Despite the previous technical difficulties of supply and demand, municipals are poised for a potentially stronger second quarter, according to Jeffrey Lipton, managing director of credit research at Oppenheimer & Co.
“We continue to believe that fund flows will demonstrate more positive conviction as we move throughout the year once technical normalization sets in,” Lipton wrote in a weekly municipal report.
“If muni market technicals can find equilibrium and if flows can move more decisively positive, munis would be well-poised to outperform U.S. Treasuries in 2018 and there is still an opportunity for munis to deliver single digit positive returns,” he wrote.
Lipton said in order for ratios to move lower, expectations for a normalized technical backdrop would need to play out with municipal outperformance of U.S. Treasuries. “This would likely include better new issue participation by banks and P&C insurance companies coupled with contained unwinding of existing muni holdings by these same institutional participants,” he wrote.
Municipal recovery is linked to Fed policy expectations, according to Lipton.
“Although inflation may eventually hit the 2% target, we do not envision breakout expansion that would require the FOMC to pursue a more aggressive tightening regiment,” Lipton said in his report, adding that he forecasts a total of three rate hikes this year.
Lipton suggests current yields available on short maturities are compelling for the more defensive investor preferring to apply a barbell strategy.
"Such buyers may have more immediate cash needs or perhaps are positioning to redeploy assets to take advantage of intermittent weakness on the long end,” he wrote.
“As the muni technical landscape normalizes, and we think that it will, then perhaps general performance figures may show a positive trajectory throughout the next couple of quarters,” Lipton wrote. “If this scenario occurs, then perhaps we may see a scaling back in support for high yield munis,” Lipton added. “The support can be even further diluted if high yield spreads continue to compress.”
Primary market
Muni market participants will see about $4.8 billion of new issues come to market this week in a calendar consisting of $3.99 billion of negotiated deals and $813 million of competitive sales.
Citigroup is set to hold a second day of retail orders on New York City’s $850 million of Fiscal 2018 Series F Subseries F-1 tax-exempt general obligation bonds ahead of the institutional pricing on Wednesday, NYC is also competitively selling $133.49 million of Fiscal 2018 Series F Subseries F-2 taxable) GOs and $116.51 million of Fiscal 2018 Series F Subseries F-3 taxable GOs on Wednesday.
Proceeds from the sale will be used to fund capital projects in the city with the exception of about $64 million, which will be used to convert some outstanding floating-rate bonds into fixed-rate bonds. The deals are rated Aa2 by Moody’s Investors Service and AA by S&P Global Ratings and Fitch Ratings.
Crews & Associates received the written award on Springdale, Ark.’s $188 million of Series 2018 sales and use tax refunding and improvement bonds on Tuesday morning.
On Tuesday, Barclays Capital is set to price the California Statewide Communities Development Authority’s $100 million of Series 2018 revenue bonds for the Huntington Memorial Hospital. The deal is rated A-minus by S&P.
Since 2008, the California Statewide CDA has sold about $17.1 billion of securities, with the largest volume in 2009, when it sold $4.12 billion and the lowest, excluding this year, in 2013, when it sold $516 million.
Tuesday’s bond offering
Arkansas:
Bond Buyer 30-day visible supply at $8.74B
The Bond Buyer's 30-day visible supply calendar increased $375.4 million to $8.74 billion on Tuesday. The total is comprised of $3.91 billion of competitive sales and $4.83 billion of negotiated deals.
Previous session's activity
The Municipal Securities Rulemaking Board reported 40,713 trades on Monday on volume of $9.04 billion.
California, New York and Texas were the states with the most trades, with the Golden State taking 17.642% of the market, the Empire State taking 11.049% and Lone Star State taking 9.312%.
Data appearing in this article from Municipal Bond Information Services, including the MBIS municipal bond index, is available on The Bond Buyer Data Workstation.
