Munis Weaken Ahead of $8.9B New Issue Calendar

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Top shelf municipal bonds ended weaker on Friday, according to traders, ahead of a hefty new issue calendar for a holiday-shortened week after the Rev. Martin Luther King, Jr. holiday.

Ipreo estimates volume for the week at $8.9 billion, up from a revised $8.2 billion of supply in the past week, according to updated figures from Thomson Reuters. The calendar is composed of about $7.4 billion of negotiated deals and around $1.5 billion of competitive sales.

"Demand may slow a little next week – renewed worries about Fed policies and interest rates," said Dan Heckman, senior fixed income strategist at U.S. Bank Wealth Management. "It does appear that there is a lot of cash on the sidelines, waiting for the right deals to come."

Goldman Sachs is expected to price the city of Chicago's $1.16 billion of taxable and tax-exempt general obligation bonds.

The underwriter said the sale will be on Wednesday or Thursday, as the taxable part and tax-exempts will come on separate days.

The deal is rated BBB-plus by S&P Global Ratings and Kroll Bond Rating Agency and BBB-minus by Fitch Ratings.

"I think there will be some demand for the Chicago deal, but it will really come down to how it is priced; it has to be cheap enough," Heckman said. "There is still a lot of risk in that name, and until the political log jams free up, it will be a challenge. It has to be priced in a way that it can bring enough return to outweigh any potential future risks."

Barclays Capital is scheduled to price the Texas Transportation Commission's $800 million of state GO mobility fund refunding bonds on Thursday. The deal is rated triple-A by Moody's, S&P and Fitch.

"There will be a lot of interest in the TTC deal, as a lot of investors are looking to get into solid credits and that certainly fits the bill," Heckman said.

RBC Capital Markets is slated to price the Los Angeles Department of Water and Power's $500 million of power system revenue bonds on Thursday, following a one-day retail order period. The deal is rated Aa2 by Moody's and AA-minus by S&P and Fitch.

In the competitive arena, the University of Houston Board of Regents will sell two offerings totaling $356.705 million on Thursday. There will be a taxable portion for $11.635 million and a $345.07 million tax exempt part. The deals are rated Aa2 by Moody's and AA by S&P.

 

Secondary Market

The 10-year benchmark muni general obligation yield rose one basis point to 2.16% on Friday from 2.15% on Thursday, while the yield on the 30-year GO increased three basis points to 2.91% from 2.88%, according to the final read of Municipal Market Data's triple-A scale.

U.S. Treasuries were also weaker on Friday. The yield on the two-year Treasury rose to 1.19% from 1.17% on Thursday, while the 10-year Treasury yield increased to 2.38% from 2.35%, and the yield on the 30-year Treasury bond gained to 2.98% from 2.95%.

Week's Most Actively Traded Issues

Some of the most actively traded issues by type in the week ended Jan. 13 were from Texas, California and Pennsylvania, according to Markit.

In the GO bond sector, the Ysleta ISD, Texas, 5s of 2046 were traded 30 times. In the revenue bond sector, the Los Angeles Department of Airports 5s of 2041 were traded 55 times. And in the taxable bond sector, the University of Pittsburgh 3.646s of 2036 were traded 32 times.

Week's Most Actively Quoted Issues

Illinois, Pennsylvania and New Jersey names were among the most actively quoted bonds in the week ended Jan. 13, according to Markit.

On the bid side, the Illinois taxable 6.63s of 2035 were quoted by 38 unique dealers. On the ask side, the Pennsylvania GO 4s of 2034 were quoted by 229 unique dealers. And among two-sided quotes, the New Jersey Transportation Trust Fund taxable 5.754s of 2028 were quoted by 18 unique dealers.

Lipper: Muni Bond Funds Report Inflows

Municipal bond funds saw inflows for the first time in eight weeks as investors returned to the market, according to Lipper data released late Thursday. The weekly reporters saw $974.172 million of inflows in the week ended Jan. 11, after outflows of $911.938 million in the previous week.

The four-week moving average remained in the red at negative $890.596 million after being negative $1.632 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 also had inflows, gaining $982.916 million in the latest week after losing $226.857 million in the previous week. Intermediate-term funds had inflows of $61.462 million after outflows of $636.984 million in the prior week.

National funds had inflows of $933.337 million after outflows of $613.824 million in the previous week. High-yield muni funds reported inflows of $796.091 million in the latest reporting week, after outflows of $244.713 million the previous week.

Exchange traded funds saw inflows of $183.828 million, after inflows of $607.714 million in the previous week.

Wells Fargo Negative Short-Term on NFP Hospitals

Wells Fargo Securities now has a more negative view in the short-term on not-for-profit hospitals.

"We revised our short-term outlook for not-for-profit hospitals to negative from stable, following the election, to reflect elevated health care sector uncertainty due to the expected repeal and replacement of the Affordable Care Act and greater downside financial risk for NFP hospitals," George Huang Wells Fargo's director of Municipal Securities Research wrote in a Friday market comment.

"Our short-term outlook is now back in line with our negative medium-term outlook, which had already anticipated a slowing of the beneficial effects of the ACA's access to care provisions," Huang wrote.

 

Kroszner: Tax-Exempt Revs Good for Infrastructure

Former Federal Reserve Gov. Randall Kroszner said he is wary of a proposal for a national infrastructure bank.

"We've seen these kind of things play out very badly in other countries," he said in comments to the media after the University of Chicago Booth School of Business's Economic Outlook 2017 conference in New York on Thursday night, citing problems with such banks in Germany.

He said rather the new administration and Congress should first look at prioritization.

"You'd like to have a consistent way of looking across all the projects in the U.S. and try to say 'Which ones are really the highest priority?' … So I think that would be the most valuable thing for trying to figure out where to do the allocations."

He was generally supportive of using tax-exempt revenue bonds for infrastructure financing.

"For example, I grew up in New Jersey and the New Jersey Turnpike was financed through bond issuance and they were very successful in repaying the debt," he said, adding, he thinks it would be best to use that model as much as possible.

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