MMA_Outlook_22Feb2021

MMA Independent and Data Driven

FEBRUARY 22 , 2021

WEEKLY OUTLOOK

SUMMARY •

MARKET UPDATE: Losses last week tracked the US Treasury market, but higher yields have not been sus- tainable in the recent past. RECOMMENDATION: Price losses and a wider curve have created the first notion of value in the municipal bond market in weeks. MMA’s own valuation metrics suggest benchmark AAAs are oversold at all maturities beyond the 2yr, but in particular the 5-8yr range. Noting the municipal asset class’s structural undersupply of tax- exempts and going-to-be-much-worse reinvestment challenges this summer, investors should be strongly considering putting some capital to work. As has become chronically the case, opportunities should dictate deci- sions. Issuers, by contrast, may want to wait on issuing, but current levels could change quickly. The 2021 munic- ipal market remains highly seller-oriented, in particular for longer maturity, lower rated, tax-exempt securities. CREDIT RECOMMENDATIONS: Credit upswing is coming via the third COVID-19 stimulus bill, just intro- duced in the US House Budget Committee. The bill in- cludes $350B of direct aid for state and local govern- ments, but other provisions (such as stimulus checks, unemployment assistance) are arguably more impactful across the breadth of the municipal borrower universe. In this context, specific details matter less (except where they do, in particular the NY MTA which may get ~$6B of cash from Congress: a down-payment on the authority’s full funding needs). But as the bill advances, now via the budget reconciliation process because of Republican opposition, better headlines and risk-on trading should follow for our sector.

US COVID-19 deaths are now 511,000, but after a few months of vaccinations, the average daily death rate has fallen by half to 1,890 (1.3 deaths per minute): lowest since December 4th. • That improvement is aiding a bullish sentiment, investors are rais- ing inflation expectations and US Treasury yields are rising ( Fig. 1 ) along a steepening curve; the 10yr UST was off 13bps last week. • Municipal benchmark yields have also, finally, begun to succumb to the UST’s gravitational pull, slipping as much as 16bps higher last week ( Fig. 2 ), 2s/30s term spreads gapping +10bps to +143. • It’s unclear how sustainable this trend may be, however, noting minimal selling pressure (customer par sold only breached 100% of its own weekday rolling average once last week; Fig. 4 ) and higher but still range bound bids wanteds ( Fig. 5 ). • Still, the negative trend has squashed most high grade municipal mutual fund YTD NAV gains ( Fig. 7 ) and likely set off some ETF redemptions last week ( Fig. 8 ). • Note that the municipal funding side remains highly aggressive; SIFMA is still pinned at 3bps ( Fig. 13 ), dealer inventories have fattened only slightly ( Fig. 9 ), and bank lenders are reasonably ready to resume originating should the capital markets pull away. • And most investors will not be at all ready to surrender reinvest- ment opportunities short of an obvious market correction. • Remember that demand (inflows plus reinvestment) has been 1.6x tax-exempt supply in Jan/Feb, and with issuers continuing to focus the new issue flow on (now higher cost) taxable advance refundings, traditional investors will still be feeling things scarce. • And muni benchmark correlations with UST trends have been random at best since last March ( Fig. 14 ). • This week a heavier new issue calendar will provide price direc- tion that, depending on volatility in Treasuries, could well turn constructive once again.

IN THIS ISSUE TEXAS STORM HIGHLIGHTS IN- DIRECT CLIMATE RISKS 2 AMERICAN DREAM STRUCTURE BESTS OPERATIONS 3 CURVE CHARTS 4 This report has been prepared by Municipal Market Analytics Matt Fabian, Partner mfabian@mma-research.com Tel: 203-226-2398 Lisa Washburn, Chief Credit Officer & Mg. Director lwashburn@mma-research.com Tel: 908-273-2142

Trend in US Treasury Yields (%)

3.50

3.00

2.50

2.00

1.50

1.00

0.50

0.00

Jul-18

Jul-19

Jul-20

Jan-19

Jan-20

Jan-21

Sep-18

Sep-19

Sep-20

Nov-18

Nov-19

Nov-20

Mar-19

Mar-20

May-19

May-20

2yr

5yr

10yr

30yr

MMA 10yr

Figure 1: US Treasury yields have been trending higher and wider ever since last March; municipals, pinned by supply and demand, have not much followed, but appeared to try last week.

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2/22/2021

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