Top-rated municipal bonds finished stronger on the long end on Monday in light activity, according to traders, ahead of a beefy new issue supply slate, which will start hitting the market on Tuesday.
Secondary Market
The yield on the 10-year benchmark muni general obligation was unchanged from 1.40% on Friday, while the yield on the 30-year muni decreased one basis point to 2.11% from 2.12%, according to the final read of Municipal Market Data's triple-A scale.
U.S. Treasuries were also stronger for longer maturities on Monday. The yield on the two-year Treasury was flat from 0.74% on Friday, the 10-year Treasury yield declined to 1.54% from 1.58% and the yield on the 30-year Treasury bond decreased to 2.23% from 2.29%.
The 10-year muni to Treasury ratio was calculated at 91.1% on Monday compared to 88.7% on Friday, while the 30-year muni to Treasury ratio stood at 94.4% versus 92.7%, according to MMD.
MSRB: Previous Session's Activity
The Municipal Securities Rulemaking Board reported 27,574 trades on Friday on volume of $9.91 billion.
Prior Week's Actively Traded Issues
Revenue bonds comprised 51.04% of new issuance in the week ended Aug. 19, up from 50.75% in the previous week, according to Markit. General obligation bonds comprised 40.04% of total issuance, up from 39.60%, while taxable bonds made up 8.92%, down from 9.65%.
Some of the most actively traded issues by type in the week ended Aug. 19 were from Kentucky, New York and Illinois issuers.
In the GO bond sector, the Louisville and Jefferson County, Ky., Visitors and Convention Center 3 1/8s of 2041 were traded 22 times. In the revenue bond sector, the Brooklyn Arena Local Development Corp.'s Barclays Center 5s of 2042 were traded 129 times. And in the taxable bond sector, the Illinois 5.1s of 2033 were traded 66 times.
Previous Week's Top Underwriters
The top negotiated and competitive underwriters of last week included Bank of America Merrill Lynch, Morgan Stanley, Goldman Sachs, Robert W. Baird, and Raymond James, according to Thomson Reuters data. In the week of Aug. 14-Aug. 20, BAML underwrote $1.5 billion, Morgan Stanley $843 million, Goldman $610 million, Baird $520 million and Raymond James $504 million.
Primary Market
This week's new issue calendar is composed of $5.85 billion of negotiated bond deals and $2.99 billion of competitive bond sales, according to Ipreo. Notes are abundant on the competitive calendar. When adding in expected note sales, the competitive calendar total jumps to $5.09 billion.
The biggest bond deals on the negotiated slate this week are coming from the California Health Facilities Financing Authority.
Bank of America Merrill Lynch is expected to price the authority's $498 million of revenue bonds for Providence St. Joseph Health on Tuesday. The deal is rated AA-minus by S&P Global Ratings and Fitch Ratings.
And on Thursday, Ziegler is set to price the HFFA's $271 million of refunding revenue bonds for the Adventist Health System/West. The deal is rated A by Fitch.
On Tuesday, Goldman Sachs is expected to price the Waterworks Board of Birmingham, Ala.'s $424 million of Series 2016A, B and C water revenue refunding bonds, broken into three series of tax-exempts and taxables. The deal is rated Aa3 by Moody's Investors Service and AA-minus by S&P.
Citigroup is set to price the Judson Independent School District, Texas' $329 million of unlimited tax school building and refunding bonds on Tuesday. The deal is rated triple-A by Moody's, S&P and Fitch.
Goldman is expected to price the Illinois Municipal Power Agency's $250 million of Series 2016A power project revenue bonds for the Prairie State Project on Tuesday. The deal is rated A2 by Moody's and A-minus by S&P.
Piper Jaffray is set to price Phoenix, Ariz.'s $232 million of Series 2016 general obligation refunding bonds on Tuesday. The deal is rated Aa1 by Moody's and AA-plus by S&P.
Competitive sales dominate this week's calendar, packed into the two-day timeframe of Wednesday and Thursday.
Topping the competitive calendar is the state of Massachusetts, which is coming to market with over $2 billion of bonds and notes.
The Bay State will competitively sell $1.5 billion of revenue anticipation notes in three separate sales on Wednesday and about $835 million of general obligation bonds on Thursday in two separate sales.
MMA Sees Disconnect Between Corporate, Muni Default Rates
There has been a recent disconnect between corporate and municipal bonds, when it comes to default predictions, Municipal Market Analytics writes in its latest Default Trends newsletter.
MMA said that S&P Global Ratings is predicting a 30% increase in corporate bond defaults, which it says has been a leading indicator for muni bond defaults.
"MMA's data set of municipal defaults begins in 2009 and, in general, the incidence of defaults in our sector has generally paralleled experience in the corporate high yield market. Until now," MMA said. "S&P shows a commodity-afflicted corporate high-yield default rate roughly doubling over the last year while our data indicates municipal defaults continuing to fall. In fact, only 34 municipal issuers have defaulted for the first time through mid-August, down 15% versus last year and almost 20% lower than in 2014 or 2013."
However, MMA said it does expect conditions to worsen for munis.
"Of all the bonds added to our database this year, nearly a third were issued in 2014 and 2015 when underwriting conditions were aggressive and security pledged to bondholders began to slip," MMA wrote. "Implying that, if economic conditions take a steeper downturn, these financings (along with, and in particular, the 2016 vintage) are more vulnerable to distress and default."
