The Week Ahead

Volume Up As Issuers Are Encouraged by Low Rates

Volume in the tax-exempt market should jump back to pre-holiday levels this week, despite several days of municipal bond underperformance in the face of a powerful rally in Treasuries.

Industry estimates predict that muni issuance should total $9.60 billion, versus a revised $3.73 billion last week. The recovery in volume shows a muni bond market that continues to feed on strong investor demand for paper even at historically low yields, as well as an issuer community encouraged to refinance older debt.

Digging deeper into the volume numbers, $2.08 billion of competitive offerings are scheduled for sale, compared with a revised $1.77 billion last week. Also slated for sale are $7.53 billion of negotiated deals, versus a revised $1.96 billion last week.

The Treasury market rally  dominated the headlines last week. The 10-year and 30-year Treasury yields have fallen 28 and 31 basis points, respectively, since May 25. And they have plunged 82 and 88 basis points since April 3, Municipal Market Data shows.

But the muni market, which didn’t rally as dramatically as Treasuries, still had a decent week. Since last Friday, the 10-year yield has fallen by eight basis points, and the 30-year is 10 basis points lower.

Industry pros say the tax-exempt market continues to be driven by robust investor demand — pushed mostly by the need to put June 1 and July 1 coupon payments and maturities redemption money to work — and historically low muni yields.

All of that money is going to help absorb the increased issuance, according to Ashton Goodfield, a managing director and portfolio at Deutsche Investment Management Americas.

The low rates are encouraging issuers, she added. But muni rates typically lag those of Treasuries and won’t follow Treasuries as far, industry experts say.

“It’s hard to predict exactly why issuers come to market when they do, but year-to-date, the high percentage of refunding deals is due to the low rates that we have,” she said. “And for new deals, issuance was so light last year; maybe it’s a catch-up for projects that they didn’t raise money for over the past 18 months.”

Going forward, at some point, with the cost of capital so low, municipalities will have to decide to really increase issuance. That will present some risks, said Michael Brooks, a senior portfolio manager in U.S. municipals at AllianceBernstein.

“The real problem there is if everybody does this at the same time and everybody tries to get out the door at the same time, it could potentially cause interest rates to go up sharply in the municipal marketplace,” he said. “If it satisfies the hunger of the investors and goes beyond that, then it certainly could go up, and that would surprise a lot of folks. But I don’t see evidence of that yet. That’s not what’s going on here.”

The negotiated market houses the week’s biggest deals. Leading off, Wells Fargo Securities is expected to price $1.1 billion of Los Angeles County tax and revenue anticipation notes in three series.

The notes are rated MIG-1 by Moody’s Investors Service, SP-1-plus by Standard & Poor’s and F1-plus by Fitch Ratings. They are expected to arrive on Tuesday.

Morgan Stanley is expected to price $844.4 million of Illinois Metropolitan Pier and Exposition Authority bonds in tax-exempt and taxable series. The bonds, which are expected Thursday, are rated AAA by S&P and AA-minus by Fitch.

The first two tax-exempt series consist of $98.1 million and $734.3 million of McCormick Place expansion project bonds and refunding bonds, respectively. Also expected is a $12 million taxable series of refunding bonds for the McCormick Place expansion project.

Goldman, Sachs & Co. is expected to price $800 million of New York City Transitional Finance Authority future tax-secured and tax-exempt subordinate bonds in two series. The bonds are rated Aa1 by Moody’s and AAA by Standard & Poor’s and Fitch.

A retail order period is expected for today and Tuesday. Institutions should be able to participate on Wednesday.

In the competitive market, Seattle is set to auction $226.3 million of drainage and wastewater improvement and refunding revenue bonds. The bonds are rated Aa1 by Moody’s and AA-plus by S&P. The bonds, expected to arrive Wednesday, should be structured as serials.


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