While the value of munis has increased, Fed data shows it's a smaller market

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As the municipal bond market gears up to see one of the biggest supply slates of the year, new data shows the overall size of the muni market is continuing to shrink.

However, size isn't everything as the value of the market has increased.

The Federal Reserve said last week that for the fifth straight quarter, the muni market contracted at an annual rate of 0.8%, to a level of $3.816 trillion from $3.818 trillion in the fourth quarter of 2018.

The first quarter decline was ninth contraction in the past 10 quarters; the only growth seen in this period was in the fourth quarter of 2017 when municipal issuers rushed to market in advance of the Tax Cuts and Jobs Act taking effect.

“We have [previously] discussed ... the TCJ-driven structural changes in demand, particularly as it relates to U.S. banks and the insurers — both property and casualty and life. These structural changes largely persisted in the first quarter of 2019 and we expect them to continue to do so going forward,” Ian Rogow, Bofa Securities municipal research strategist, wrote in a Monday market comment. U.S. banks, impacted by tax changes and ratios — reduced their muni holdings almost 12% on a year-over-year basis, he said.

Holdings of municipal securities by U.S. households rose in the first quarter to $1.875 trillion, the Fed said in its flow of funds report, up from $1.842 trillion in the fourth quarter of last year.

Mutual funds holdings rose to $738.6 billion in the first quarter from $693.6 billion in the fourth quarter of 2018. Holdings by money market funds dropped to $135.0 billion from $142.8 billion. Foreign holdings of municipal securities slipped to $100.6 billion in the first quarter from $101.0 billion in the fourth quarter of last year.

However, Patrick Luby, senior municipal strategist at CreditSight, noted that while the total amount of municipal bonds outstanding fell, the worth of those securities rose.

“Because of the strength in the market, the total value of the market grew by 1.8% to $4.025 trillion from $3.955 trillion,” Luby wrote in a Monday market comment.

Primary market
Over the last several years, June has been on average one of the busiest months of the year for new issuance and this year the month is off to a strong start, Luby said.

“Last week's actual volume of $8.0 billion was 30% higher than average and this week's calendar — with $10.3 billion expected — is 70% above the year-to-date weekly average,” he said. “This could be the heaviest week of borrowing since the week of Oct. 15, 2018, when $11.5 billion in bonds were issued.”

On Tuesday, Ohio (NR/AA+/NR) is competitively selling $300 million of Series 2019A higher education unlimited tax GOs. Proceeds will be used to pay the costs of capital facilities for state-supported and state-assisted institutions of higher education. Acacia Financial Group is the financial advisor; Frost Brown is the bond counsel.

The Santa Clara County Financing Authority, California, (NR/AA+/AA) is competitively selling $249.24 million of Series 2019A county facilities lease revenue bonds. Proceeds will be used to reimburse the county for costs related to the purchase of Acquired Health Facilities. KNN Public Finance is the financial advisor; Orrick Herrington is the bond counsel.

Pennsylvania State University (Aa1/AA/NR) is coming to market with two competitive issues totaling $226 million. The Penn State issues consist of $119 million of Series 2019B taxable revenue bonds and $107 million of Series 2019A tax-exempt revenue bonds. Proceeds will be used to finance various university projects. PFM Financial Advisors is the financial advisor; Greenberg Traurig is the bond counsel.

In the negotiated sector, JPMorgan Securities is expected to price the Michigan Finance Authority’s (A1/NR/AA-) $575 million of Series 2019A hospital revenue bonds for McLaren Healthcare.

Goldman Sachs is set to price the Los Angeles Department of Airport’s (Aa3/AA-/AA-) $434 million of Subordinate revenue bonds consisting of Series D bonds subject to the alternative minimum tax and Series 2019E non-AMT bonds.

Raymond James & Associates is set to price Maine’s (Aa2/AA/NR) $104 million of Series 2019B GOs.

BofA Securities is expected to price Riverside County, Calif.’s $340 million of Series 2019 tax and revenue anticipation notes.

Secondary market
Munis were mixed on the MBIS benchmark scale on Monday, with yields rising by three basis points in the 10-year maturity and falling less than a basis point in the 30-year maturity. High-grade munis were weaker, with MBIS’ AAA scale showing yields rising by one basis point in the 10-year maturity and by less than a basis point in the 30-year maturity.

On Refinitiv Municipal Market Data’s AAA benchmark scale, the yield on the 10-year GO rose two basis points to 1.63% and the yield on the 30-year muni increased three basis points to 2.33%.

The 10-year muni-to-Treasury ratio was calculated at 76.1% while the 30-year muni-to-Treasury ratio stood at 88.9%, according to MMD.

“Municipal bonds are one to two basis points higher today as the market gears up for $10 billion in new supply expected to price this week,” ICE Data Services said in a Monday market comment. “Taxable yields are higher as well, in line with the move higher in Treasuries today. High-yield is quiet and little changed on the day.”

Treasuries were stronger as stocks traded higher. The Treasury three-month was yielding 2.268%, the two-year was yielding 1.898%, the five-year was yielding 1.904%, the 10-year was yielding 2.136% and the 30-year was yielding 2.620%.

Previous session's activity
The MSRB reported 31,243 trades Friday on volume of $10.66 billion. The 30-day average trade summary showed on a par amount basis of $12.61 million that customers bought $6.22 million, customers sold $4.22 million and interdealer trades totaled $2.16 million.

California, Texas and New York were most traded, with the Golden State taking 14.062% of the market, the Lone Star State taking 11.826% of the market, and the Empire State taking 9.658%.

The most actively traded security was the Puerto Rico Sales Tax Financing Corp. restructured A-1 5s of 2058, which traded 57 times on volume of $57.91 million.

Last week's actively traded issues
Revenue bonds made up 49.07% of total new issuance in the week ended June 7, down from 49.49% in the prior week, according to IHS Markit. General obligation bonds were 46.31%, up from 45.93%, while taxable bonds accounted for 4.62%, up from 4.58%.
Some of the most actively traded munis by type in the week were from Georgia, New York, Iowa and Puerto Rico issuers.

In the GO bond sector, the Fulton County, Georgia, 2.5s of 2019 traded 29 times. In the revenue bond sector, the Matagorda County Navigation District, Texas, 2.6s of 2029 traded 45 times. In the taxable bond sector, the Puerto Rico Sales Tax Finance Corp. 4.55s of 2040 traded 31 times.

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 Ziad Saba at 212-803-6079 for more information.

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Primary bond market Secondary bond market State of California State of New York State of Texas State of Ohio County of Santa Clara, CA Penn State Michigan Finance Authority Puerto Rico Sales Tax Financing Corp (COFINA)