Admin Note: Our latest Podcast Episode was recorded yesterday and can be found HERE.
Municipal Summary
Municipal benchmark yields were lowered 6–9 bps across a flatter curve yesterday, supported mostly by a better Treasury bid, but also via higher taxable equivalent yields and the related "value" from May's losses.
Performance so far this month has been unseasonal but contained, price volatility has been higher but manageable, supply volume has been large enough to maintain a YTD record pace but small enough to distribute without major distribution challenges, and ratios have cheapened but remain near their 3-month averages — meaning yesterday's strength was not a bounce off a severely oversold/adverse market, but rather just a better retail and institutional bid in pursuit of higher nominals. Cover from the session's Treasury strength certainly helped; but overall, it was a day of strength for an asset class showing signs of both order and value.
Indeed, primary and secondary market volumes were lower yesterday, which, via thinner price discovery, can result in benchmarks leaning on UST movement and participant sentiment for (sometimes more exaggerated) adjustments. However, high-grade blocks were still firmer, offerings were bumped to lower yields, and retail's pursuit of taxable equivalents between 5.0% and 6.0% has become standard practice since 2022.
Below is a review of secondary break activity for deals >$50M that priced over the last two weeks. As a reminder, a secondary break measures the basis point difference between a deals original issue yield and its first secondary traded yield, adjusted for any AAA benchmark movement between sale and trade date. MuniStreet also maintains a DATABASE of searchable secondary break activity on our website.
Secondary Trade Breaks, Last Two Weeks
A larger percent of deals have traded to lower yields in recent weeks amid May’s weakness and a more concessionary tone in the primary. The below figure shows a select basket of average secondary breaks across recent municipal borrowers.
Breaks by rating data show lower rated deals breaking by larger disparities when becoming free to trade — a typical occurrence and reflective of the greater credit, duration and distribution risks of the market’s lowest rated names.
Breaks by maturity showed greater consistency across the curve over the last two week period. Interestingly, though, despite better long strategy fund inflows in recent weeks, the long-end has still required more concession to clear, producing larger breaks.
And lastly, breaks by sector largely coincided with rating and offering type — meaning lower-rated, negotiated “development” and “higher-ed” deals tended to show larger disparities vs. higher-grade, competitive “local GO” borrowers.
Tripp Kaiser, CFA, is the founder of MUNISTREET, Executive Director of the Center on Municipal Capital Markets, and a professor of practice at the LBJ School of Public Affairs at the University of Texas at Austin.