Muni Volume Drops to $4B for Fed Week

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Municipal bond traders will have a lot less to work with, as the new issuance calendar shrinks ahead of the Federal Open Market Committee meeting on interest rates.

Volume for the week ending Dec. 16 is forecast by Ipreo to drop to $4.01 billion, from a revised total of $6.64 million in the previous week, according data from Thomson Reuters. The calendar is comprised of $3.24 billion of negotiated deals and $771 million of competitive sales.

There are only eight deals on the calendar that are larger than $100 million, and seven of those are negotiated deals.

The Federal Reserve policy makers are expected to raise the fed funds target rate 25 basis points to between 1/2 and 3/4 percent on Wednesday.

Issuers have a track record of staying away from issuing the week of a scheduled FOMC announcement, especially the day of the announcement.

Although the Fed has pulled surprises before, observers doubt it will happen this time.

"There's little thought given to the Fed not raising rates that I'm aware of," said Gary Binkiewicz, senior vice president and head municipal bond analyst at R. Seelaus and Co. "Perhaps there is a FOMC factor as to its lightness; there's also the interest rate implications for potential refunding deals that might be contributing" to the weakness in volume.

Michael Pietronico, CEO at Miller Tabak Asset Management said that the market has been conditioned with this Federal Reserve never to say never, as members have proven to be quite capable of finding other reasons not to tighten monetary policy.

"We see a 90% chance of a Fed tightening next week," he said.

Since it takes about two weeks to close on a transaction, deals that might not look like 2016 business could be held off until 2017, Binkiewicz said.

Barclays is expected to price the largest deal on the calendar – $500 million of dedicated capital improvement tax bonds from the Chicago Board of Education. There is no expected pricing date, and the timing is dependent on market conditions, according to Chicago Public Schools spokeswoman Emily Bittner.

The sale will be under a new dedicated capital improvement tax crafted to provide a borrowing outlet it can present as insulated from both the district's operating struggles and the threat of Chapter 9 bankruptcy.

The new structure offers a new ad valorem tax pledge distinct from the district's traditional double-barreled offering of a general obligation pledge and alternate revenue source pledge.

The isolation of the revenues earned the bonds an A rating from Fitch Ratings. That's eight notches above the junk level rating of B-plus Fitch assigns to the district's GOs. Kroll Bond Rating Agency was the other rating agency asked to rate the new, non-GO structure. It assigned a BBB. Fitch, Moody's Investors Service and S&P Global Ratings all rate the district's $6.8 billion of GOs at junk level. Kroll assigns a BBB-minus rating to most of the outstanding GOs and a BBB to a sale earlier this year. All assign a negative outlook to the GOs.

"We would give it a 50/50 chance[of coming to market next week] at this point," said Pietronico. "There is not a lot of money chasing weaker credits right now given the outflows in the mutual fund space."

Citi is scheduled to run the books on the New York State Housing Finance Agency's $223 million of affordable housing revenue bonds and climate certified green bonds on Tuesday following a one day retail order period. The deal will be separated into $99.115 million of revenue green bonds and $123.445 million of revenue bonds. The green bond portion will be the first ever affordable housing green bond deal. The deal is rated Aa2 by Moody's.

"New York demand has been very solid and with yields having moved up the last few months, we see retail [investors] as having interest in this deal, especially if they reside in New York State," Pietronico said.

Morgan Stanley is slated to price the University of Pittsburgh's $200 million of revenue bonds on Tuesday.

With its solid higher education credit, the University, which hasn't been to market since 2014, "should be well received," Binkiewicz said.

Pietronico agreed, saying that "since the new issue market will be slowing down as the holidays approach and as such Pennsylvania residents and even national portfolios will be looking for opportunities to invest."

In the competitive arena, the one sale that is notable will take place on Wednesday, when the Omaha Public School District No. 001, Neb., will be auctioning $141 million of general obligation bonds. The deal is rated Aa1 by Moody's and AAA by S&P.

Secondary Market

Top shelf municipal bonds finished weaker on Friday. The yield on the 10-year benchmark muni general obligation rose two basis points to 2.31% from 2.29% on Thursday, while the yield on the 30-year increased two basis points to 3.12% from 3.10%, according to the final read of Municipal Market Data's triple-A scale.

U.S. Treasuries were also weaker. The yield on the two-year Treasury rose to 1.13% from 1.10% on Thursday, the 10-year Treasury gained to 2.47% from 2.38%, while the yield on the 30-year Treasury bond increased to 3.15% from 3.08%.

The 10-year muni to Treasury ratio was calculated at 93.8% on Friday compared to 95.9% on Thursday while the 30-year muni to Treasury ratio stood at 98.8% versus 100.4%, according to MMD.

Week's Most Actively Traded Issues

Some of the most actively traded issues by type in the week ended Dec. 9 were from New York, New Jersey and California, according to Markit.

In the GO bond sector, the New York City 4s of 2043 were traded 156 times. In the revenue bond sector, the New Jersey Economic Development Authority 5s of 2041 were traded 49 times. And in the taxable bond sector, the California 7.55s of 2039 were traded 12 times.

Week's Most Actively Quoted Issues

Illinois, New Jersey and California names were among the most actively quoted bonds in the week ended Dec. 9, according to Markit.

On the bid side, the Illinois taxable 6.63 of 2035 were quoted by 54 unique dealers. On the ask side, the N.J. EDA revenue 4.75s of 2031 were quoted by 308 unique dealers. And among two-sided quotes, the California taxable 7.55s of 2039 were quoted by 24 unique dealers.

Lipper: Muni Bond Funds Report Outflows

Municipal bond funds experienced more outflows as investors pulled cash out of the market, according to Lipper data released late Thursday.

The weekly reporters saw $2.213 billion of outflows in the week ended Dec. 7, after outflows of $2.081 billion in the previous week.

The four-week moving average remained in the red at negative $2.385 billion after being negative $1.815 million in the previous week. A moving average is an analytical tool used to smooth out price changes by filtering out fluctuations.

Long-term muni bond funds had outflows, losing $1.208 billion in the latest week after shedding $1.238 billion in the previous week. Intermediate-term funds had outflows of $690.530 million on top of outflows of $523.811 million in the prior week.

National funds had outflows of $1.750 billion after outflows of $1.745 billion in the previous week. High-yield muni funds reported outflows of $775.563 million in the latest reporting week, after outflows of $714.491 million the previous week.

Exchange traded funds saw outflows of $127.509 million, after inflows of $6.013 million in the previous week.

 

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