Municipal Debt Industry Update:
The week of Jan. 24 had $1.15 billion scheduled to price with the largest deals coming from high-yield issuers, according to EMMA. But market technicals and macros headwinds beached a few of them, said market sources.
The largest of this week’s primary offerings was $419 million from the New Hope Cultural Education Facilities Finance Corp. on behalf of the Dwyer Workforce Development Portfolio Project, which initially launched in
December 2021. A $113 million offering from the California Statewide Communities Development Authority, or CSCDA, for an essential housing project called The Crescent - West Hollywood was the third-largest issuance of the week. CSCDA
priced just before trading closed for the week.
The Dwyer deal did not sell and has dropped into the day-to-day calendar, which means it will price whenever enough orders come in, said market sources. Both Dwyer and the Crescent represent two sectors that are most exposed to market volatility: senior housing and a new structure out of California called essential housing, said the market sources. A third deal,
NewLife Forest Restoration LLC, also moved to day-to-day this week after multiple delays last year.
With the municipal market undergoing its second straight week of outflows, breaking a 45-week positive flow streak, cash pulled to the sidelines by spooked investors slowed the high-yield pipeline. The outflows are not expected to be a permanent pattern at this time and largely reflect inflation and rate hike concerns of investors, according to market participants.
Last year, the high-yield municipal market was awash with inflows, and risky structures and credits could easily access capital. With outflows though, an offloading of high-yield paper has depressed prices, with sectors such as senior and essential housing hit especially hard, said the sources. Price talk on Crescent was wide of existing secondary yields and threatened to push out spreads
not unlike during the fourth quarter of 2021, said the market sources.
- A $45 million 2.875% Series 2021A-1 Jefferson-Anaheim essential housing revenue bond due 2041 traded Thursday, Jan. 27, at 91.7 to yield 3.4%, down from 96 to yield 3.1% at the start of January and well below its February 2021 issuance at par, according to EMMA.
- A $75 million 2.8% Series 2021A-1 Orange Portfolio senior lien essential housing revenue bond due 2047 was quoted at 87 this week, according to Solve Advisors. Its last trade was in October at 94 to yield 3.135%, down from its September issue price at par to yield 2.8%, according to EMMA.
Muni funds had $1.4 billion in outflows for the week ended Jan. 26, following $239 million withdrawn for the week ended Jan. 19, according to Refinitiv Lipper U.S. Fund Flows data. For the week ended Jan. 26, $454 million was pulled from high-yield funds, according to Refinitiv.
“This is not like a crazy sell-off by any stretch yet. It's just really a movement from interest rates that were incredibly low … just to a level where it probably reflects a little more normalcy in the market,” said John Mousseau, CEO and director of fixed income at Cumberland Advisors.
Jeff Lipton, head of municipal credit and market strategy at Oppenheimer & Co. Inc., said concern over Federal Reserve policy catalyzed a 2022 month-to-date and year-to-date loss of 1.85% in the general municipal bond index.
“The January losses of record significance will certainly define the opening month of the new year, and I think likely generate a more guarded bias for investors going forward,” Lipton said.
Some primary deals may be more attractive depending on term structure. JR Rieger, owner of the Rieger Report, noted that longer-term cushion bonds, that is, bonds purchased at high premiums, will see prices fall in a rising rate environment but not as much as other fixed income classes where the bonds are sold closer to par or face value.
Rieger said, “Investor sentiment is still a key influence of how the municipal bond market performs … [A]t current tax-exempt yields, inflation is kryptonite weighing heavily on investors.”
As investors keep tabs on rate volatility in the markets, Lipton noted, “we’re not calling for a cyclical shift to outflows. But I do think we are likely to see more in the way of intermittent outflows.”
--Anastasia Bergeron, Seth Brumby