR Markets expected a pace of 690,000 sales.

Sales are down 27.2% from the 972,000 pace of a year ago. The median and average sales prices both gained in the month, while the supply of homes also increased.

“Home buying activity has cooled off in recent months alongside soaring prices and shrinking inventories, however July’s report is evidence that underlying demand for homes remains strong,” said Wells Fargo Securities Senior Economist Mark Vitner and Economist Charlie Dougherty.

Elsewhere, the Federal Reserve Bank of Philadelphia’s Nonmanufacturing Business Outlook Survey suggested growth slowed in August. “The indexes for firm-level general activity, new orders, and sales/revenues remained positive but declined” in the month, the report said.

Fluctuation continued in the employment read, with the full-time employment index dropping to 8.2 in August from 24.8 in July, when it rose 21 points.

The prices indexes both slipped, but remain elevated.

The Federal Reserve Bank of Richmond’s service survey showed a slowdown in growth as well, as the revenues, demand and local business conditions indexes all were positive, but below July’s levels.

The employment index and the price indexes all rose.

The Richmond Fed manufacturing survey also showed growth slowed in August, with the manufacturing, shipments and volume of new orders positive, but lower than July’s figures.

The employment index halved to 18 from 36, while the prices paid was slightly down and prices received climbed.

Primary to come
Wednesday:
Federal Way SD #210, Washington (Aaa///) is set to sell $107.25 million of unlimited tax general obligation bonds at 11:30 a.m.

In the negotiated market, North Carolina is set to price $245.45 million of Series 2021 grant anticipation revenue vehicle bonds (A2/AA/A+/). BofA Securities.

Campbell, California, Union High School District is set to price $224.76 million taxable GO bonds (AAA/AA+//). RBC Capital Markets.

The City of Miami Beach Health Facilities Authority (Baa1//A-/) is set to price $139.325 million of Mount Sinai Medical Center of Florida hospital revenue bonds, serials 2030-2041, terms 2046, 2051. Raymond James & Associates, Inc.

The California Community Housing Agency is set to price $129.595 million of essential housing revenue bonds, series 2021A-1 senior bonds (non-AMT), Series 2021A-1T senior bonds (federally taxable), Series 2021A-2 junior bonds (non-AMT), (The Exchange ay Bayfront Apartments). Jefferies LLC.

Tacoma, Washington, (/AA/AA-/) is set to price $118.26 million of electric system revenue green bonds, serials 2036-2041, terms 2046, 2051. Citigroup Global Markets Inc.

The Tennessee Housing Development Agency (Aa1/AA+//) is set to price $99.99 million of residential finance program social bonds, serials 2022-2033, terms 2036, 2041, 2046, 2051, 2052. RBC Capital Markets.

Thursday:
The Hospital Authority of Hall County and Gainesville, Georgia, will sell $456 million of taxable revenue anticipation certificates (/AA/AA/) for the Northeast Georgia Health System, Inc. project. BofA Securities.

The Utah Military Installation Development Authority is set to price $260 million of tax allocation and hotel tax revenue Series 2021A-1 and tax allocation revenue bonds Series 2021A-2. Piper Sandler

Love Field Airport Modernization Corp. is set to price $246.72 million of Series 2021 AMT general airport revenue refunding bonds (/A-/). BofA Securities.

New York City Housing Development Corp. is set to price $200 million of Series 2021 Series G multifamily housing revenue bonds (Aa2///). Ramirez & Co.

The Cleveland County Educational Facilities Authority (Aa3/A+//) is set to price $159.34 million of Moore Public Schools Project lease revenue bonds, 2022-2031. D.A. Davidson & Co.

The North Carolina Housing Finance Agency (Aa1/AA+//) is set to price $150 million of home ownership revenue bonds, series 47 (non-AMT) (1998 Trust Agreement), serials 2022-2033, terms 2036, 2041, 2044, 2051. Wells Fargo Corporate & Investment Banking.

Denton, Texas, (/A+/A+/) is set to price $141 million of utility system revenue refunding bonds, taxable series 2021. Citigroup Global Markets Inc.

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