I doubt there are any mothers reading my write-ups on munis at this point but if there are, Happy Mother’s Day! Why have chocolates or flowers when you can have munis? 😉
Last week I got a bit in the weeds over the Puerto Rico Bankruptcy filing so this week will be a bit more brief. We should learn more about Puerto Rico this week as various creditors, hedge funds, and the Puerto Rican government will appear in court for the first time on May 17th. No matter what happens, this case will likely set precedent for other muni cases. It is worth paying attention to if you are heavily invested in munis.
Muni Yields Continue to Fall
Treasury yields rose for the first half of the week until FBI Chief James Comey was surprisingly fired. Weaker thank expected CPI data on Friday sent yields lower with the 10 year treasury closing the week at 2.32%.
Munis don’t always move the same direction as treasuries. Muni traders use what is known as the MMD (Muni Market Data) curve for a benchmark when setting bond prices/yields for new muni deals. They also use the MMD curve as a reference when trading munis that are trading in the secondary market (bonds that were previously issued and owned by someone).
Early in the week when treasury yields were rising portions of the muni curve, the 5-10 year range for instance, were falling. This is just the ebb and flow of supply and demand for munis being reflected in yields. Lower yields and lower spreads relative to treasuries make for a less attractive environment to be a buyer of munis.
The best offers should be found on new deals, especially negotiated ones.
Muni AAA Yield Curve
Muni yields have fallen between 20-40 basis points over the past 2 months. If you bought munis any time following the election in November you should have made money both from the coupon and price appreciation.
The iShares Muni ETF (MUB) continues to rise and is nearing the high for the year. The current distribution yield for MUB is 2.37% but depending on your income tax rate the tax-equivalent yield would be higher. I created a simple tax-equivalent yield calculator to help explain that calculation.
Muni Deals This Week
There’s about $10.1 billion worth of new muni deals on the calendar this coming week. Some of the top deals are listed below.
I recently provided a muni research report for the Alabama Federal Aid Highway Bonds and plan to write more of these types of reports in the future. Readers who have a particular credit or municipality they would like me to review – please reach out in the comments section.
|Issuer Description||State||Amt (MM)|
|LOS ANGELES USD -REF||CA||1089.815|
|DISTRICT OF COLUMBIA ST-A||DC||576.415|
|DASNY - A - REV - REF||NY||440|
|CA HLTH FACS FIN AUTH -A||CA||281.715|
|OR DEPT OF TRANSPRTN -A||OR||245.63|
|NC HSG FIN AGY -38 -B||NC||237.835|
|DASNY -B - REV- REF -TXBL||NY||225|
|KY ECON DEV FIN AUTH -B||KY||213.045|
|CT ST HLTH AND EDUCTNL -A||CT||200|
|FL DEPT OF MANGMT SRVCS-A||FL||187.825|
|CHARLOTTE -A -REV||NC||173.05|
|TENNESEE HSG DEV AGY- #2B||TN||151.89|
|ALABAMA FED AID HWY FIN||AL||142.805|
Oregon Department of Transportation Munis
This deal could be interesting but the maturities range from 2018 to 2027. This area of the muni curve has been less attractive as munis have tightened against treasuries. This is a negotiated deal coming from Citigroup for $245 million. The bonds are highly rated at Aa1/AAA/AA+.
These are senior lien revenue bonds backed by state tax collections on weight-mile taxes and road use fees, motor vehicle fuel taxes, and vehicle titling fees and registration fees. This is a similar credit to the Alabama Federal Aid Highway bond credit.
Debt service coverage on the senior lien Oregon bonds was 4.4x in 2016 and is expected to remain around 4.3x through 2020. Including subordinate debt, coverage falls to 3.3x which is still solid. Depending on what the bonds yield when they are offered, this could be a deal worth looking into.
Sitting on the Sidelines
I’m hoping the trend in higher rates will continue for better opportunities as a buyer. As I noted, muni rates don’t always rise with treasuries. We are just a month away from the next expected Fed rate hike in June which will put the Fed Funds Rate at the 1.00%-1.25% range. I continue to expect the Fed to raise rates 2 more times this year and this will lead to a flatter yield curve. Higher short-term rates with longer term rates rising just slightly.
The 1 yr T-bill rate at 1.10% is the highest it’s been since 2008 – while not an amazing yield, it reduces the need to rush into an investment. While most bank accounts or money market funds will be slow to adjust to this new higher rate environment, there is nothing wrong with leaving cash in a short-term risk free T-bill to be opportunistic about taking on longer-term investment risk.