As supply bounces back this fall, refunding volume will stay in the dust behind new money deals.
Just $5 billion of refundings are expected through the remainder of 2014, predicted Peter Hayes, a managing director and head of the Municipal Group at Blackrock, at a press briefing Wednesday.
The week of Sept. 22's primary calendar is slated to include more than $9 billion in deals, nearly all new money. Though borrowers have netted record low borrowing rates through the first nine months of the year, refundings have dwindled, down about 20% from the same time last year, according to Hayes.
The calendar will be led by two deals over $2 billion each from the state of California and New York City, two issuers with exceptionally different demand bases, as previously reported.
Hayes predicted that the demographic trends will only lend themselves to even more demand for municipal products, as public finance debt buyers typically prioritize income rather than returns.
"Household formation is a huge economic driver," said Hayes at the meeting. "An aging population will mean even more demand for fixed income products in the municipal asset class."
Between heighted demand and stifled supply, the low rate environment is expected to continue in the near term future, said Hayes.
More demand has also flowed into municipals as the asset class has delivered robust returns, especially when compared to dismal expectations, Hayes said. To preserve these returns, Hayes recommended shifting yield curve positioning into the longer end of the curve where he said there was more value. Hayes also said people should think about managing expectations for municipal returns in the future.
"It's time for investors to reset their expectations and perhaps start building a more defensive portfolio," said Hayes.
Rick Rieder echoed Hayes concerns surrounding the seemingly boundless opportunities investors believe to lie in municipals and fixed income as a whole.
"You can't come up with too many places to find safe yield anymore," he said at the same press meeting. Rieder is a managing director at Blackrock and its Chief Investment Officer of Fundamental Fixed Income.
Though fixed income, especially municipals, have enjoyed intense demand in 2014, Rieder noted that it is "nowhere near bubble territory."
"However, we could be there if we keep policy too loose too long," Rieder added.
In regard to Federal Reserve policy, Hayes recommended reviewing the Fed of 2004 to predict the actions of today's Fed. Hayes noted that the two regimes were similar enough that 2004 would probably be a good indicator as to how 2014's will act. The periods are similar for the Fed in that there's a need to raise interest rates and a desire to maintain transparency to the American public, Hayes said.
Municipal Market Data's triple-A scale showed munis were mixed on Friday, with yields for bonds maturing in two years rising by two basis points, but strengthening by one basis point for bonds maturing in six to 23 years and by two basis points for bonds maturing in 24 to 30 years.
The rest of the curve held steady.
Municipal Market Advisors' data showed the 10 and 30 year municipal bonds strengthened by one basis point to 2.22% and by two basis points to 3.35% respectively. The two-year held steady at 0.31%.
Treasuries strengthened led by the 30-year that's yield dropped by seven basis points to 3.29%. The 10-year's yield declined by five basis points to 2.58% and the 2-year note by two basis points to 0.57%.
