The food fight among municipal investors is expected to reach new heights with the arrival of the summer reinvestment season, municipal managers and observers said.
Some say it will be the first time in a decade that the municipal market’s lofty prices, severe lack of supply, and intense demand will combine to create a historical repeat of the climate following the financial crisis.
“I think demand will exceed prior years — and the big reason is because you have much less supply,” Howard Mackey, managing director at NW Financial Group in Hoboken, N.J., said on May 30.
Typically characterized by a heavy slate of bond maturities and coupon payments and calls due on June 1 and July 1, the summer reinvestment season is expected to be stronger than average this year judging by the recent severe lack of paper, the experts said.
“There will be more money coming into the market to compete for fewer bonds,” Mackey said.
It has been over a decade since the municipal market saw a similar scenario following the financial crisis, according to Mackey.
“That was the last time we had a similar scenario with an inverted yield curve that spooked investors — coupled with the scarcity in the muni sector," he said. “I haven’t seen that type of inverted yield curve since 2008 or 2009.”
Others like Peter Delahunt, managing director of municipals at Raymond James & Associates, agreed that the principal and interest rollover potential this year is “quite a bit larger” than past years, with negative net supply for June, July, and August estimated at $40 billion.
“Several factors will contribute to the reallocation of these monies vis-à-vis the limited supply of new issuance,” not the least of which is the recurring 21 consecutive weeks of nearly $1 billion plus of weekly inflows, Delahunt said.
Besides bond funds, exceptionally strong demand has come from the separately managed accounts, especially in the seven to 18-year range, he added.
“These two demand components have driven ratios to U.S. Treasuries to historic lows,” Delahunt said. “So while the tax-exempt muni market may be considered rich, the technicals are poised to maintain this richness.”
Mackey said the intense need for tax-exempt paper to replace maturing and called bonds will keep investors feasting after municipals well into the third quarter — and paying lofty prices if necessary.
Currently, investors are coughing up extra cash to purchase high-quality bonds at the current hefty prices — which are at time up to 10 basis points through the generic, triple-A general obligation scale published by Refinitiv Municipal Market Data, Mackey observed.
There was a surge in demand in early 2019 as income tax season brought to light the realities of tax reform and the new limitations on State and Local Tax Deductions (SALT).
“Issuance is down and we are well below the average for last year, so those factors, I think, are going to present a stronger picture in terms of demand compared to where we were last year,” Mackey said.
Mackey said investors are willing to pay higher prices for paper — particularly specialty states, such as New Jersey and New York — due to the extreme scarcity.
With cash hitting their accounts, they are eager to reinvest — even if it means a higher price tag.
“Bond funds and investment advisors have to put the money to work,” he said.
John Mousseau, president and chief executive officer of Cumberland Advisors, agreed that the reinvestment season could far surpass other years given the current market technicals.
“We expect demand to be strong, the amount of reinvestment to be strong, and the overall supply to be light relative to the demand,” he said on May 30.
To make matters worse, said the absence of refunding issues is complicating the existing supply famine — and impacting prices, he noted.
“We would be piled up with refunding issues if this was 2017, and 4% issued bonds would be candidates to be refinanced,” Mousseau said, noting that in 2016 and 2017, almost a third of issuance consisted of advance refundings.
He said the removal of advance refundings has forced a dramatic move in long-term municipals, which were long considered cheap versus long Treasuries.
“It took this tax bill to move the needle and it has moved substantially,” Mousseau said.
He said one of the biggest concerns as reinvestment season approaches is whether the market is “getting ahead of itself.”
The unsold balances on this week’s Southern California Metro Water deal could be a sign.
“If unsold balances continue to crop up, that will tell you the market has reached a pause button moment,” Mousseau said. “And the one thing we know from the bond markets of 2016 and 2018 is that things can turn on a dime,” he added.
Meanwhile, Mackey expects to see most of the summer reinvestment cash resurfacing into the market via individual bonds or bond funds — mainly shorter instruments in specialty states where taxes are the highest.
“We have seen that in New Jersey for quite a while now with high-grade, triple-A bonds trading well through MMD,” Mackey said, citing bonds for the New Jersey Educational Facilities Authority for Princeton University as an example.
The five-year bonds are trading eight to 10 basis points richer than the existing MMD scale.
For instance, a 2024 N.J. bond is trading between 1.34% and 1.36%, compared to the comparable MMD maturity, which was yielding 1.44% on Thursday, he noted.
But, not all of them will be eager to reinvest at the new rates.
The principal and interest on bonds held by banks and property and casualty companies will most likely not be redeployed back into tax-exempt municipals as those institutions have been net sellers, according to Delahunt.
The scenario is apparent in the secondary market where blocks of bonds that are out for the bid by bond funds that need to raise cash are getting snapped up by other bonds funds that need paper — even though they are trading well through MMD levels, according to Mackey.
Primary market
It’s feast after famine as a spurt of new municipal bond supply is set for sale this first week of the new month.
IHS Markit Ipreo forecasts weekly bond volume will rise to $6.99 billion from a revised total of $1.97 billion in the prior week. The calendar is composed of $4.36 billion of negotiated deals and $2.63 billion of competitive sales.
To slake buyers’ thirst for short-term paper, Los Angeles County is coming to market with $700 million of tax and revenue anticipation notes in a rare negotiated note deal.
BofA Securities is expected to price the TRANs on Wednesday.
Last June, the county sold $700 million of TRANs as 4s to yield 1.55%. These notes, which are maturing at the end of this month, were trading late last week at a high yield of 1.958%.
Some buyers sell notes to free up cash in advance of the new sale so they can purchase the new transaction.
JPMorgan Securities is expected to price $410 million of Series 2019 taxable bonds for American University in Washington, D.C., on Thursday.
In the competitive arena, the Clark County School District, Nevada, (NR/A+/NR) is selling $200 million of Series 2019A limited tax general obligation building bonds on Wednesday.
Proceeds will be used to acquire, construct, improve, and equip the district’s school facilities. Zions Public Finance is the financial advisor; Sherman & Howard is the bond counsel.
The district last competitively sold comparable bonds on Oct. 18, 2018, when Citigroup won $200 million of Series 2018B GOs with a true interest cost of 3.8365%.
Massachusetts is selling $178.245 million of GO refunding bonds on Wednesday.
PFM Financial Advisors is the financial advisor; Mintz Levin is the bond counsel.
The state last competitively sold comparable bonds on May 5 when Morgan Stanley won $400 million of Consolidated Loan of 2019 Series C GOs with a TIC of 3.726%.
Lipper: More inflows into muni funds
For 21 weeks in a row, investors have placed cash into municipal bond funds, data from Refinitiv Lipper shows.
Tax-exempt mutual funds which report flows weekly saw $918.862 million of inflows in the week ended May 29 after inflows of $1.502 billion in the previous week.
Exchange traded muni funds reported inflows of $136.912 million after inflows of $79.125 million in the previous week. Ex-ETFs, muni funds saw inflows of $781.950 million after inflows of $1.423 billion in the previous week.
The four-week moving average remained positive at $1.298 billion, after being in the green at $1.367 billion in the previous week.
Long-term muni bond funds had inflows of $859.320 million in the latest week after inflows of $1.008 billion in the previous week. Intermediate-term funds had inflows of $165.568 million after inflows of $428.393 million in the prior week.
National funds had inflows of $636.857 million after inflows of $1.306 billion in the previous week. High-yield muni funds reported inflows of $173.707 million in the latest week, after inflows of $580.780 million the previous week.
On Wednesday, the Investment Company Institute reported long-term municipal bond funds and exchange-traded funds saw a combined inflow of $2.080 billion in the week ended May 22, while long-term muni funds alone saw an inflow of $1.934 million and ETF muni funds saw an inflow of $146 million.
Secondary market
Munis were stronger on the
On Refinitiv Municipal Market Data’s AAA benchmark scale, the yield on the 10-year muni GOs declined three basis points to 1.65% while the yield on the 30-year muni decreased four basis points to 2.32%.
The muni market continued to climbing higher on Friday, though underperforming Treasuries.
“The ICE Muni Yield Curve is down two to three basis points,” ICE Data Services said ina market comment. “High-yield is moving in sync, dropping two basis points across the curve along with tobacco bonds. Taxable spreads to Treasuries are fout to six basis points tighter.”
The 10-year muni-to-Treasury ratio was calculated at 77.0% while the 30-year muni-to-Treasury ratio stood at 90.3%, according to MMD.
Treasuries were stronger as stock prices traded sharply lower. In late Treasury trade, the three-month was yielding 2.353%, the two-year was yielding 1.960%, the five-year was yielding 1.941%, the 10-year was yielding 2.151% and the 30-year was yielding 2.588%.
Previous session's activity
The MSRB reported 38,976 trades Thursday on volume of $13.30 billion. The 30-day average trade summary showed on a par amount basis of $12.45 million that customers bought $6.15 million, customers sold $4.09 million and interdealer trades totaled $2.20 million.
California, Texas and New York were most traded, with the Golden State taking 15.784% of the market, the Lone Star State taking 12.563% of the market, and the Empire State taking 9.807%.
The most actively traded security was the Puerto Rico Sales Tax Financing Corp. restructured revenue COFINA A-2 4.55s of 2040, which traded 44 times on volume of $27.96 million.
Week's actively traded issues
Some of the most actively traded munis by type in the week ended May 31 were from New York, Iowa and Puerto Rico issuers, according to
In the GO bond sector, the New York City zeros of 2047 traded 28 times. In the revenue bond sector, the PEFA Inc. of Iowa 5s of 2049 traded 35 times. In the taxable bond sector, the Puerto Rico Sales Tax Finance Corp. 4.55s of 2040 traded 40 times.
Week's actively quoted issues
Puerto Rico, New York and Illinois names were among the most actively quoted bonds in the week ended May 31, according to IHS Markit.
On the bid side, the COFINA revenue 5s of 2058 were quoted by 38 unique dealers. On the ask side, the Dormitory Authority of the State of New York revenue 5s of 2039 were quoted by 174 dealers. Among two-sided quotes, the Illinois taxable 5.1s of 2033 were quoted by 18 dealers.
Data appearing in this article from Municipal Bond Information Services, including the MBIS municipal bond index, is available on The Bond Buyer Data Workstation.
