Against the odds, munis look favorable, BlackRock says

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Despite muted issuance and net negative supply so far in 2018, relative valuations and historical seasonal trends suggest that favorable conditions are on the horizon for the municipal market, Peter Hayes, head of BlackRock’s municipal bonds group, wrote Tuesday in a municipal market update for July.

“Valuations have slightly improved and typical summer strength may provide a boost,” according to Hayes, whose group oversees $129 billion in municipal assets.

Municipals produced favorable returns in June, as a persistently strong technical environment provided solid footing for municipal bonds to benefit from interest rates remaining range-bound amid geopolitical uncertainty and mounting fears around the impact of international trade wars, the report said.

“Muni bonds rewarded investors with an unexpected positive return in June against the odds that a stark pickup in supply would saturate the market as history suggests for this time of year,” he wrote.

While issuance remains muted after tax reform, demand remains remarkably firm. “Issuance continues to be depressed in 2018 as a result of tax reform — which eliminated the exemption for advanced refunding bonds — down 19% year-to-date versus the same period last year and remaining below the 5-year average,” Hayes said.

The reinvestment of payouts from calls, coupons and matured bonds outweighed gross supply in June, driving prices higher, he said, adding, “the benefits of this net negative supply environment were slightly mitigated by activity in the secondary market, where dealer inventories remain bloated.”

There have been eight consecutive weeks of mutual fund inflows since the tax-time surge in short-term fund selling, while short and intermediate term issues outperformed longer-term bonds in June, according to Hayes.

With a favorable backdrop, Hayes has shifted to a slightly longer-than-neutral stance on duration, or interest rate risk, while maintaining a barbell yield curve strategy.

“We prefer lower-rated investment grade credits and revenue bonds for their ability to provide income, and we remain neutral on high yield,” and high-yield municipal bonds were among the stronger performers in June, Hayes wrote.

“Heading into the late summer months — historically a period of net negative supply following the spring supply push — we hold a positive view on the muni market, particularly as relative valuations have reset to slightly more attractive levels,” Hayes wrote. “Looking further ahead into the fall, we anticipate taking a bit more caution as we watch for event risks relating to a potential third Fed rate hike, midterm elections, and the curtailment of the tax benefit for pension buyers.”

Primary market
The first of the week’s deals come to market as two big competitive issues sold.

In the competitive arena, the Massachusetts School Building Authority sold $200 million of Series 2018B subordinated dedicated sales tax revenue bonds on Tuesday.

Bank of America Merrill Lynch won the bonds with a true interest cost of 4.0306%. The deal is rated Aa3 by Moody’s Investors Service, AA by S&P Global Ratings and AA-plus by Fitch Ratings. The financial advisor is Acacia Financial Group; the bound counsel is Mintz Levin.

Since 2009, the SBA has sold about $6.5 billion of debt, with the most issuance occurring in 2012 when it sold $1.68 billion. The authority did not come to market in 2014 or 2017.
In the short-term competitive sector, Colorado sold $310 million of Series 2018A education loan program tax and revenue anticipation notes.

Three groups won the TRANs, including Wells Fargo Securities, BAML and Morgan Stanley. The deal is rated MIG1 by Moody’s and SP1-plus by S&P. The financial advisor is Kutak Rock and the bond counsel is RBC Capital Markets.

The Swarthmore Borough Authority, Pa., sold $93 million of revenue bonds for Swarthmore College. Wells Fargo won the bonds with a TIC of 3.64%. The deal is rated triple-A by Moody’s and S&P. The financial advisor is The Yuba Group and bond counsel are Saul Ewing and Steven A. Goldfield.

In the negotiated sector, Citigroup priced Atlanta’s $290.85 million of Series 2018B water and wastewater revenue and revenue refunding bonds. The deal is rated Aa2 by Moody’s and AA-minus by S&P.

Citi also priced the Mesquite Independent School District, Texas’ $118.7 million of Series 2018 unlimited tax school building bonds. The deal, backed by the Permanent School Fund guarantee program, is rated AAA by S&P and Fitch.

JPMorgan Securities priced the Lewisville Independent School District, Texas’ $114.855 million of Series 2018 unlimited tax school building bonds. The deal, backed by the PSF, is rated AAA by S&P and Fitch.

BAML priced the American Municipal Power, Inc.’s $99.795 million of Series 2018A combined hydroelectric projects revenue bonds. The deal is rated A2 by Moody’s, A by S&P and A-minus by Fitch.

Tuesday’s sales

Click here for the SBA deal

Click here for the note deal

Click here for the Swarthmore deal

Click here for the Mesquite deal

Click here for the Lewisville deal

Click here for the Atlanta deal

Click here for the AMP deal

Secondary market
Municipal bonds were mixed on Tuesday, according to a late read of the MBIS benchmark scale. Benchmark muni yields fell as much as one basis point in the one- to four-year and seven- to 20-year maturities, rose less than a basis point in the 22- to 28-year maturities and were unchanged in the five- and six-year, 21-year and 29- and 30-year maturities.

High-grade munis were mostly stronger, with yields calculated on MBIS’ AAA scale falling as much as one basis point in the one- to three-year and seven- to 30-year maturities, rising less than a basis point in the five-year maturity and remaining unchanged in the four- and six-year maturities.

Municipals were mixed on Municipal Market Data’s AAA benchmark scale, which showed the 10-year muni general obligation yield remaining unchanged and the 30-year muni maturity yield gaining one basis point.

Treasury bonds were little changed as stocks were higher.

On Tuesday, the 10-year muni-to-Treasury ratio was calculated at 84.8% while the 30-year muni-to-Treasury ratio stood at 98.2%, according to MMD. The muni-to-Treasury ratio compares the yield of tax-exempt municipal bonds with the yield of taxable U.S. Treasury with comparable maturities. If the muni/Treasury ratio is above 100%, munis are yielding more than Treasury; if it is below 100%, munis are yielding less.

Previous session's activity
The Municipal Securities Rulemaking Board reported 40,814 trades on Monday on volume of $9.02 billion.

California, New York and Texas were the states with the most trades, with the Golden State taking 16.558% of the market, the Empire State taking 12.073% and the Lone Star State taking 10.684%.

Treasury sells $35B 4-week bills
The Treasury Department sold $35 billion of four-week bills on Tuesday at a 1.85% high rate.

The bills had a coupon equivalent of 1.878%. The median rate was 1.83% and the low rate was 1.81%. The bid to cover ratio was 3.16; 86.42% were accepted at the high rate. The bills are due Aug. 2 and are a reopening of an auction originally held in February.

Treasury auctions $33 billion 3-year notes
Treasury auctioned $33 billion of three-year notes on Tuesday at a 2.685% high rate.

The bills had a coupon equivalent of 2 5/8%. The median rate was 2.66% and the low rate was 2.56%. The bid to cover ratio was 3.16; 37.03% were accepted at the high rate. The bills are due July 15, 2021.

Data appearing in this article from Municipal Bond Information Services, including the MBIS municipal bond index, is available on The Bond Buyer Data Workstation. Click here for a brief tour of the Workstation, or contact Vanessa Kim at 212-803-8474 for more information.

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Primary bond market Secondary bond market Massachusetts School Building Authority State of Colorado State of California State of New York State of Texas