Munis net positive for ’18 as demand survives tax law; weekly volume dips under $5B
Municipal bond volume is estimated to drop below $5 billion in the coming week. Ipreo forecasts weekly bond volume at $4.4 billion, down from a revised total of $6.6 million pro the past week, according to updated data from Thomson Reuters. The calendar is composed of $3.5 billion of negotiated deals and $932 million of competitive sales.
“The strength of recent inflows coming into the municipal bond market has been a nice surprise,” Dan Heckman, senior fixed-income strategist at U.S. Bank Wealth Management, said on Friday. “Although that could change with rates moving up this past week, in general we have seen tremendous inflows and the market is net positive for the year.”
That the market is in the green for the year is a surprise, given the tax law changes that occurred, he said.
“A lot of people thought muni demand might fall off, and although it has dropped a tick with banks - individuals and retail investors have put a lot of money in,” he said. “The money/demand is there but the new issues are not. The strong dynamics should continue, as we don’t see volume accelerating and will end the year between 15 and 20% down from last year.”
Heckman added that something he feared has and is occurring, investors crowd into shorter maturity bonds.
“It has made the short end expensive but also, at some point when then market gets a surprise, investors will realize they are too short and need to go further out,” he said. “That will make allocations for everyone even smaller – it has been bad but that would exacerbate it.”
He advised those who find something of good value right now — whether a new issue or secondary offering — to snap it up immediately. “Waiting around doesn’t seem to be a sound strategy.”
Other opportunities and challenges
Though seasonal demand continues to be brisk, market hurdles such as the summer doldrums, potential for rising rates, and low volume are presenting challenges for investors, according to Chris Brigati, managing director and head of municipal trading for money manager Advisors Asset Management.
“In general, demand in the municipal market has been fairly robust given the significant amount of cash hitting the market over the past few weeks from redemptions and coupon payments — as demonstrated by fund flows last week exceeding $1.6 billion,” he said in an interview Thursday.
Professional portfolio managers have been actively putting redemption cash to work, while retail investors appear to be distracted by many factors including vacations, trade-war headlines, and concerns about rising rates, Brigati said.
“The lighter new-issue supply coupled with solid demand has limited portfolio manager needs for liquidity and kept spreads tight,” Brigati said. “Municipal ratios as a percentage of Treasuries have hovered around the lowest levels we have seen in quite some time on the front-end of the curve.”
The two-year ratios, he added, have been pegged around 60% on strong demand for investors seeking shorter duration risk.
The Washington State Convention Center Public Facilities District is coming to market with a $974 million issue next week.
Citigroup is set to price the Series 2018 lodging tax bonds and subordinate lodging tax bonds on Wednesday. The bonds will finance part of the construction associated with building an addition.
In the competitive arena, Maryland is selling two deals totaling over $500 million on Wednesday.
The deals consist of $275.3 million of Bidding Group 1 state and local facilities loan of 2018 second series tax-exempt bonds and $234.71 million of Bidding Group 2 state and local facilities loan of 2018 second series tax-exempt bonds.
In the short-term competitive sector, the Miami-Dade County School District is selling $335 million of Series 2018 tax anticipation notes on Tuesday.
Bond Buyer 30-day visible supply at $7.88B
The Bond Buyer's 30-day visible supply calendar increased $477.1 million to $7.88 billion for Monday. The total is comprised of $3.31 billion of competitive sales and $4.58 billion of negotiated deals.
Municipal bonds were mixed on Friday, according to a late read of the MBIS benchmark scale. Benchmark muni yields fell less than one basis point in the one-year and six- to 14-year maturities, rose less than a basis point in the two- to dour-year and 16- to 30-year maturities and remained unchanged in the five-year, and 14- to 15-year maturities.
High-grade munis were stronger, with yields calculated on MBIS’ AAA scale falling less than one basis point in the one- to 30-year maturities.
Municipals were steady on Municipal Market Data’s AAA benchmark scale, which showed both the 10-year muni general obligation yield and the yield on the 30-year muni maturity remaining unchanged.
Treasury bonds were stronger as stocks traded lower.
On Friday, the 10-year muni-to-Treasury ratio was calculated at 82.4% while the 30-year muni-to-Treasury ratio stood at 97.2%, 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.
Previous session's activity
The Municipal Securities Rulemaking Board reported 37,913 trades on Thursday on volume of $16.01 billion.
California, New York and Texas were the states with the most trades, with the Golden State taking 17.725% of the market, the Empire State taking 12.777% and the Lone Star State taking 10.748%.
Week's actively traded issues
Some of the most actively traded munis by type in the week ended July 27 were from New York, California and Illinois issuers, according to Markit.
In the GO bond sector, the New York City zeros of 2038 traded 24 times. In the revenue bond sector, the Los Angeles 4s of 2019 traded 56 times. And in the taxable bond sector, the Illinois 5.1s of 2033 traded 38 times.
Week's actively quoted issues
Nevada, New York and California names were among the most actively quoted bonds in the week ended July 27, according to Markit.
On the bid side, the North Las Vegas taxable 6.572s of 2040 were quoted by 42 unique dealers. On the ask side, the NYC Transitional Finance Authority BARBs 3.5s of 2047 were quoted by 258 dealers. And among two-sided quotes, the California taxable 7.55s of 2039 were quoted by 20 dealers.
Lipper: Muni bond funds saw inflows
Investors in municipal bond funds showed continued confidence and once again put cash back into the funds during the latest reporting week, according to Lipper data released on Thursday.
The weekly reporters saw $550.041 million of inflows in the week ended July 25, after inflows of $1.259 billion in the previous week.
Exchange traded funds reported inflows of $130.955 million, after inflows of $74.167 million in the previous week. Ex-ETFs, muni funds saw $419.087 million of inflows, after inflows of $1.184 billion in the previous week.
The four-week moving average remained positive at $567.565 million, after being in the green at $535.401 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 $408.358 million in the latest week after inflows of $583.602 million in the previous week. Intermediate-term funds had inflows of $117.106 million after inflows of $530.958 million in the prior week.
National funds had inflows of $494.716 million after inflows of $1.167 billion in the previous week. High-yield muni funds reported inflows of $216.171 million in the latest week, after inflows of $313.810 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 Ziad Saba at 212-803-6079 for more information.