Municipal market girds for a nearly $10B week — even without advance refundings

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Municipal bonds turned mostly weaker on Friday ahead of the coming week’s new issue slate.

Ipreo estimates weekly volume at $9.56 billion, up from a revised total of $2.16 billion in the four-day week after Memorial day, according to updated data from Thomson Reuters. The calendar is composed of $6.54 billion of negotiated deals and $3.02 million of competitive sales.
“The municipal market continues to fund infrastructure projects and the week offers a spectrum of offerings for all kinds of investors, high-grade and high-yield,” said Natalie Cohen, managing director and head of municipal research for Wells Fargo. “We are heartened to see a nearly $10 billion calendar for the post- holiday week, despite the loss of advanced refunding.”

In May, muni volume rose for the third straight month, though issuance still lagged behind last year’s pace. Some market participants said they were heartened by the gains, but others cautioned against reading too much into the numbers, since a comparison between last year and this year doesn’t take into account the ban on advance refundings.

One New York trader said he expected a food fight for the week’s deals, given that many investors are flush with cash — either from spring reinvestments or sitting on the sidelines waiting for higher yields and more volume.

“The reinvestments are the bigger factor here. People have so much cash, I think all the deals will be very well received.” he said on Friday afternoon.

“There is still a lack of paper in the market — we can really use some bonds,” another New York trader said. “In this environment muni prices are going to be held up and higher than they should be because of the lack of supply.

“We need paper — either through forced selling, which we are not seeing, or a much bigger calendar. It’s been a disappointing environment for anyone in the municipal bond arena,” he said

Primary market
Leading the negotiated sector is a $1.2 billion deal from the California Municipal Finance Authority.

Bank of America Merrill Lynch is expected to price the Series 2018 A and B senior lien revenue bonds for the automated people mover project on Tuesday.

The deal is rated BBB-plus by Fitch Ratings, which also assigned a stable outlook to the credit.

“The ratings are driven by the design build, operation and maintenance, and lifecycle cost parent company guarantees, the latter two of which are through the length of the concession,” Fitch said. “The ratings also reflect the highly capable team of contractors that have experience with similar large-scale capital projects, a strong revenue-paying grantor, and well-defined payment mechanism and operating standards.”

Morgan Stanley is set to price the Southeast Alabama Gas Supply District’s $900 million of gas supply revenue bonds for Project No. 2 on Thursday.

The deal is rated A3 by Moody’s Investors Service and A by Fitch.

JPMorgan Securities is expected to price the Port of Seattle’s $567.38 million of Series 2018 A and B intermediate lien revenue bonds subject to the alternative minimum tax on Tuesday.

The deal is rated A1 by Moody’s, A-plus by S&P Global Ratings and AA-minus by Fitch.

BAML is set to price Connecticut’s $500 million of Series 2018 C and D general obligation bonds on Tuesday after a one-day retail order period.

The deal is rated A1 by Moody’s, A-plus by S&P and Fitch and AA-minus by Kroll Bond Rating Agency.

On the competitive front, the New Mexico Finance Authority is selling $423.75 million of Series 2018A state transportation refunding revenue subordinate lien bonds on Thursday. The deal is rated AA by S&P.

On Tuesday, Ohio is competitively selling $300 million of Series 2018A common schools GOs. The deal is rated AA-plus by Fitch.

Also Tuesday, Clark County School District, Nev., is competitively selling $200 million of Series 2018A limited tax GO building bonds.

Secondary market
Municipal bonds were mostly weaker on Friday, according to a late read of the MBIS benchmark scale. Benchmark muni yields rose as much as one basis point in the one- to 29-year maturities and fell less than one basis point in the 30-year maturity.

High-grade munis were also mostly weaker, with yields calculated on MBIS’ AAA scale rising as much as two basis points in the three- to 30-year maturities and falling less than one basis point in the one- and two-year maturities.

Municipals were also weaker along Municipal Market Data’s AAA benchmark scale, which showed yields rising three basis points in the 10-year general obligation muni and gaining five basis points in the 30-year muni maturity.

On Friday, the 10-year muni-to-Treasury ratio was calculated at 84.3% while the 30-year muni-to-Treasury ratio stood at 95.9%, 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.

Friday’s overall light trading activity in the secondary — the lightest in five days — was dictated by the weakness in the Treasury market following the release of the May employment data, according to one New York trader.

Non-farm payrolls rose 223,000 in May, higher than an expected gain of 190,000. The jobless rate fell to 3.8% in May, matching April 2000 as the lowest rate since 1969, according to Bloomberg data.

“Today we were off a little in the morning before the data, then the data pushed it a little weaker, so we are seeing fairly limited response today due to weaker moves in the Treasury market,” the New York trader said. “It just seems like it’s really quiet. People are ready for the weekend after getting their heads jerked around after a few sessions.”

At the same time, he said, skittishness is causing investors to curtail purchases on the long end of the yield curve, and find value on the short end of the curve.

Despite the light overall activity, he said investors continue to view the opportunities on the short end as “compelling” — especially those who have been hoarding cash recently.

“With bonds coming due in June, I’m seeing a lot of bids every day within five years” among cautious investors, according to the trader, who trades paper in the two- to 10-year range of the yield curve.

“There is too much cash to spend and on the long end people are nervous,” he said.

He said one of the week’s deals — the Las Vegas Valley Water District’s $100 million competitive sale — demonstrated the market’s reluctance to invest in long paper.

“The bidding was tight top to bottom,” he said. “I would have expected the lower coupon bonds to be priced wider. That to me is indicative of dealers apprehensive to stock lower coupon bonds.”

The deal’s structure included large block of 2048 maturities on the back end of the deal. “Typically you would see a bigger discrepancy between the maturities,” instead of the tight bidding that occurred, the trader said.

Another New York trader described Friday as “very quiet” and “typical for an employment Friday,” as much of the activity shut down after noontime.

He said there was little impact on prices in the municipal market following the Treasury weakness earlier in the day and that supply scarcity is largely dictating the market tone and price direction as opposed to economic data or other factors.

“It would take a major negative move in Treasury market for it to have any great effect on munis right now,” he said.

Previous session's activity
The Municipal Securities Rulemaking Board reported 42,276 trades on Thursday on volume of $14 billion.

California, New York and Texas were the states with the most trades, with the Golden State taking 13.671% of the market, the Empire State taking 13.626% and the Lone Star State taking 9.633%.

Week's actively traded issues
Some of the most actively traded bonds by type in the week ended June 1 were from California and Illinois issuers, according to Markit.

In the GO bond sector, the Santa Rosa High School District, Calif., 4s of 2043 traded 22 times. In the revenue bond sector, the Regents of the University of California 5s of 2048 traded 57 times. And in the taxable bond sector, the Illinois 5.1s of 2033 traded 34 times.

Week's actively quoted issues
California names were among the most actively quoted bonds in the week ended June 1, according to Markit.

On the bid side, the California taxable 7.55s of 2039 were quoted by 46 unique dealers. On the ask side, the California taxable 3.5s of 2028 were quoted by 94 dealers. And among two-sided quotes, the California taxable 7.55s of 2039 were quoted by 31 dealers.

Lipper: Muni bond funds saw inflows
Investors in municipal bond funds again showed confidence and put cash into the funds in the latest reporting week, according to Lipper data released on Thursday.

The weekly reporters saw $77.249 million of inflows in the week ended May 30, after inflows of $232.801 million in the previous week.
Exchange traded funds reported inflows of $165.757 million, after inflows of $105.053 million in the previous week. Ex-ETFs, muni funds saw $88.509 million of outflows, after inflows of $127.748 million in the previous week.

The four-week moving average remained positive at $171.080 million, after being in the green at $65.590 million in the previous week. A moving average is an analytical tool used to smooth out price changes by filtering out fluctuations.

Long-term muni bond funds had inflows of $165.844 million in the latest week after inflows of $154.282 million in the previous week. Intermediate-term funds had inflows of $129.236 million after inflows of $141.916 million in the prior week.

National funds had inflows of $328.046 million after inflows of $301.718 million in the previous week. High-yield muni funds reported inflows of $224.989 million in the latest week, after inflows of $166.008 million the previous week.

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 Vanessa Kim at 212-803-8474 for more information.

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Primary bond market Secondary bond market Municipal bond funds State of California State of New York State of Texas California Municipal Finance Authority Southeast Alabama Gas Supply District Port of Seattle State of Connecticut State of Ohio Clark County School District New Mexico Finance Authority