The municipal bond market can expect issuance to come in on par with what the market has seen in recent weeks, and market participants expect demand to continue to outweigh supply.
The tax-exempt market should see $7.38 billion this week, up from last week’s revised $6.31 billion. On the negotiated calendar, $5.75 billion is expected to be priced, up from last week’s revised $4.80 billion.
In competitive deals, $1.63 billion is expected to be auctioned, up from last week’s revised $1.50 billion.
Leading the long-term new-issue calendar is $950 million of New York’s Metropolitan Transportation Authority bonds priced by Wells Fargo Securities. The bonds are rated AA by Standard & Poor’s and AA-minus by Fitch Ratings. A retail order period is expected Monday followed by an institutional order period Tuesday.
Loop Capital Markets is expected to price $600 million of California State Public Works Board lease revenue and lease revenue refunding bonds, rated A2 by Moody’s Investors Service and BBB-plus by Standard & Poor’s and Fitch.
A retail order period is expected Wednesday followed by institutional pricing Thursday.
On the short-term calendar, District of Columbia should auction $675 million of notes in the competitive market Tuesday.
And while last week saw weakening, municipal market participants expect firming this week as demand should remain strong.
“We feel quite strongly that there is a lot of money still out there,” said Tom Metzold, co-director of municipal investments at Eaton Vance.
“Last week seemed weaker because of the holiday more than anything,” he said, adding that supply and demand factors still remain favorable.
Until a lot more supply comes, the market will be stuck in the same stalemate it has been at recently. “No one is willing to part with their bonds at bid side prices and buyers aren’t willing to step up to high enough levels to entice people to sell.”
The slight uptick in volume should help create more transparent pricing.
“Sometimes our market needs supply to create price discovery,” Metzold said. “It’s a situation where an increase in supply creates trading volume and a resulting ‘trade print’ on the Municipal Securities Rulemaking Board website. No one is going to buy at a level until it’s been proven. And only that stagnation can be released when new issues are priced and then the secondary will trade on that price.”
While frustration continues over high prices, cash sitting on the sidelines will be put to work eventually, sources say. “Inflows are such that people have got to be sitting on cash,” Metzold said, adding that he looked at one big fund that reported 10% cash. “You multiply that by hundreds of funds out there and that’s billions of dollars.”
Others agree.
“I believe the market should handle the week’s manageable level of supply given high cash balances and sizable mutual fund inflows,” said Peter DeGroot at JPMorgan.
“Investors are flush with capital from the preceding 45 consecutive weeks of inflows. Year-to-date, municipal funds have received $43 billion of net new cash. This week’s concentration in specialty state and higher yielding issuers should also be supportive of better liquidity.”
DeGroot noted that the muni market is coming into the week somewhat cheaper relative to Treasuries than it did the previous week, further helping to support the supply.
“We are about at 102% whereas we began last week at about 99%,” he said.
