Municipal bond traders were looking at a light and tight primary market Monday, as less than $1 billion of deals are packed into a two-day pricing window in this holiday-shortened week.
New issue volume is expected to fall to around $911 million this week, according to Ipreo LLC and The Bond Buyer. This is down from a revised $6.97 billion in new issues priced last week, as reported by Thomson Reuters. An estimated $7.9 billion of supply was originally expected for last week.
The bond markets are closed on Thursday for Thanksgiving and have a 2 p.m., EST, recommended close on Friday.
All of the muni deals will come to market in the two-day window of Monday and Tuesday. No deals are scheduled for Wednesday or during the abbreviated trading session on Friday.
"Most of the staff is off on Wednesday and Friday," a trader in Texas said.
Lower Issuance Seen Ahead
Looking ahead, some market observers see municipal issuance moving lower heading into year end and 2015.
"Our municipal market bond issuance forecasts for 2014 through 2017 cited six factors why we see issuance falling in coming years," Janney Capital Markets said in its latest fixed-income strategy and research report.
"The factors include: 1) higher interest rates- which will result in lower refunding amounts; 2) the continued use of alternatives such as direct bank loans (excluded in municipal issuance data); 3) issuer austerity measures; 4) less flexibility in spending due to lower revenues and crowding out from rising legacy costs and spending; 5) political and voter attitudes (as evidenced by ballot initiatives in Ohio) and 6) no broad public policy or political support nation-wide for higher government spending that would result in higher levels of issuance," according to Janney.
"The imbalance of cash chasing too few bonds historically has been -- and I expect will continue to be -- the story," said James Colby, senior municipal strategist and portfolio manager at Van Eck Global. "With current interest rates remaining range bound, municipals can present a compelling value proposition for investors."
Colby said that in the short-term he expected no great pickup of issuance in December or January.
However, he said that expectation could change if Puerto Rico comes to market with its big general obligation bond sale.
Late on Monday, Reuters quoted sources as saying that the sale of up to $2.9 billion of GOs would not happen before early 2015.
Primary Market
Leading off the primary market on Monday was an offering of $70 million pollution control revenue bonds from two Kentucky issuers.
The deal was priced as a single issue by Morgan Stanley on behalf of the Louisville Gas & Electric Co. project. It is comprised of $35 million of Louisville/Jefferson County, Ky., Metropolitan Government PCRs, and $35 million of Trimble County, Ky., PCRs.
Both series are structured to mature in 2027 and will be priced at par and subject to a mandatory put in 2018.
The Louisville/Jefferson County, Ky., Metropolitan Government PCRs were priced at par to yield 1.35% in 2027. The Trimble County, Ky., PCRs were priced at par to yield 1.35% in 2027.
The issue is expected to be rated A1 by Moody's Investors Service and is rated A-minus by Standard & Poor's.
Meanwhile, the biggest deals of the week are out of Illinois.
On Tuesday, Siebert Brandford Shank & Co. is scheduled to price $270 million Illinois State Toll Highway Authority toll highway senior revenue refunding bonds.
The bonds are scheduled to be priced as serials from 2018 to 2025. The issue is rated Aa3 by Moody's and AA-minus by both S&P and Fitch Ratings.
Also on Tuesday, BMO Capital Markets Inc. is set to price $110.97 million McHenry County, Ill., Conservation District general obligation refunding bonds as serials maturing from 2015 to 2027.
The issue is rated A1 by Moody's and AA-plus by S&P.
On Friday, a court in Illinois overturned the state's overhaul of state public pensions. The case is now headed to the state Supreme Court following the lower court's ruling that the benefit cuts violate the state constitution.
Illinois has a huge unfunded pension liability that has resulted in the state having one of the lowest credit ratings among states with their GOs being rated A3 by Moody's and A-minus by S&P and Fitch. It is also one of the few states that currently have higher spreads than their 12-month average.
On Friday, MMD calculated the spread at plus-150 basis points at 3.65% in 2024 compared with 2.15% for the MMD scale read and at 145 basis points for the 30-years at 4.53% versus 3.08% for the MMD read.
Meanwhile, the only competitive sale above $50 million this week is Hudson County, N.J.'s $74 million general obligation bond offering, due 2015-2031. The bonds, rated AA by S&P, are up for bid on Tuesday.
Secondary Market
Municipal bond yields were little changed at the close, with the benchmark 10-year GO steady at 2.15% and 30-year GO unchanged at 3.08%, according to the final read of Municipal Market Data's triple-A scale.
Treasury prices were also nearly flat, with the two-year note yield down one basis point at 0.50% from Friday's market close. The 10-year yield was also down one basis point at 2.31% while the 30-year was unchanged at 3.02%.
"It's been really quiet," the Texas trader said. "We're just cleaning up some stuff in the secondary and doing a few retail trades."
On Monday, the muni to Treasury ratio was higher. The 10-year muni to Treasury ratio closed at 93.2% from 92.9% on Friday. The 30-year muni to Treasury ratio closed at 102.1% from 101.9% on Thursday.
MSRB: Previous Session's Activity
The Municipal Securities Rulemaking Board reported 36,771 trades on Friday for volume of $10.387 billion. Most active were the Phoenix, Ariz., Industrial Development Authority's 7s of 2049, which traded 307 times at a high of 100.00 and a low of 100.00, according to the MSRB's Electronic Municipal Market Access (EMMA) webpage.
