Demand for new munis seen strong

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Municipal bonds were mostly stronger on Tuesday as traders returned to work after the three-day holiday weekend.

Portfolio managers look likely to drive demand for this week’s new issue slate, which totals under $3 billion.

Optimistically cautious
The consistently heavy flow of new cash into the municipal bond mutual funds is a constructive sign for the market and suggests that there should be a reasonable amount of demand as portfolio managers put that money to work, said Patrick Luby, senior municipal strategist at CreditSights.

“Combined with last Friday's $10 billion in redemptions, there could easily be more demand than supply, particularly since the visible new issue calendar is so anemic,” said Luby. “As a result, the new issue market is likely to outperform the secondary market this week and next, and because there is so much demand concentrated in the new issue market, there may be some attractive opportunities in the secondary market.”

He added that March redemptions will be less than February's, reducing that source of demand.

“In addition, the closer that we get to April 15th, the more that high net worth investors and their advisors will be focused on preparing tax returns and less on putting money to work in the muni market,” he said.

Luby continued to say that reinforcing that concern is the slowed pace of trading in municipal bond ETFs and closed-end funds, both of which imply a tapering of demand from investors, or at least an increase of distractions.

“So while mutual fund flows are strongly positive and the light supply is also positive, we expect that retail demand will be light in the coming weeks,” Luby said. “If the pace of mutual fund inflows slows down, beware of reduced liquidity (and higher volatility) as well as underperformance by the municipal market until sometime after April 15th and retail demand returns.”

He also said that after tax day, the approach of summer redemption season will begin to exert positive influence on the market. So while CreditSights is cautious for the time being, it sees positive market dynamics emerging over the next few months.

“We remain unconvinced that the strong mutual fund inflows are a harbinger of new demand, but rather suspect that the driver has been asset rebalancings by mutual fund investors because the increased flows into fixed income have been accompanied by outflows from equities.”

Secondary market
Municipal bonds were mostly stronger 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 eight-year, 12- to 15-year and 24- to 30-year maturities, rose less than a basis point in the 10-year and 17- to 22-year maturities and remained unchanged in the nine-year, 11-year, 16-year and 23-year maturities.

High-grade munis were mostly stronger according to MBIS, with muni yields falling as much as one basis point in the one- to 14-year and 25- to 30-year maturities, rising less than a basis point in the 16- to 22-year maturities and remaining unchanged in the 15-year, 23- and 24-year maturities.

Municipals were steady on Refinitiv Municipal Market Data’s AAA benchmark scale, which showed the yield on both the 10-year muni general obligation and the 30-year muni maturity remaining unchanged.

Treasury bonds were mixed as stock prices traded higher.

On Tuesday, the 10-year muni-to-Treasury ratio was calculated at 79.7% while the 30-year muni-to-Treasury ratio stood at 100.3%, 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.

COFINA bonds trading
Some of the newly restructured Puerto Rico Sales Tax Financing Corp. bonds were actively trading on Tuesday. Last week, COFINA swapped new bonds for old ones in the biggest municipal debt restructuring in U.S. history.

On Tuesday, the COFINA restructured Series A1 5% bonds of July 1, 2058, dated Aug. 8, 2018, were trading at a high price of 98.204 cents on the dollar and a low price of 95.10 cents, compared to a high price of 98.637 cents and a low price of 95.055 cents on Friday, according to the Municipal Securities Rulemaking Board’s EMMA website.

Trading volume totaled $110.782 million in 61 trades compared to $166.912 million in 49 trades last Friday, EMMA reported.

The COFINA restructured Series capital appreciation 0% bonds of July 1, 2046, dated Aug. 8, 2018, were trading at a high price of 20.836 cents on the dollar and a low price of 18.712 cents, compared to a high price of 22.657 cents and a low price of 19.835 cents on Friday, according to EMMA.

Trading volume totaled $64.306 million in 72 trades compared to $51.76 million in 19 trades last Friday, EMMA reported.

Previous session's activity
The Municipal Securities Rulemaking Board reported 34,766 trades on Friday on volume of $12.61 billion.

California, New York and Texas were the municipalities with the most trades, with the Golden State taking 12.083% of the market, the Empire State taking 11.241% and the Lone Star State taking 11.067%.

Week's actively traded issues
Revenue bonds comprised 55.39% of total new issuance in the week ended Feb. 15, down from 55.60% in the prior week, according to IHS Markit. General obligation bonds made up 38.65%, down from 38.67%, while taxable bonds accounted for 5.96%, up from 5.73%.

Some of the most actively traded munis by type in the week were from Puerto Rico, Texas and Michigan issuers.

In the GO bond sector, the Puerto Rico 8s of 2035 traded 59 times. In the revenue bond sector, the Texas 4s of 2019 traded 37 times. In the taxable bond sector, the Michigan State University 4.496s of 2048 traded 49 times.
Primary market
This week’s volume is estimated at $2.8 billion, consisting of $1.62 billion of negotiated deals and $1.17 billion of competitive sales.

Louisiana will competitively sell $309.845 million of Series 2019A general obligation bonds on Thursday. Proceeds will be used to finance various improvement projects.

The financial advisor is Lamont Financial Services; the bond counsel are Breazeale Sachse and Butler Snow. The deal is rated AA-minus by S&P Global Ratings and Fitch Ratings.

On Wednesday, Collin County, Texas, is competitively selling $151.285 million of Series 2019 limited tax permanent improvement GOs.

The financial advisors is Hilltop Securities; the bond counsel is Bracewell. The deal is rated AAA by S&P.

In the negotiated sector, Wells Fargo Securities is expected to price the North Carolina Medical Care Commission’s $206.71 million of Series 2019A-D healthcare facilities revenue bonds for the Wake Forest Baptist Obligated Group on Wednesday. The deal is rated A2 by Moody’s Investors Service and A by S&P.

On Wednesday, Bank of America Merrill Lynch is set to price the San Francisco Bay Area Toll Authority’s $125 million of Series 2019S-H subordinate toll bridge revenue bonds. The deal is rated A1 by Moody’s and AA-minus by S&P and Fitch.

And RBC Capital Markets is expected to price the San Francisco City and County Airport Commission’s $125 million of special facilities lease revenue bonds for the SFO Fuel Co. on Wednesday. The deal consists of Series 2019A bonds subject to the alternative minimum tax and Series 2019B taxable bonds. The deal is rated A1 by Moody’s and A by S&P.

Bond Buyer 30-day visible supply at $4.52B
The Bond Buyer's 30-day visible supply calendar increased $176.2 million to $4.52 billion for Tuesday. The total is comprised of $2.55 billion of competitive sales and $1.96 billion of negotiated deals.

Future demand, opportunity
A technical imbalance in the municipal market is being prompted by the trend of mutual fund flows in light of the ample demand from retail investors with outsized reinvestment needs from principal maturities, bond calls and coupon payments, according to a report from Oppenheimer & Co.

“Although we do not see any disruptive forces on the near-term radar screen, we do think about anticipated shifts in reinvestment needs and expectations for heavier new issue calendars that could possibly invert the technical variances,” Jeffrey Lipton, head of municipal research and strategy and municipal capital markets wrote in the Feb. 12 report.

He predicted investment opportunities may arise if less compelling technical dynamics push municipal yields and ratios higher. “Tax-exempt bond prices continue to draw comfortable support, with even longer-dated munis seeing some renewed demand,” he said.

Growing longer demand, he noted, stems from a combination of greater comfort with Fed policy that has created a willingness to extend duration, as well as an extended period of rich valuations on short-dated paper that have elicited sticker shock for many investors.

“We think that if an extended period of Treasury weakness emerges, strong muni technicals should support outperformance,” Lipton wrote.

While federal tax-exemption will be part of developing tax discussions going forward, Lipton does not anticipate any serious threat to its continuation. “As tax issues are debated, we do not expect there to be adverse influences upon muni valuations and performance, and, in fact, we do expect the asset class to benefit from technical-based performance,” he added.

Meanwhile, on the income tax front, Lipton said demand for municipal tax exemption could increase as a way to lower rising tax liabilities.

“We recommend that investors consult with their tax advisors when it comes to these types of considerations, but we can say that there are enough elements of the Tax Cuts and Jobs Act that are now unpopular with Democrats and Republicans alike,” he wrote.

The importance of investors buying in-state bonds is more pronounced, he said, because, for example, the $10,000 cap on state and local tax deductions (SALT) “is creating a crowding-out effect in that it is becoming difficult to identify a reasonable offset to the new limitations.”

Treasury auctions discount rate bills
Tender rates for the Treasury Department's latest 91-day and 182-day discount bills were mixed, as the $45 billion of three-months incurred a 2.395% high rate, down from 2.400% the prior week, and the $39 billion of six-months incurred a 2.455% high rate, up from 2.450% the week before.

Coupon equivalents were 2.443% and 2.520%, respectively. The price for the 91s was 99.394597 and that for the 182s was 98.758861.

The median bid on the 91s was 2.370%. The low bid was 2.350%. Tenders at the high rate were allotted 45.53%. The bid-to-cover ratio was 2.99.

The median bid for the 182s was 2.430%. The low bid was 2.400%. Tenders at the high rate were allotted 13.82%. The bid-to-cover ratio was 3.08.

Treasury to sell $50B 4-week bills
The Treasury Department said it will sell $50 billion of four-week discount bills Thursday. There are currently $35.001 billion of four-week bills outstanding.

Treasury also said it will sell $35 billion of eight-week bills Thursday.

Gary E. Siegel contributed to this report.

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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