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Analysts Predict Strong Spring Rollover Season

When June 1 officially kicks off the spring reinvestment season, bondholders will be faced with an estimated $51.6 billion in municipal bond redemptions for the month - approximately a 15% increase over June 2007, according to new figures from Interactive Data.

On the heels of June's redemptions, July 1 will bring with it another $38.2 billion in anticipated early summer payouts. The combined $89.8 billion in redemptions compares to 2007's $85.4 billion two-month total - $44.68 billion in June and $40.70 billion in July, according to the May 8 data.

Municipal market participants say heading into this spring's rollover, retail investors will have a lot more than usual on their plate to consider before reinvesting - from the upcoming presidential election and the state of the economy, to lack of liquidity and investment alternatives. Still, they said, many should feel compelled to keep their money in the tax-exempt market nonetheless, with little indigestion and a strong appetite for municipal reinvestment.

June represents the highest monthly volume of redemptions in all of 2008. The payments from issuers to investors are expected to total $365 billion in proceeds for current and advanced refundings, maturing bonds, and notes, as well as coupon payments. This year's expected total is an increase of $24.3 billion - or 7% - compared to the $340.7 billion in redemptions in all of 2007.

April and May ranked second and third by total payments this year, with $40.47 billion and $40.38 billion in redemptions, respectively.

Retail investors are already thinking about what to do with their anticipated proceeds, but will have more to consider than ever before when deciding where and when to plunk down available cash, players said.

Three out of the five municipal professionals interviewed for this story said they believe investors flush with cash shouldn't have to look far when it comes to reinvesting - particularly now that the Supreme Court on Monday ruled in favor of states exempting from income tax interest on in-state bonds and taxing out of state bonds in the long-awaited outcome of the Kentucky v. Davis case.

That will be one less thing affecting investors' decision-making, sources said.

Despite the other harrowing events that recently plagued the market - the collapse of auction-rate securities, the bond insurer crisis, and the subprime mortgage debacle - sources said most bondholders should be eager to roll over their expected proceeds into munis given the current attractive yields.

For instance, late last week, 30-year tax-exempt bonds were yielding 100% of their taxable Treasury counterparts. Earlier this week, that relative value decreased slightly, but still remained attractive as municipals yielded 4.45% in 30 years on Monday, according to Municipal Market Data, and comparable Treasuries were at a 4.56%, according to information on the Treasury Department's Web site. The municipal scale in 10 years yielded a 3.56% on Monday, compared with a 3.83% yield on 10-year Treasuries.

"Retail demand remains very strong and fund flows are strong as well, so I think it will be a typical rollover season helped by the fact that munis are cheap to Treasuries and the yield curve is steep," explained Clark Wagner, chief investment officer of First Investors Management in New York City. "That will help create demand for municipal reinvestment."

With rollover season approaching, "over time, there will be a little more demand than supply and that may continue to support munis at these levels," said Tom Spalding, senior investment officer at Nuveen Advisory Corp. in Chicago.

Judith Cochrane, a vice president at Seattle Northwest Securities LLC, said supply creates demand, which bodes well for the market ahead of rollover season.

"There is every reason in the world to believe that this event will be well-received by investors" seeking safety and principal preservation, Cochrane said. "It's a noteworthy event because all of a sudden there's so much demand, it's an opportunity for people to jump into the market."

"I think with the subprime mortgage crisis, with oil through the roof, the prices of commodities going up, and the stock market scaring people, and so many events taking place that there are so many factors that say go to safety," she added.

Peter Delahunt, national institutional sales manager at Raymond James & Associates Inc. in New York City, said he also expects the spring rollover to be "business as usual" - despite the poor liquidity he attributed to the exits of Bear, Stearns & Co. and UBS Financial from the municipal market in recent weeks.

"Needless to say, there is less liquidity out there with UBS and Bear out of the fray," Delahunt said. "We may see the bid-side soften with those two big players out of the market. But if yields reflect that, it will more than likely add to the appetite" of retail investors faced with reinvestment needs come June 1 and July 1, he noted.

The swell of auction-rate conversions to fixed- or variable-rate debt and a healthy 30-day visible supply of $8 billion will continue to provide a boost in fixed-rate volume that should sustain the heavy rollover demand, he added.

Delahunt said retail demand is still a strong component of the demand universe and that segment of the market should have its sights set on muni reinvestment, despite any clouds hanging over the market.

On the other hand, a California retail sales manager said that with all the obstacles the market has weathered in recent months, investors will be hard-pressed to reinvest spring proceeds on the longer end until they get a clearer picture of where things are headed.

"Decision-making is not as simple as it used to be," he said, especially this year with a weaker economy, the election, and the equity volatility. "With so much deficit-spending going on, the economy right now has a direct impact on the stock market and the bond market."

"Traditionally, a lot of June and July rollover money would go into auction-rate product and wait there until note season came, but now I think investors will be parking cash in either Treasuries, money markets, or agencies," the sales manager predicted. "You will see a lot more retail money find its way there until things settle down."

"There is a lot of money and a lot of demand," said Nuveen's Spalding. "Some of that money will find its way back into the market, but some will probably stay in cash for a while or find some alternative investments."

 

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