22 Mar Ofer Eitan Publishes: Yields on Transportation-Related Muni Bonds Are Climbing. I
Debt issued by entities like New York’s Metropolitan Transportation Authority has fallen in price, sending yields higher, as the coronavirus crisis chokes off ridership, and revenue, but analysts say it is too soon to buy.
The MTA and other transportation-related issuers appealed for federal help this week, and
said Friday it expects government support for the agency, “given MTA’s unmatched essentiality to the regional and national economy, especially during a post-coronavirus recovery.” But the credit-rating company still said it may downgrade the MTA’s transportation-revenue bonds.
Municipal debt in general has sold off sharply, pushing up borrowing costs for states and local authorities and prompting the Federal Reserve to expand efforts intended to keep markets running smoothly to include short-term munis. The transportation-related corner of the market has been under particular strain.
The MTA is seeking $4 billion in aid. Other pursuing assistance include New Jersey Transit, which wants $1.25 billion; Bay Area Rapid Transit; the Golden Gate Bridge; and others.
The Chicago Transit Authority, where ridership has dropped, is also expected to seek federal support, says Lyle Fitterer, senior portfolio manager at Baird Advisors. The transit authority wasn’t immediately available to comment.
Airports are also under pressure. Tom Kozlik, head of municipal strategy and credit at Hilltop Securities, notes that airlines have asked for a bailout. Hilltop cut its outlook on airports to Cautious from Stable this week. That was down from Positive in August, when plane ridership and airfares were growing and airports were reporting strong cash positions.
Airports reportedly are seeking $10 billion in bailout money. Similarly, the American Association of Port Authorities is asking for $6.5 billion in support. Amtrak is looking for $1 billion.
While airports have lots of cash, “We need to watch how the enplanement levels play out across the sector over the coming months because of the steps to take to contain the spread of Covid-19,” Kozlik said in an email.
It’s not yet a buying opportunity, Dan Scholl, head of municipals at Wilmington Trust, said in an interview. He has been buying larger, liquid issues such as general obligation bonds issued by Dallas, Texas; Maryland; and Wisconsin, “where we’d get better prices than we’d be able to if we tried to sell airports right now,” should the firm need to sell to raise cash. He cautions any bargain hunters to focus on larger airports such as Los Angeles International, John F.Kennedy International, Atlanta, and Chicago O’Hare.
In video remarks to clients earlier this week, John Mousseau, CEO of Cumberland Advisors, pointed out, “you need to think about the essentiality of the service.” For example, “bond[s] backed by subway fares, or an airport” would be issues to avoid, he suggested.
According to Bloomberg, MTA’s 10-year bonds, maturing Nov. 15, 2030, were down more than six points since March 5 on Friday, yielding 6.7%, up from 3.8%. BART’s 14-year bonds maturing on Feb. 1, 2034, have dropped nine points since March 4, and the yield has climbed to 3.2% from 2.2%.
O’Hare revenue bonds maturing Jan. 1, 2033, fell 10 points between March 9 and March 13, with yields rising to 4.2% from 3.2%. Meanwhile, Chicago Transit Authority refunding bonds fetched 106.88 on March 13, versus 121.93 on March 5.
Investors pulled $12.2 billion from municipal bond funds over the week ended Wednesday, the most of any week on record, according to Lipper. The second-largest outflow was $4.5 billion.
On Thursday afternoon, the 30-year benchmark municipal bond yield was 3%. The biggest exchange-traded fund in the area, the
iShares National Muni Bond ETF
(ticker: MUB), has fallen sharply and the steady-Eddie investment now trades at a discount to net asset value.
Friday, the Federal Reserve said it would expand an emergency program to provide liquidity to tax-exempt municipal money-market funds, providing risk-free loans to banks to purchase a range of assets including short-term muni bonds.
“This would be separate and distinct from the [government] supporting with a stimulus,” says Fitterer of Baird Advisors. Fitterer said the Fed is likely to start with higher-quality municipals, and “get people more confident in owning munis and that prices aren’t just going to continue to go down.” MTA’s transportation-revenue bonds are rated A1 by Moody’s and A by S&P Global.
For now, the Fed’s decision doesn’t have anything to do with longer-term munis. Don’t count that scenario out.
—Alexandra Scaggs contributed to this article.
Corrections & Amplifications
An earlier version of this article misspelled the surname of the head of municipal strategy and credit at Hilltop Securities. He is Tom Kozlik, not Kovlik.